Q3 2022 Dropbox Inc Earnings Call
The conference will begin shortly to raise your hand during Q&A you can dial star one one.
[music].
Good afternoon.
Afternoon, ladies and gentlemen, thank you for joining Dropbox as third quarter 2022 earnings conference call. All participants will be in a listen only mode. After today's presentation. There will be a question opportunity to ask questions to ask a question. During the session you will need to press star one one on your telephone.
This conference call is being recorded and will be available for replay from the Investor Relations section of Dropbox as website. Following this call I will now turn it over to current Gabor head of Investor Relations for Dropbox. Mr. Kapoor. Please go ahead.
Thank you good afternoon, and welcome to Dropbox as third 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 fourth quarter and fiscal year 2022, and our expectations regarding our revenue growth profitability operating margin free cash flow as well as our expectations regarding.
Our business asset product strategies technology employees users' demand and market.
These statements are subject to risks and uncertainties that could cause actual results to differ materially. They are also based on assumptions as of today and we undertake no obligation to update them as a result of new information or future events.
Actors and risks that could cause our actual results to differ materially from these forward looking statements are set forth in todays earnings release, and our quarterly report on Form 10-Q filed with the SEC.
Well 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 Darko.
I would now like to turn the call over to Dropbox as co founder and Chief Executive Officer Drew Houston drew.
Thanks, Scott and good afternoon, everyone. Welcome to our Q3 2022 earnings call. Joining me today is Tim <unk>, our Chief Financial Officer.
First share some business and product highlights for the quarter and then Tim will discuss our Q3 financial results and provide guidance for the remainder of the year we.
We delivered another strong quarter amidst an increasingly challenging macroeconomic backdrop.
We saw strength from our team's plan is driven by pricing and packaging changes, which we rolled out in June and this strength was partially offset by some continued moderation in our document workflow businesses, which I touched on last quarter, along with some recent softness so that plus individual SKU.
And mobile.
Like many of our peers, we're keeping a close eye on the evolving economic climate and the potential impacts to our own business, which Tim will speak to in a moment during.
During these uncertain times is especially critical we pay close attention to how we continue to best serve our customers.
By remaining focused on simplifying workflows and keeping security top of mind are driving higher value of the business users when they need to be more strategic with their spend.
And we're doing this while staying disciplined ourselves as demonstrated once again by a stronger than expected profitability, which Tim will also discuss.
And as we approach 2023, we remain committed to the strategy we outlined earlier this year.
First we continue to evolve our core FSS offering by improving the user experience to set a stronger foundation for future growth.
Second we are innovating and workflows beyond storage, particularly in documents and videos to better serve the growing needs for freelancers and small business teams.
And finally, we're focused on maintaining operational excellence as we continue to balance growth and profitability.
I'll start with how we continue to evolve our core business, particularly around driving retention.
Consistent with the past several quarters, we saw churn rate decrease year over year, and while we did observe some incremental churn in the quarter amongst them individually users on our plus plants, particularly in mobile we saw improve retention among business users, even as we updated our pricing and packaging for claims.
A key part of improving retention has been to enhance the user experience by reducing friction in two important actions such as uploading and sharing.
These enhancements will lead to more engaged users who ultimately retain at higher rates.
I'm also excited about how we're building machine learning into the core Dropbox user experience.
In Q3, we enhanced our browse functionality or folder navigation page on the web by rolling out content suggestions.
<unk> suggested leverage ml of a surface files that users need to access most resulting in an increase in <unk> per user.
We also saw increased engagement with new organizational features like machine learning assisted naming conventions, where our machine learning models identify patterns suggest filings for users who have workflows around saving a renaming lots of files.
Among those who have adopted this feature we've seen a significant increase in logins and file actions in Dropbox.
And as we highlighted last quarter, we added value to our standard and advanced teams plans and updated our pricing and packaging.
