Q2 2022 Dropbox Inc Earnings Call
The conference will begin shortly to raise your hand during Q&A you can dial star one one.
[music].
The conference will begin shortly to raise your hand during Q&A you can dial star one one.
[music].
Good afternoon, ladies and gentlemen, thank you for joining Dropbox, a second quarter 2022 earnings conference call all participants will be in listen only mode.
After todays presentation, there will be an opportunity to ask questions to ask a question. During the session you will need to press star one one on your telephone.
As a reminder, this conference call is being recorded and will be available for replay from the Investor Relations section of Dropbox website. Following this call.
I will now turn it over to current Gabor head of Investor Relations for Dropbox. Mr. Gabor. Please go ahead.
Okay.
Thank you good afternoon, and welcome to Dropbox in second quarter 2022 earnings call.
Before we get started I'd like to remind you that our remarks today will include forward looking statements such as our financial guidance and expectations, including our long term objectives and forecasts for our third quarter and fiscal year 2022, and our expectations regarding our revenue growth profitability operating margin and free cash flow as well as your expectation.
Regarding our business asset product strategies technology employees users demand and market. These.
These statements are subject to risks and uncertainties that could cause actual results to differ materially. They're also based on assumptions as of today and we undertake no obligation to update them as a result of new information or future events.
<unk> and risks that could cause our actual results to differ materially from these forward looking statements are set forth in todays earnings release and in our quarterly report on Form 10-Q filed with the SEC.
We will also discuss non-GAAP financial measures, which are not prepared in accordance with generally accepted accounting principles.
A reconciliation of GAAP and non-GAAP results is provided in our earnings release and on our 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 Q2 2022 earnings call. Joining me today is Tim <unk>, our Chief Financial Officer.
I'll first share our business and product highlights from the quarter and then Tim will review, our Q2 financial results provide guidance for the third quarter and update our outlook for the remainder of the year.
I'm really pleased with the resilience of our business and our execution in Q2, especially against the challenging macroeconomic backdrop.
We saw continued growth in our professional and teams plans and strong performance in our maintenance sales business.
We also saw increased adoption of some of our newer products drop box backup and capture.
We announced the pricing and packaging update for standard and advanced plans in June delivering more value to our teams customers around security and data protection.
Lastly, we continued to deliver profitability through operational efficiencies across the business, which Tim will discuss shortly.
Well, we're certainly keeping an eye on the macro environment, we remain confident in our strategy that we outlined at the beginning of the year.
First we're continuing to evolve our core FSS business by improving retention and monetization stabilized growth.
Second we're driving more adoption of workflows beyond FSS around video and documents to better serve distributed teams small businesses solo printers and creators.
Finally, we're maintaining operational excellence by continuing to balance growth and profitability.
And with a healthier and more stable foundation in our core business.
Laying the groundwork to achieve our vision of being a solution that organizes all your cloud content and the workflows around it.
I'll start with how we're evolving our core business.
Consistent with last quarter, we once again saw our overall churn rate fall year over year.
This was a result of ongoing improvements to the core FSS user experience, particularly on mobile.
For example, we enhanced our mobile uploads experience for our users driving significantly faster speeds on our iOS app, which led to nearly double the percentage of active users on the app, who upload content compared to a quarter ago.
We also improved the performance and design of the photos tab in the mobile App, which increased the overall number of photos previewed on our mobile a mobile experience by over 10% since the start of the year.
This builds on the work, we talked about last quarter around driving faster performance with previous on the web.
These pages are some of the most traffic surfaces for our users and these ongoing enhancements of saving them time, and allowing them to do more with their content, especially their photos and videos.
In addition to the UX improvements, we're seeing increased adoption of multiple dropbox features among our paid users.
And we are discovering that customers that leverage multiple capabilities retain at higher rates than those who do not.
For example, there are millions of paid individual users using dropbox backup and these users retain at higher rates than those who haven't turned on back up.
Similarly, we're seeing early signals that customers, who use dropbox passwords retain at higher levels than those who don't.