I am pleased to see the prioritization of features around security and data protection resonating with our customers.
For example, we launched a new dashboard that makes it easier for admins to view certainly shared links by the team in one centralized place.
<unk> access when needed to keep their proprietary content secure.
This provides customers the metrics to which they can use to evaluate their firm security needs.
We've received very positive feedback on these reporting capabilities, including from larger customers, who handle sensitive financial and health information.
And then the time, our consolidated spend is top of mind for customers. We're focused on selling complete solutions beyond stores to include important security capabilities like content controls data governance add ons and external drive back up.
By addressing these needs are managed sales organization had another strong renewal quarter.
The focus on security and data protection has also driven the incremental adoption of backup and passwords teams users, which is helping to improve retention as users with multiple features get more utility from dropbox.
Moving to our second objective of driving adoption of workflows beyond FSS, specifically around documents in video.
I'll start with docs sandwich continues to be our fastest growing business.
Last quarter, I mentioned that we started seeing pockets of softness and documents CT market metric.
Venture capital fundraising.
It's all incremental moderation with some customers choosing to be more price sensitive given the slower market backdrop, and we're investing in the docks and experience to cater to additional professional service verticals, while also driving awareness across the core Dropbox user base.
We started experimenting with introducing draughtsman powered analytics as a premium experience to dropbox for individual users and we're learning important insights about overlap of course, that's as users who share files and want to view analytics about their file sharing such as viewership time at completion.
And in Q3, we built functionality production customers, who want to send video content within docs.
Setting the stage for last week's launch of Docs and advanced video analytics, which was the top requested feature.
Now users can easily share videos and see rich analytics like playback completion rate time watched and insights into individual very diverse experiences.
Video analytics and high demand I'm excited for the potential <unk> to expand its use cases and its target audience.
Well Hello sign as you know we've been working towards driving tighter integration with Dropbox to further streamline agreement workflows.
I'm excited to announce that last week <unk> is now dropbox side.
This rebranding is an important step in our strategy towards developing a seamless content platform for our customers, while leveraging dropbox is brand awareness.
Additionally, we launched our signature hub within the Dropbox platform, providing our customers the ability to manage the agreement workflows without ever leaving Dropbox.
While we are still seeing growth moderate for assign business. During this challenging period for the broader esignature market.
It's important that we differentiate dropbox sign from traditional design solutions.
We're leveraging value add offerings like our API or saw an uptick in developer activity in Q3, and Dropbox farms Ah No-code builder that makes complex pdfs mobile friendly.
But dropbox forums customers like HR teams and gig economy platforms can quickly streamline the onboarding process of their workforces.
We're including complex forms with our higher tiered plans, adding differentiated value for our customers and I'm excited to build brand awareness for dropbox sign and a suite of products heading into 2023.
And lastly, moving to video workflows.
I am excited to announce that last week, we released Dropbox capture to all users and as a reminder, capture is an all in one digital communications tool that we developed in house during the pandemic and Washington data last year.
And since then we've expanded the number of beta users that rely on capture to communicate with their teams whether they're presenting work providing feedback are sharing how to in training videos.
<unk> is now available across all Dropbox plans with premium features included in our professional and teams plans like editing for videos of any length and the ability to record and for K Cup to the planned storage limit.
With basic plus in family plans, you just get up to two hours of recording time at ADP and editing for video under five minutes.
Sorry to see capture continuous viral growth is more user share videos and screenshots of their network saving hours from video meetings and long emails, we see Katherine as both a retention driver among paid users how do we as we add differentiated value to existing plans as well as a customer acquisition channel as neuroscience or captures will recognize the time savings simplicity and utility.
For their own workflows.
And as customers shift to working more and more in the browser and in cloud native tools, we're evolving the dropbox experience from taking your files to organizing all of your cloud content across all platforms. Our acquisition of <unk> plays an important role in this road map and I look forward to sharing more about the work we're doing in the coming quarters.