Given this in Q2, we rolled out passwords the teams users as part of our update to our standard and advanced plans.
Already seeing strong early adoption.
I will discuss how this updates aligns with our pricing and packaging strategy in a moment, but I'm pleased to see how we're monetizing multi product adoption in the form of higher attention.
Outside of our self serve business. We also saw strong renewal activity amongst some of our larger strategic customers due to a new account management structure that we implemented last year.
I'm really encouraged to see that despite the uncertain macro environment, our account reps were able to drive healthy renewal activity earlier in the quarter.
Building on our strong retention wins, we also made progress driving monetization through upsell cross sell and conversion.
And our managed sales business, we saw a healthy number of renewal customers purchase products like our data governance add on.
And in multiple cases customers purchase a combination of Dropbox Palestine and document.
This improved cross sell motion as a result of optimizing our sales force to sell the broader suite of Dropbox products.
Similarly, we made progress with cross sell activity in our core FSS business.
Earlier this year, we released our first self serve AD on cold extended version history, which allows plus users to extend deleted fire recovery and version history from 30 days to a year.
Early adoption has been encouraging and we're experimenting with other add ons, where we can seamlessly offer additional premium capabilities to our self serve users.
These efficient revenue opportunities required low incremental cost and I'm excited to see us expand on our early progress here.
We also continue to see an opportunity to improve top of funnel activity through targeted marketing and mobile.
Mobile represents an important channel for acquiring and converting new basic users and in Q2, we increased our conversion rates through more targeted mobile prompts.
We also saw an increase in mobile trials driven by higher adoption of pro on mobile due to enhancements made to the mobile landing page.
Another important piece of our monetization strategy is around pricing and packaging changes.
In June we rolled out a number of highly requested security and data protection features for our standard and advanced teams users.
One of the enhancements we made to these plans with the inclusion of Dropbox passwords.
Strong early activation in its first month.
Passwords for teams provides admins consolidated dashboards to alert them when their passwords are weak.
Used are breached.
We also enabled admins to receive reporting and monitoring capabilities.
Let's see how files and folders are being shared outside of their teams.
With the ability to revoke access where needed.
In addition, following our successful rollout last quarter of backup and external drive backup as a standalone SKU and feature for paid individual plans, we introduce this offering to teams.
Long early adoption.
And for advanced teams, our premium offering we launched new ransomware detection and recovery.
This capability of relies on machine learning to monitor for behalf of attacks and offers protection against the new strains of ransomware.
By bundling a number of highly requested new capabilities into our teams plans, we updated our pricing to reflect the added value.
Tim will discuss this more but I'm really pleased with the early response and our ability to monetize important new products through our existing paid plants.
Through our focus on security and data protection, we're confident that we are providing value that customers find essential.
Moving to our second objective of driving adoption of workflows beyond FSS, specifically around documents with document and Hello sign and video with capture and replay.
Dukson, which is now in its second year as part of Dropbox has accelerated its growth since we acquired them.
While we're seeing some pockets of softness in areas like venture capital fund raising we continue to see opportunities for strong organic growth along with greater revenue synergies.
We're investing further in DOCSIS capabilities, as well as marketing to expand into new verticals.
In Q2, we added the ability to view images in the docks and viewer instead of having to download content out of the browser, creating a stickier experience, which resulted in a significant increase in image file uploads.
In Q3, we plan to offer additional capabilities for video, enabling more use cases, and expanding the audience of potential docs and users.
And integrating the docs and experience into Dropbox continues to track well.
Last month, we launched safe to Dropbox, which allows users with both the Dropbox Anna Docs on account to say a final documents from docs and into Dropbox and one click.
Yes.
<unk> continues to show solid growth despite moderating following the pandemic search.
And with the broader esignature space.
We saw a greater mix shift towards higher price plans as well as healthy upsell of the of the <unk> API.
This is an opportunity to continue to differentiate <unk> as we've enhanced our offering to improve the developer's ability to explore and build with our API.
And last month, we announced an integration with hotspot, which allows sales teams to automate critical agreements processes in one unified workflow.
Initial feedback from the integration is encouraging and I'm looking forward to driving more awareness to joint marketing campaigns this quarter.
We're excited about the continued momentum of these businesses, especially through deeper integrations within dropbox, increasing revenue synergies and offering our users a more cohesive experience.
Finally, I'll cover our product experience is around video capture and replay which saw a strong adoption in Q2.
Capture our all in one visual communication tool that helps teams share their work and ideas synchronously. Once again saw active users increased significantly versus last quarter with customer satisfaction score is also improving.
We removed the five minute limit for capture videos, which was a top request among our beta users differentiating capture from the competition.
We see an opportunity to drive captures adoption to a wider audience of dropbox users.
<unk> to evaluate the best pricing and packaging approach for it.
Replay has already become an essential tool for the creator audience due to its ease of use performance and convenience as part of the Dropbox product suite.
Beta user retention is strong and we see an opportunity to drive product awareness further to grow its user base.
We're leaning into these organic bets as we've seen an increase in the percentage of our weekly and monthly active users that engage with video, including uploading sharing and viewing.
As this mix continues to rise, we see significant potential in creating larger flywheels around video workflows and.
I am excited for the potential for capture and replay to reach more creators and distributed teams.
And as we expand on workflows around content types. We're also focused on evolving from thinking files and folders to organizing all of your cloud content.
Universal search is a key part of this road map, which is why I am excited about our recent acquisition of command D.
I look forward to sharing more about our progress here in the coming quarters.
In closing it was a solid quarter with increased multi product adoption retention wins updated pricing and packaging for teams and strong performance in our managed sales business.
Core Dropbox FSS experience continues to improve with faster performance and enhanced security.
The changes we continue to make strengthen our platforms foundation and our disciplined approach allows us to be opportunistic with our growth path.
We believe we're operating from position of strength, given our healthy financial profile and a strong balance sheet and the work we've done over the last several years to build even more resilience into our business.
And we remain focused on our customers, especially during this challenging macroeconomic environment solving for what they need to do their most important work faster and more easily.
And with that I'll hand, it over to Tim to walk through our financial results.
Thank you drew before turning to our quarterly results.
I'd like to start with a reminder of our financial strategy.
We continue to focus on balancing growth and.
And profitability in a thoughtful and disciplined way.
We remain committed to our long term objectives, including delivering operating margins of 30% to 32% and generating annual free cash flow of $1 billion by 2024.
We also remain focused on allocating capital to growth initiatives.
And both organic as well as through acquisitions.
While also returning a significant portion of our free cash flow to shareholders in the form of share repurchases.
We believe that execution against these objectives will generate long term value for our shareholders.
Today I'll talk their performance for the quarter and our updated guidance for the year.
Each of which demonstrate that we continue to operate the business in line with these principles.
Let's begin with our second quarter results.
While the revenue for the quarter increased seven 9% year over year to $573 million.
Beating our guidance range of $568 million to $571 million.
Foreign exchange rates provided an approximate.
Proximate 5 million dollar headwind to growth.
Above our previous guidance range of a $3 million headwind.
On a constant currency basis year over year growth was eight 8%.
Total <unk> for the quarter grew seven 7% year over year for a total of 233 3 billion.
On a constant currency basis, <unk> grew by $44 million sequentially.
Eight 3% year over year.
We continue to drive growth in <unk> through strengthen our teams and professional plan.
With retention improving year over year drew.
Driven by mobile enhancements and stronger renewals by our account management team.
As well as healthy cross sell activity.
<unk> also continued to show solid growth.
We exited the quarter with $17 $3 7 million paying users and added approximately 280000 net new paying users in the second quarter.
Average revenue per paying user was $133 34 in Q2.
<unk> decreased by $1 in 2009 compared to Q1, primarily due to FX rate headwinds and continued strength from family plan, which as a reminder is comprised of six seats and therefore carries a lower <unk> profile.