Before I wrap up I would also like to highlight that last week, we published our inaugural ESG report outlines our progress towards achieving our sustainability goals investing in social impact initiatives and being a force for good both inside our company and in our broader communities.
This work has been going on for years and we're proud of what we've accomplished so far.
And we're committed to sharing our progress as we build on our efforts in the years to come.
In closing as a solid quarter amidst the period of growing uncertainty, while we know we're not immune to economic challenges. We believe we're positioning ourselves well to whether a more challenging macro backdrop with our healthy financial profile and balance sheet. We remain focused on our customers are staying disciplined operationally and we're innovating around workflows that we believe.
We will only grow in importance as customers increasingly focus on streamlining their existing solutions.
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 are continuing to pursue sustained growth and profitability in a disciplined and thoughtful manner.
While remaining committed to our long term objectives.
We also remain focused on allocating capital to growth initiatives that we believe will drive future revenue.
Both organically and through acquisitions.
While also returning a significant portion of our free cash flow to shareholders in the form of share repurchases.
As you highlighted we are keeping a close eye on the macro environment and in particular foreign exchange rates, where we continue to see intensifying headwinds from the strengthening dollar.
I will discuss this in more detail shortly.
Let's start with our third quarter performance and I will provide updated guidance for the remainder of the year.
Beginning with our third quarter results.
Revenue for the quarter increased seven 4% year over year to $591 million, beating.
Beating our guidance range of 584 million to $587 million.
Foreign exchange rates provided an approximate $13 million headwind to growth in line with our previous expectations.
On a constant currency basis revenue grew nine 7% year over year.
Total <unk> for the quarter grew nine 6% year over year.
For a total of 243 1 billion.
On a constant currency basis.
<unk> grew by $98 million sequentially.
And 10, 2% year over year.
This step up its sequential error and acceleration in our year over year growth on a constant currency basis was largely driven by pricing and packaging changes with our teams plan that we announced in June which drew touched on earlier.
We exited the quarter with $17 $5 5 million paying users and added approximately 180000 net.
Net new paying users in the third quarter.
Average revenue per paying user was $134 31 in Q3.
Up nearly $1 from Q2, primarily driven by increased pricing our teams plans.
Partially offset by FX headwinds and the adoption of our 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 .
It excludes 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, while we have been taking steps to <unk>, our real estate portfolio as a result of our transition to a virtual first model.
While the real estate market is evolving, particularly in the San Francisco Bay area.
At this time, we continue to estimate that our total impairment charges.
We'll be up to $450 million.
In Q3, we recorded an additional $4 million in impairment charges, primarily related to an increase in our common area of fees for our San Francisco headquarters.
Where we have space available for sublease.
This brings our cumulative impairment to $442 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.
As well as greater optimization around our customer support needs.
Third quarter R&D expense was $166 million.
Our 28% of revenue.
Which increased compared to 24% of revenue in the third quarter of 2021.
The increase in R&D was primarily driven by an increase in hiring.
To backfill the elevated levels of attrition that we saw last year.
And as we continue to invest in growth and other key initiatives.
Going forward, we do not expect to see this pace of growth in R&D as a percentage of revenue continue as we expect that most of our critical openings will be filled by the end of the year.
Third quarter sales and marketing expense was $95 million or 16% of revenue.
Which decreased compared to 919% of revenue in the third quarter of 2021.
As a majority of our brand campaign spend last year was incur incurred in Q3.
Third quarter, G&A expense was $43 million or 7% of revenue, which decreased compared to 8% of revenue in the third quarter of 2021.
In total we earned an operating profit of $187 million in the third quarter Rep.
Representing an operating margin of 32% and up roughly two points compared to the third quarter of 2021.
Our Q3 operating margin exceeded guidance by about three points driven by stronger than expected gross margin.
Efficiencies from hiring in lower cost locations lower than expected G&A cost.