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 exclude stock based compensation amortization of purchased intangibles.
Certain acquisition related expenses impairments of our real estate assets and net gains on equity investments.
Our non-GAAP net income also 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 de cost our real estate portfolio as part of our transition to our virtual first model.
In the second quarter, we continued to make progress against our goals executing sub leases in San Francisco as well as Seattle.
As a result, we have now executed all of our planned sub leases outside of San Francisco.
While we continue to estimate that our total impairment charges will be up to $450 million.
Lower than expected sub leasing in San Francisco.
Resulted in an additional $9 million in impairment charges in Q2.
Bringing our cumulative impairment to $438 million.
With that let's continue with the P&L.
Gross margin was 83% for the quarter, representing an increase of nearly two percentage points on a year over year basis.
The improvement in our gross margin was primarily driven by ongoing efficiencies in our data center infrastructure.
Well as slower than expected onboarding of outsourced customer support.
Second quarter, R&D expense was $155 million or 27% of revenue.
With increased compared to 25% of revenue in the second quarter of 2021.
The increase in R&D was primarily driven by an increase in head count.
To replace the elevated levels of attrition, we saw last year.
And as we continue to invest in growth and other key initiatives.
Second quarter sales and marketing expense was $96 million or 17% of revenue.
Which remained flat as a percentage of revenue compared to the second quarter of 2021.
Sales and marketing expense increased on a sequential basis, driven by a shift of some marketing campaigns from Q1 to Q2.
Second quarter, G&A expense was $41 million or 7% of revenue.
Which decreased compared to 8% of revenue in the second quarter of 2021.
In total we earned an operating profit of $183 million in the second quarter.
Which represents an operating margin of 32%.
Which is flat compared to the second quarter of 2021.
Our Q2 operating margin exceeded guidance by over three points driven by stronger than expected gross margin.
Efficiencies stemming from hiring in lower cost locations lower than expected <unk> costs.
As well as the timing of spend shifting from Q2 to future quarters.
Net income for the second quarter was $138 million.
Which is a 14% decrease versus the second quarter of 2021.
Diluted EPS was <unk> 38 per share based on 366 million diluted weighted average shares outstanding down from 40 <unk> per share based on 397 million diluted weighted average shares outstanding for the second quarter of 2021.
Our net income and EPS declined year over year as our income tax expense increased significantly year over year due to the impact of new R&D tax legislation and given that we have now fully utilize our nols for non-GAAP tax purposes.
Moving on to our cash balance and cash flow.
We ended the quarter with cash and short term investments of $1 4 billion.
Cash flow from operations with $210 million in the second quarter.
Capital expenditures were $4 million during the quarter.
This resulted in quarterly free cash flow of $206 million.
Compared to $216 million in Q2 of 2021.
In the second quarter, we added $14 million to our finance leases for data center equipment.
Let's turn to our share repurchase activity.
In Q2, we repurchased eight 9 million shares spending approximately $190 million.
During Q2, we exhausted our previous $1 billion share repurchase authorization from 2021.
And began executing against our new $1 $2 billion authorization that was approved in Q1 of this year.
As of the end of the second quarter approximately $1 1 billion remains under the current authorization.
I would now like to share our guidance for the third quarter and provide an update to our full year 2022 guidance.
I will also provide some context on the thinking behind this guidance.
For the third quarter of 2022, and we expect revenue to be in the range of 584.
The $587 million.
We are assuming a currency headwind of approximately $13 million in the third quarter.
Thus on a constant currency basis, we expect Q3 year over year revenue growth to be roughly consistent with that of Q2.
We expect non-GAAP operating margin to be approximately 29%.
The expected sequential decline from Q2 operating margin is primarily driven by the continued progress on our planned hiring strategy in 2022 towards growth initiatives increased levels of TNT and project spend in Q3 as well as an incremental FX headwind.
Q2 operating expenses also benefited from the onetime release of certain non income tax reserves in the quarter.
Finally, we expect diluted weighted average shares outstanding to be in the range of 360.
365 million shares.
On a trailing 30 day average share price.
For the full year 2022, due to the significant strengthening of the U S dollar since our last update.
We are revising our as reported revenue guidance range down by $12 million.
The $2 308.
To 231 8 billion.
From our previous guidance range of $2 320.
Two to 330 billion.
However.
On a constant currency basis, we are revising our guidance range up by $8 million.
The 2342.
To 235 2 billion.
Up from the prior range of 2334.
For 234 4 billion.
We now estimate our full year 2022 currency headwind of approximately $34 million.
As compared to our prior forecast of $14 million.
We now expect gross margin to be approximately 81, 5%.
Up from our prior forecast of 81% due to ongoing infrastructure efficiencies.
We are also raising our operating margin guidance to approximately 30% up from our prior guidance of between 29 to 29, 5%.
This operating margin guidance is inclusive of an approximately one point headwind from FX as compared to our prior estimate of approximately a half point.
We are maintaining our free cash flow guidance to be in the range of $760 million to $790 million.
This includes $17 million in cash outflows for the 2022 installments of the acquisition related deal consideration holdback.
Additionally, our free cash flow guidance is inclusive of an estimated $25 billion headwind.
Resulting from the impact of R&D tax legislation newly effective in 2022.
We continue to expect capital expenditures for 2022 to be in the range of $25 million to $35 million.
We continue to expect additions to our finance lease lines to be approximately 5% of revenue in 2022.
Finally, we expect 2022 diluted shares outstanding to be in the range of 364 three.
369 million shares.
Down from our previous guidance range of 366 to 371 million shares.
This reduction in our share count reflects our commitment to an anticipated impact of our share repurchase program.
To share some additional context on this guidance for revenue.
For 2022, we are raising our constant currency revenue guidance range up by $8 million.
As a reminder, our guidance continues to include the impact of discontinuing new sales along with financial sanctions in Russia.
Resulting in a headwind in the mid to high single digit millions of dollars to revenue this year.
Additionally, this guidance also reflects updates to our pricing and packaging approach for our teams plans that we announced in June .
As Joe discussed, we recently updated our standard and advanced teams plans.
Bundling, a number of new capabilities around security and data protection.
These planned prices were raised by 20%.
New customers began purchasing the higher priced plans starting in June .
And existing customers began renewing at the higher price point starting in July .
As a reminder, we will see the benefit of the pricing change flow to <unk> as customers billing cycles occur.
With monthly customers flowing through in the first month of the change.
And given our ratable revenue recognition model the revenue impact will flow to both 2022.
And 2023.
The subset of our user base that is subject to the price increase comprises approximately one third of our total error.
We are seeing positive early signals on this pricing and packaging change thus far.
Given the positive customer reception as well as continued year over year improvements in retention.
Raising our constant currency revenue guidance range.
As it relates to gross margin, while we achieved a gross margin level above the high end of our long term target range in Q2.
We continue to expect to invest in customer support.
Will ultimately result in gross margin.
Wording within the parameters of our long term guidance range in the coming quarters.
As it related to operating margin, while we are experiencing incremental FX headwinds teeny and office reopening expenses as pandemic restrictions soften we are raising our 2022 operating margin guidance as we continue to have success with our ability to hire top talent.
Outside of traditional high cost tech hubs, such as San Francisco, New York and Seattle.
As it related to full year free cash flow, we are maintaining our 2022 free cash flow guidance.
We are maintaining the range that we introduced at the beginning of the year as a result of the significant strengthening of the U S. Dollar.
Which is now more than a $30 million headwind to our initial free cash flow guidance.
I know that FX has a more immediate impact on billings and hence cash flow as compared to revenue given our ratable revenue recognition model.
Thus a larger cash impact will be absorbed this year offsetting the benefits of our increased operating margins.
Lastly, we remain committed to achieving our long term targets of delivering operating margins of 30% to 32% and $1 billion of annual free cash flow by 2024.