And lower project spend.
Net income for the third quarter was $153 million.
Which is a 4% increase versus the third quarter of 2021.
Diluted EPS was <unk> 43 per share based on $360 million.
Diluted weighted average shares outstanding.
Up from 37 per share based on $398 million diluted weighted average shares outstanding for the third quarter of 2021.
With that let's turn to guidance for Q4 and for the full year.
I will also provide some context on the thinking behind this guidance.
For the fourth quarter of 2022, we expect revenue to be in the range of $592 million to $595 million.
We are assuming a currency headwind of approximately $19 million.
In the fourth quarter, which translates to more than a 300 basis point headwind to growth.
And a $2 million greater than what was implied in our previous full year guidance.
We expect non-GAAP operating margin to be approximately 29 to 29, 5%.
The expected sequential decline from Q3 operating margin is primarily driven by planned infrastructure investments to meet our future capacity needs.
An increase in expected project spend and finalizing our planned hiring for the year.
Finally, we expect diluted weighted average shares outstanding to be in the range of 354 to 359 million shares.
Based on our trailing 30 day average share price.
For the full year 2022.
We are raising our reported revenue guidance to $2 318 to 2.321 billion.
Up from our previous guidance range of 2.308.
231 8 billion.
On a constant currency revenue basis, we are raising by $8 $5 million at the midpoint.
To 2354.
Two to $3 $5 7 billion.
Up from the prior range of 2342.
To $2 $35 2 billion.
We now estimate our full year 2022 currency headwind of approximately $36 million.
Up from our prior forecast of $34 million.
We are raising our gross margin guidance to approximately 82%.
Up from our prior forecast of approximately 81, 5%.
Due to some of the infrastructure efficiencies we've seen this year.
We are also raising our operating margin guidance to be in the range of 35% to 31%.
Up from our prior guidance of approximately 30%.
This operating margin guidance range is inclusive of an approximately one point headwind from FX.
We are raising the midpoint of our free cash flow guidance by $5 million.
To now be in the range of $770 million to $790 million.
Compared to our prior forecast of $760 million to $790 million.
This includes $17 million in cash outflows for the 2022 installments of acquisition related deal consideration holdback.
And as a reminder, our free cash flow guidance is also inclusive of an estimated $25 million 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.
This implies a significant step up in Q4 leases due to a planned build out of new data center.
Expected to go live in early 2023.
Finally, we expect 2022 diluted shares outstanding to be in the range of 363% to 368 million shares.
Down from our previous guidance range of 364 to 369 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 2022, and we are raising the high end of our constant currency revenue guidance range up by $5 million.
As we mentioned earlier, we are pleased with the early results of our pricing and packaging changes to our teams plans.
Which is being partially offset by continued moderation in our document workflow businesses document and Dropbox science and some recent softness in our plus SKU, particularly on mobile.
As a reminder, in Q3, we saw benefits from pricing and packaging changes to our standard and advanced teams plans, which largely went into effect in July .
Given the introduction of additional value to these plans, we raised their respective prices by 20%.
The subset of our user base that is ultimately subject to the price increase comprises roughly one third of our total IRR.
The majority of these customers will see the pricing increase this year with a remainder lending in 2023.
As well as 2024 for some of our managed accounts.
While we do not guide to <unk>. It is important to keep in mind that we do not expect to see a similar step up in absolute <unk> in Q4.
As Q3 includes an immediate contribution from our monthly customers subject to the pricing change.
And remember given our ratable recognition model the.
The revenue impact will flow accordingly to 2022 and beyond.
As it related to operating margin, while we are experiencing incremental FX headwinds teeny and office reopening expenses as pandemic restriction 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.
Hubs, such as San Francisco, and New York, and Seattle, as well as due to due to infrastructure efficiencies driving higher gross margin.
As it related to full year free cash flow, we are raising the midpoint of our 2022 free cash flow guidance.