In conclusion, we continue to execute well against our initiatives.
Demonstrating stability and focus on our customers, while driving continued operational efficiencies.
This stabilization of discipline allows us to operate from a position of strength.
During an unpredictable macro environment as we continue to execute towards our long term objectives.
With that I'll now turn it over to the operator for Q&A.
Thank you as a reminder to ask a question. Please press star one one on your telephone to ask a question.
Once again Thats star one one to ask a question.
Our first question comes from the line of.
Richard Poland.
RBC capital markets Richard Poland. Please go ahead.
Hey, Thanks. This is Phil Creek beyond for Richard Poland. I. Appreciate you taking the question.
Wanted to start in on the team has been placing update so it looks like.
40%.
Price increase.
It's taken us the first one since 2017, so it seems incredibly reasonable to me but.
You talked about.
Receiving some early positive signals on the pricing change.
Maybe talk about any potential impact to you or maybe you're assuming.
In terms of monetization or renewals on this and then can you give us a sense of the linearity over the next 12 months of moving the subscribers to the new pricing.
Yes.
Yeah sure. So this is Tim ill take that one so we did raise prices for these plans by 20%. This.
This is our standard and advanced team plans, which we have not changed these prices since 2017, so you're exactly right.
Again for new customers. These began to have the higher price plans starting in June and for existing customers. They began renewing at the higher price point starting in July .
The subset of our user base that this is subject to.
Who comprises about one third of our total IRR and as a reminder, we will see the benefit of the pricing change, Florida arrows customer billing cycles occur.
With monthly customers flowing through in the first month of the change and then given our ratable revenue recognition model the revenue impact will flow through to both 2022 and 2023 and so maybe one other point along those lines just to give you a sense of the timing is that our annual customers tend to represent about two thirds of our.
Customer and user base, whereas our monthly customers about obviously, one third where the monthly customers will be subject to the change largely in the third quarter. So therefore, we expect most of the impact to flow through in the third quarter.
Got it that's very helpful.
And then drew you mentioned.
The softness that we're seeing.
The D C market I noticed you also released dropbox or startups recently.
Seems like a great maybe talk about.
Your expectation for.
Some of your key customers and I don't know if you quantified it but.
Give us a sense on your exposure to VC backed startups.
Sure.
That's certainly a popular use case for docs stand or they've got some early traction with founders and investors.
And startups and so some of that activity is pulled off we've seen some of that reflected on dock sands.
So there is a lot more use cases for docs and beyond fundraising.
Pretty much.
Rolls and accompany that involve deals are closing deals of sharing.
Content externally and needing to have rich analytics and security options. So.
Just to be clear there is a lot more custom.
Customers beyond the venture capital and.
And foundry ecosystem.
So if you think about sales and marketing.
Many other functions.
Sure Rich.
So we think there is so we continue to be excited about doctor and there are a lot of other adjacencies and target customers there.
And.
Let's see and then I think the other part of the question was.
Hello, Dropbox or startup so I think I think more broadly.
We're finding that there are a lot of freelancers and creators and solo printers to adopt dropbox.
And a lot of those folks have pretty common needs. So do you think about in your dropbox this for their core storage.
All companies need esignature with LSI.
And then if certainly if youre fundraising.
Dr. <unk> is a great fit for that too and then we see a number a number of other opportunities in our portfolio.
Yes.
Professionals selling printers are people starting something.
More of a bundle so.
Still early innings on that but that's an opportunity area, we see growing.
Great. Thank you.
Thank you. Our next question comes from the line.
Jason Ader, William Blair, Jason Ader. Please go ahead, yes. Thank you.
Hey, guys.
Maybe if you could talk about any other impact you've seen from the macro environment, you talked about the fundraising space, but any other.
Regions verticals anything that you saw in terms of just the metrics in the business that would suggest that we're in a weaker economic environment.
Sure.
Overall things have been pretty stable.
I mean, we're not immune to the macro environment obviously.
However were affected by things like FX, given our international next like most companies, we have been impacted by the Russia, Ukraine situation.
High single digit millions in revenue.
And so on and Mike while we talked about there is softness in fundraising that's not really material to the dropbox business overall.
Quantify things.
It is a signal, but I wouldn't say, it's like a huge signal.
We find that.
Dropbox, when we talk to our customers.
They need to Dropbox.
Any drop off in all macro and economic environments are a lot of our customers. That's really mission critical thing not optional.
I think the pandemic was illustrative people need a dropbox before during and after the pandemic.
And so while we didn't necessarily see a huge run up in the Dropbox core business. During Covid. We also didn't see a rundown. So all of that is to say.
Things look pretty stable again, we're not immune to any macro economic environment and we're also mindful that.
Yes.
No one knows exactly what the future holds that we're monitoring everything carefully as anything thats not good for our customers. It's good for our business.
But so far.
Yes.
The early signals have been positive or stable.
Okay. Thank you and then Tim.
Can you talk about <unk> dynamics, right now and what your where do you expect <unk> to trend over time and you've got some price increases you've got the family plan.
A bunch of moving parts here, but maybe just talk us through the puts and takes here.
Yes, sure so we.
We did in Q2 with <unk> $133 34.
It did decline about $1 29 sequentially, where FX did play a big part in that so FX was about 88% sequential headwind for US and then of course greater adoption of our family plan, which as you know carries six licenses with each plan.
Is about.
Looking forward, we don't formally guide to <unk>. There are some factors that do play a part clearly the pricing change will play a part in that we are not guiding obviously to RFP, but as far as pricing that will be a tailwind for us but again, we will have these these headwinds from from the family plan perspective, as well as FX.
Okay, Great and then one quick last one for for drew drew I think you guys you seem to be hitting a nice.
<unk> of them around.
Kind of upsell and keeping people on our platform, reducing churn, adding new features to plans.
Or are there some specific things Youre also doing around just monetization of the free user base.
Maybe talk us through that.
Sure.
Certainly monetizing.
Better monetizing our free user base continues to be a priority for us.
And we have a lot of ways of doing that.
So one is just having a broader product portfolio. So a few years ago, maybe we just had the dropbox core products offer but now we have <unk> and docs and.
Our debt portfolio will be growing with some of our neurovascular capture and replay and shop and so on and.
So we continue to iterate on the pricing and packaging in general.
We have also launched a number of other skus that get people onto the platform.
Paid subscription at a lower price point, so our backup SKU as an example of that so we found that.
Customers may or latest kind of customers with lighter weight needs.
Need to back up a computer so.
We launched that cheaper SKU for that.
Provide an upgrade path into.
Our mi nine plants.
There's still a ton of headroom here and then.
Sure.
With both growing in the portfolio and iterating on different kinds of bundles and suites.
And then after I just getting people into some kind of pay plan, obviously theres a lot that we're doing to.
Focus on particular customer segments, I talked about kind of creators and solo printers and so on.
Before.
But we continue to be very focused on better monetizing free users and we've seen a lot of gains in our.
<unk> said to better monetize users in their first year.
Raising those curves of monetization in the first few years of being a basic user.
Thank you good luck.
Thank you. Our next question comes from the line of Joanne Marin check of JMP Securities. Your line is open.
Hey, Tim Thanks, so much for the questions Jerry I know, there's a lot of uncertainty out there, but I'm curious where do you see the most opportunity for dropbox in the near term.
So in the near term we have had a lot of.
Success with I mean, there's a lot of different levers for growth and so we've talked a lot about.
Pricing and packaging and this flywheel that we have.
<unk>.
They are adding value to our plans inside this most recent example was our teams our teams planned standard and advanced plan.
We found that a lot of customers had new demands after COVID-19 and when you think about security what security means.
Or what kind of protecting your digital environment means.
It has changed a lot when you are kind of in a distributed world are all working from home.
That brings the number of new challenges so.
One kind of category of opportunity is thinking about the way that work has changed.