As a reminder, our compared to when we introduced our free cash flow guidance at the beginning of the year as.
The significant strengthening of the U S. Dollar has resulted in more than a $30 million headwind to our initial free cash flow guidance.
I would also note that FX has a more immediate impact on billings and hence free 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.
Which brings me to our long term financial targets of delivering operating margins of 30% to 32% and $1 billion of annual free cash flow by 2024.
As you can see from our Q4 guidance, we are seeing FX headwinds intensified as we exit the year based on how our software subscription business recognized as revenue over a period of time from the time of booking.
Assuming these current FX rates remain constant we will experience increased currency headwinds to revenue and free cash flow in 2023.
While we believe we are managing the business in a way that will enable us to weather a more challenging backdrop.
We recognized there was a lot of uncertainty.
And so while we believe it is too early to make any changes to our long term financial targets at this time.
We are keeping a close eye on the macro environment and how best to respond as events unfold.
In conclusion, we continue to execute well against our initiatives demonstrating stability and solid execution during a time of increasing uncertainty.
I'm, especially proud of our team for remaining focused on our customers.
While running the business efficiently to drive margin outperformance and healthy free cash flow generation.
Which we continue to allocate in a way that drives long term value to the business and our shareholders.
With that.
I'll now turn it over to the operator for Q&A.
Thank you.
As a reminder to ask a question you will need to press star one on your telephone please standby, while we compile the Q&A roster.
Our first question comes from <unk> <unk> with RBC you May proceed.
Wonderful. Thanks, so much for taking my questions nice to see continued strength in spite of the macro headwinds I've got one question for Joe one for Tim.
Joe I wanted to start during your prepared remarks, you talked about how youre seeing continued strength in dark sandwiched I'm pleasantly surprised to hear in spite of kind of a softer <unk>.
Funding environment can you talk a little bit about what's driving.
That adoption and you talked about kind of wanting to explore or drive newer used cases for docs and what was some of those look like.
Sure. Thanks for the question so.
<unk> continues to be one of our fastest growing businesses.
We have just to be clear we have seen headwinds.
Given the <unk> exposure to the fundraising market, which and so fundraising activity has come down so.
Just to be clear, we have seen some headwinds headwinds there that said there are a lot of different verticals that.
The revolve around sending content and needing to have analytics around it and the kinds of things that docs and provides so.
We're seeing.
A lot of opportunity in new verticals like professional services and sales and customer success account management. So in short, we're branching out and into other customer segments, and adding new kinds of value and so for example in things we added last week and our launches we advanced video analytics. So we see continued opportunity for docs and but there'll be a mixture.
We believe that are likely to be a mix shift to other customer segments.
As the funding funding activity moderates.
Got it that's really helpful and then.
Wanted to maybe get a sense like if we look at the numbers right. We saw overall revenue growth accelerated.
Slightly under 1% constant currency IRR accelerated by about two points constant currency now you did mentioned some of that was obviously the uplift from a pricing and packaging changes.
To the extent you can can you help us understand.
What was the actual impact in the quarter from those and without thinking about guidance for next year, just when does that kind of flow through from this and so we're not over extrapolating from this quarter. Thank you.
Sure. So we don't break out the pricing contribution separately I'll give you a bunch of the pieces here. So we did raise prices by 20% on our standard and advanced team plan.
And so for new customers they began purchasing the higher price plans starting in June and existing customers began renewing at the higher price points, starting in July and the subset of our user base that is ultimately subject to the price increase comprises about one third of our total IRR and the majority of those customers will see the pricing increases this year.
The remainder landing in 2003 as well as 2024 for some of our managed accounts and then just given how we recognize revenue that revenue will trail these billing cycles.
<unk>, two 2022 and beyond and of course within that new era. This quarter, a large portion of that step up did come from our monthly customers as they became subject to the change.
Got it that's really helpful color. Thank you so much guys.