And then solving new problems for our customers as a result, and so with.
Going back to that teams example, we found that the number of ransomware attacks has dramatically increased so Mike tripled or quadrupled in the last year.
Small businesses are half to three quarters of.
The victims and half of small businesses.
Don't have any resources for cyber security. So there is a natural adjacency for us we're already taking your file.
Now, we can add and ransomware protection and then we also included our passwords Dropbox passwords product and our teams plans and so perfect example of how these kind of combined where we have both new value propositions for our customers, but then as we add these new features into our plans.
Create more customer value, then we can update our pricing and packaging or increased prices to better reflect the value that we're providing.
More broadly I think there is opportunities across our portfolio I think we are participating in a lot of markets that are in the early innings.
An area that I'm really personally excited about.
Is the evolution of Dropbox.
From just thinking your files to organizing all your cloud content. So we bought a company called command D last year that your Universal search.
And I think another example of Caesars.
So we all have like what started out as a 100 trials on our desktop are now a 100000 or browsers and as we manage all of these cloud drives cloud docs.
It's kind of a mess so.
We think that.
I believe that Theres, a lot of universal problems.
We're addressing a lot of areas.
In our in early next.
Finding a really exciting time to bill.
Awesome. Thank you so much.
One quick follow up just given the pullback in valuations how are you thinking about M&A at this time.
How do you sort of weigh the decision between maybe a more transformative deal versus a tuck in or any thoughts there.
Thanks, so much.
Yeah, Great question, I mean, something is certainly on our minds.
Doing transformative M&A was pretty challenging when multiples were where they were.
We care a lot about deploying our capital efficiently and being disciplined.
So as multiples continue to moderate.
Then M&A becomes.
It gets much easier for M&A today.
Attractive return hurdles. So we're going to be after a opportunistic here I think in general we feel pretty.
Grateful that our business is stable and resilient.
Product people need sustainable business model, a healthy balance sheet a lot of good places to invest M&A.
M&A is.
That window of opportunity is going to continue opening.
That said, we will continue to be disciplined, but we're happy to be able to play offense square.
Other companies are having to pull back.
Thank you. Our next question comes from Brent Thill of Jefferies. Brent Thill Your line is open.
Okay.
Again, Brent Thill. Your line is open maybe what's what's not embedded if you can just give us a little more color. Thank you.
Yeah.
Tim Hey, Brian I Might've missed this comes back to.
Your question, Yes, we only caught the tail end of that question.
Sorry, just on the guidance what is embedded in your guidance and ultimately whats with maybe not embedded as it relates to.
Whats within the guide.
I mean are you taking any yes, you take any.
A more conservative view than ultimately what you saw this quarter same hour improving do you just curious kind of how you're thinking through the environment.
Yes, so I'd say that our business does remain resilient in this challenging macro environment.
As we talked about we're raising our constant currency revenue guidance for the year by about $8 million.
Or about to eight 8% at the midpoint.
Far as what's included the range does include our mid to high single digit million dollar impact from our discontinued services to Russia.
As far as what's driving the raise we are seeing positive early signals on our pricing and packaging change, thus far certainly seeing churn rates coming in better than we expected. So clearly the pricing has been factored into our guidance and again, we're seeing continued your year over year improvements in retention across many different areas of the <unk>.
As I alluded to so we're very positive about many opportunities that are in play, including upsell cross sell of new products, New feature adoption growth areas, such as DOCSIS Hello sign all of that clearly has been included in our guidance from a philosophy perspective, we have no material changes from our historical.
Approach and we continue to guide to what we have a high degree of visibility into so certainly keeping an eye on things like the macro economy, but to <unk> earlier points. We are seeing strength on that front all of that of course is factored into our guidance.
Thank you.
Thank you and ladies and gentlemen at this time that does conclude today's conference. Thank you for your participation.
You may disconnect at this time have a great day.
Yeah.
Yeah.
The conference will begin shortly to raise your hand during Q&A you can dial one one.
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