Thanks.
Thank you one moment for questions.
Our next question comes from Brent Thill with Jefferies. You May proceed.
Hi, This is love soda onto Brent so congrats.
Congrats on a solid trend here.
Just wanted to ask maybe first one for drew.
One of the comments you made in the prepared remarks was around churn rates.
Four teams plans being down despite the price increase I guess could you unpack that a little bit.
Just because given the environment we're in today.
Some of the other companies are facing higher churn within the SMB side. So just unpack the the customer base and what drove that strength there.
Sure.
A couple of parts, one is churn or customer retention has been improving overall in the core business and.
And that's a trend we've been seeing continue.
I'd say on the on the price increase or the.
New plans.
I would say China is ahead of our.
Expectations.
And.
And so we see it basically it says that that's gone.
Or the packaging changes have gone better than we anticipated.
And part of what's driving this is or part of why we believe it's going better than expected as well.
We see the packaging and pricing changes as part of a flywheel, where first we create new customer value and so in this case. It wasn't just the price increase we also introduced a lot of security features for teams that had been in response to customer demand.
So for example, ransomware attacks are way up 300% up in the last year.
Between 50, and 75% of the victims are smbs.
These don't have dedicated security resources and so we've been building in that direction, because we see that will be a growth area and then you need security and any kind of macroeconomic environment.
So we see that it's a positive but overall we see.
When we look at how the macro environment is affecting us we've been pleased by the stability. So far that's what we do.
I want it and we know that.
Walloping situations. So we're gonna be cautious and monitor all of these signals really closely for changes.
Got it.
And then one for Tim I know Youre raising the guide for this year obviously.
But how should we think of the level of conservatism embedded into this guide is it similar to what you have embedded previously.
Bedding more conservatism given the environment. We're in just any any color there Tim.
Sure I'll, just say that there are no material changes from our historical guidance approach. We continue to guide to what we have a high degree of visibility into and we factor in growth initiatives. When we have sufficient signal on their performance and as we see additional data over the course of the year as we are seeing with these changing.
<unk> macro economic conditions, we do revise and incorporate those trends into our guidance as needed.
Got it thank you.
Thank you one moment for questions.
Our next question comes from Mark Murphy with Jpmorgan you May proceed.
Great. Thanks, Hi, this is <unk> on for Mark Murphy. Thank you for taking the question and I'll re iterate that congrats on the quarter.
On the softness you mentioned in some of the business segments that saw a bit of element elevated demand. During the pandemic would you say that some of the pressures here where were consistent with the prior quarter or did they incrementally worse and any sense of when you expect to see a bit of a plateau in some of the softness.
Sure. So we are seeing some incremental <unk>.
Macro headwinds in our Dropbox sign business as we do lap Covid tailwind and then we're also seeing docs and slow down a bit just given that a fair amount of that business is driven by the fundraising community and then of course, we also mentioned that we're seeing some some signs of macro related softness around some of our <unk>.
Plus users.
Particularly on mobile so all of those components have been factored into our guidance.
I'm not going to give forward looking guidance beyond Q4 at this point and certainly as I mentioned to love and we factored in these baseline trends these updated trends into our guidance for the rest of the year.
Got it. Thank you that's very helpful. And then as a quick follow up on the topic of the recent 20% price increase is there is there any change in the level of elasticity among customers relative to some of the prior price increases that you've done, particularly given the inflationary environment.
So I.
I don't think we break out specific stats on that I can what I can say is that.
So we certainly taken to account as you'd imagine when we project the impact of price increases how those have gone in.
In prior cycles.
And I can say that teams are price increase has gone better than expected.
Yeah.
Great. Thank you very much.
Thank you one moment for questions.
Our next question comes from Steve Enders with Citi. You May proceed.
Great. Thanks for thanks for taking the question.
I just wanted to ask I guess.
The pricing and packaging dynamics I mean, it seems like there's been really good success with.
With with.
But the team's increased in the past quarter I guess, how are you thinking about kind of more broadly.
Raising prices on.
On some other plans or thinking about shifting some of the some of the packaging.
Essentially drive drive increase of our pricing in that way.
Well I think it starts with our philosophy, which has been pretty consistent.
And as I mentioned before we start by creating value.
So adding new features in response to customer demand. So that the team's price increase for example was paired with a lot of the security features around ransomware protection and backup and passwords.
That customers have been asking for.
And then we add new products right. So capture dropbox capture of new product is available.
To all paid subscribers. So that's another example of creating value and then we change prices are changed packaging as our portfolio, we see that a lot of our customers are obviously not not.
And not only need to store and share and sync their files, but there are a lot of work flows around them and as we have a broader portfolio of products that address these workflows like dropbox sign docs and.
The opportunity is as bundling right and when you look at other SAP companies, there's been a lot of success there.
And it and bundling economics are obviously great for.
For customers and there are also favorable economics for the company.
So I'd say, we're early innings in terms of thinking through bundling and we'll be doing.
More here, especially as customers are also thinking about how to consolidate how do they.
Or how do you consolidate their tools manage spend more effectively.
We think having more suites and all in one type solutions.
We will resonate in a in a challenged environment.
Okay got you.
Hello, Paul.
I guess on the on the plus plan.
I know that Theres been kind of more focus from you historically just in terms of like trying to drive.
Conversion rates in the App and trying to help.
I'll kind of improve some of those retention trends I guess, how did you kind of think about the levers you could.
Potentially pull to either.
Either kind of improve some of the retention rates on the plus side or drive further.
Further conversion.
Yeah, I can start I mean first of all you've just seen good returns to just improving the core experiences and streamlining some of the basics. So we found that there by removing friction from our onboarding experiences by making sharing more seamless bye.
By improving like photo backup speeds are things like that just the nuts and bolts we.
We see engagement increase we see retention improve.
So weak that we continue to invest in those kinds of levers and then.
I mean, there are certain they're going to be puts and takes with any individual SKU. We also think about zoom out a little bit from any one of the skus and think about.
How do we direct our customers and match them with the most.
<unk> offering for them and so I think we've also been driving a mix shift.
From plus towards higher value plans like professional or our teams plans that have more of like network effect, driven retention and things like that so I'd say within any individual SKU. There are a number of levers as far as how we monetize this specific offering churn versus pricing or things like that but then we also look at it from a portfolio level and making sure we're.
Making and ensure we're making globally optimized decisions.
Okay perfect. Thanks for taking the questions.
Thank you one moment for questions.
Our next question comes from Julian <unk> with J P. M Securities You May Please JMP Securities you May proceed.
Oh, Thank you so much and congrats on the nice results here.
Drew can you tell us more about security what is it that customer what our customer needs as it relates to security and what are some ways Dropbox and help and then maybe additionally can you touch on the Github fishing incident, what happened and what steps have you taken thank you so much.
Sure.
Great questions. So on the security front from a customer demand standpoint.
The landscape continues to evolve right and so as I shared before ransomware attacks have been up almost 300% in the last year.
Something like half to three quarters of the victims or small businesses. So we see new demand and then those small businesses half of them don't have dedicated security resources. So we see a big opportunity for Dropbox.
To help in a number of those areas from ransomware protection to a more.
Tomorrow, a fully featured backup options in a world where people are now working from everywhere being able to back up all your endpoints.
It is something that were avenue needs.
Managing passwords for the team and and and.
So theres a lot of different areas, where we can we've been launching new security functionality, that's been resonating with customers and has been in response to new demands and that has been a big part of it we see that the adoption of those new features and the success of the price increase and packaging changes.
The security features we've launched or have been instrumental to that.
Second just for background, you mentioned that the Github fishing in incidents. So in October we were the targeted phishing campaign and one of our employees.
Github accounts was compromised.
We resolved the issue quickly we believe the overall impact was minimal spin.
Specifically the kinds of things we look at in our apps.
<unk> core source code production environments, where not accessible no evidence that customer content or passwords or payment information is compromise no indication that there will be material business or customer impact.
If you'd like to be transparent about how we handle these kinds of incidents and we've posted theres lot more detail on our blog, but again, we think we've responded quickly and don't believe there'll be a material impact.
That's very helpful. Thank you so much and then can you also give us an update on our <unk> how's it performing relative to expectations and what's your ultimate vision there. Thanks Sharon.
We're excited about <unk> and we see.
A big opportunity and an evolving the dropbox experience and when I started the company. It was really about how do I think my files across different different devices different operating systems.
And today, we have we all have new challenges, where a lot of work has moved into the browser and a lot of cloud tools, but then theres new problems around fragmentation.
And just challenges around the basics like not being able to find information not being able to organize it. So command is a great example of addressing some of those those challenges. So instead of having 10 different search boxes for 10 different apps commander you provide universal search we bought a company about a year ago, we've been investing more there.
And we think that there are fundamental needs in the cloud world around organizing your content and evolving dropbox from thinking pilot files to organizing all your cloud content, that's a big opportunity in any macroeconomic environment. So we'll have more to share on the roadmap, there and new product experiences in the coming quarters.
Thank you one moment for questions.
Our next question comes from Matt <unk> with Bank of America, You May proceed.
Hi, I'm on for Mike and Thanks for taking my questions just wanted to triple tapped here on the pricing increases. So we did see deceleration in net adds of around 100 K. This from these the average of the past couple of quarters I'm trying to frame that do you sell in terms of pricing impact versus the plus weakness in mobile was most of that D cell driven by.
The pricing increases and if so can we assume that.
Now to the monthly users have digested that we could see at <unk>.
A reselling that adds going forward. Thanks.
Sure. This is Tim I'll take that so we added about 180000 net new paying users in the third quarter. We did see an expected drop in paying users from our teams plans in the wake of the pricing and packaging changes that we've been talking about.
We also did see some softness around some of our plus users, particularly on mobile due to the challenging macro environment.
As far as breaking that out I would say that a larger portion of the drop does stem from the pricing change.
As far as looking forward, we don't formally guide to paying users. We do expect our team's pricing and packaging change to have an impact on net new paying users. However, we're encouraged by the early signals, we're seeing in our confidence that this pricing changes are net positive to air in the long run.
Excellent. Thank you very much.
Yes.
Thank you and as a reminder to ask a question you will need to press star one one on your telephone.
Our next question comes from Jacobs Stifle with Goldman Sachs. You May proceed.
Hey, guys. Thanks for your thanks for the question I wanted to ask around ARPA real quick it seems like.
The last well call it five or six quarters <unk> kind of been floating around in that like $1 33, <unk> hundred 34 range and obviously the.
A portion of that is due to the family plan and the <unk> et cetera included in that but given all the product innovations that have been recently released.
How are you thinking about future acceleration of <unk>.
This is Tim So we did end the third quarter with <unk> at about $134.
Which was up about 52 since year over year and this was driven by benefits from our pricing initiatives and a continued mix shift to our premium skus now offsetting that there was a nearly a three dollar headwind from FX. So FX plays apart from a headwind perspective as does as you mentioned the fan.
We plan and looking forward, we don't formally guide to RP. There continue to be some factors that may impact our trends pricing that will continue to be a tailwind to <unk> FX again, we expect FX headwinds to intensify.
Existing the year and into 2023, assuming current rates hold and then of course the family plan is as you mentioned and so there are puts and takes here, which is why profitably growing our total air our base versus optimizing for a specific RP.
Is our priority.
Awesome. Thanks, so much.
Thank you. Thank you.
That concludes our Q&A session.
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