Q1 2023 Dropbox Inc Earnings Call

[music].

Good afternoon, ladies and gentlemen, and thank you for joining Dropbox. Its first quarter 2023 earnings conference call. All participants will be in listen only mode. After today's presentation. There will be an opportunity to ask questions to ask a question. During this session you will need to press star one on your tongue.

Awesome.

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 the call over to current Kapoor head of Investor Relations for Dropbox. Mr. Kapoor. Please go ahead.

Thank you good afternoon, and welcome to Dropbox as first quarter 2023 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 objective and forecasts for our second quarter and fiscal year 2023, and our expectations regarding our revenue growth profitability operating margin and free cash flow.

As well as our expectations regarding our business asset product strategies technology employees users demand industry trends and the macroeconomic environment.

These statements are subject to risks and uncertainties that could cause actual results to differ materially.

Also based on assumptions as of today, and we undertake no obligation to update them as a result of new information or future events.

Factors 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 annual report on Form 10-K filed with the SEC.

We will also discuss non-GAAP financial measures, which are not prepared in accordance with generally accepted accounting principles I.

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.

Yeah.

Thanks, Scott and good afternoon, everyone.

Welcome to our Q1 2023 earnings call. Joining me today is Tim <unk>, our Chief Financial Officer.

I'll first share of business and product highlights from the quarter and then Tim will review, our Q1 financial results provide guidance for the second quarter and update our outlook for the remainder of the year.

I recognize our announcement last week to reduce our workforce is top of mind for many and I plan to discuss that in a moment.

But as far as our financial results overall I'm pleased with how we performed in Q1 during a challenging environment.

We beat our guidance across all metrics led by revenue outperformance and farm Swift, which we acquired in late Q4, and some better performance around individuals' lineups exiting the quarter.

On the flip side, we saw continued weakness across our teams plans as our customers faced pressure in their own businesses.

And we also saw continued moderation in our docks and in Dropbox sign businesses due to ongoing softness in their respective markets.

Over the last several months, we've noted that we're not immune to the increasing macro headwinds that our customers are also facing.

And during this period, we've carefully evaluated our different business units and recognize that some investments which showed promise before the downturn have less potential today.

Part of this is accepting some normalization following demand acceleration during the pandemic as well as the natural maturation of our existing FSS business.

And yet at the same time, we see a huge opportunity for building new AI powered products for our customers to improve the technology and tools that are used to get our work done which I'll discuss in more detail shortly.

I'm determined to ensure that dropbox is at the forefront of innovating for this new AI era, just as we were at the forefront of the shift to mobile and the cloud.

And while we've added talent over the last couple of years that bring AI and early stage product development skill sets to dropbox, we need to free up resources to better align our investments with these long term growth initiatives.

And so unfortunately, these shifts required us to reduce our workforce by approximately 16%.

This wasn't really tough decisions, but necessary to long term health of our company.

And while it's painful to say goodbye to many of our colleagues I'm grateful for all their contributions to dropbox.

In conjunction with this announcement, we've also updated and streamlined our strategic objectives.

The first objective is around building AI powered product experiences centered on organizing cloud content.

We believe for many years and the potential for AI to completely transforming knowledge work and we've been investing in automation and machine intelligence features to help our users organize their cloud content and search and discover more easily.

And with recent advancements in AI, we are able to accelerate our vision.

I'm excited to share some progress you've made here and what do you expect over the next few months.

Second we're evolving our core FSS experience to specifically address customers' workflows around documents and videos.

And with this shift we consolidated our docks and foreign Swift and Dropbox sign businesses together with our core team, which we believe will drive a more integrated and seamless product experience for our customers.

And lastly, as a foundational objectives, we remain focused on driving operational excellence by improving our efficiency, our execution and the product velocity.

So with that backdrop I'll share some updates for this past quarter and touch on what we're working on for each of our first two objectives.

Starting with investing in AI capabilities to organize all cloud content and improving our customers working lives.

You've heard me talk on previous calls about the evolution of workloads moving from files and folders to the browser and web based apps.

Well it used to be 100 icon on your desktop have now become 100 tabs in your browser.

And what used to be one hard drive to search for all your content is now 10 fragmented search boxes.

We believe a large audience of knowledge workers face growing challenges when searching organizing and using content across multiple cloud repository of the platforms to start their workflows and see a huge opportunity here.

That's why we've been working on in AI and ml powered solution that offers one universal search buyer for all your cloud content.

Our acquisition of <unk> in 2021 was an important first step in building the functionality and I'm excited to share that just this week.

Began testing our first AI powered universal search product with a select group of customers and can't wait to share more in the coming months.

Universal search is just one application of how AI and ml can improve the way our customers work.

We've all seen how generative AI tools like <unk> and others have captured People's imaginations, and Oprah and their eyes over the last few months to a lot of new possibilities.

One thing that becomes clear when using these tools is the need for personalization.

We all want and AI that knows about us than it is about our content notes about our company that you can interact with using natural language.

And of course, you can't build personalized AI without access to your data and building personalized AI at scale is a lot easier when you have millions of people already storing their most important information on your service.

So we strongly believe that users of existing dropbox products stand to benefit from AI enabled experiences like this and they want a service that they can trust that will use AI responsibly.

The market for these types of products and capabilities are growing faster than anyone could have imagined and I believe dropbox is uniquely positioned to lead here for years, we've invested in AI and ml technology to improve our infrastructure improve our search functionality image recognition and many others.

Now we can apply the same principles and techniques to organizing our customers working lives.

And our customers can rely on us as a trusted brand that integrates seamlessly with all of their work tools.

And we are committed to ensuring the privacy and security of our customers' content and using AI responsibly.

And we'll leverage our foundational strengths as we build out additional AI powered capabilities and lean into this new era of computing.

And just as we're increasing our product velocity with the launch of our new AI powered Universal search products. We're also increasing the level of urgency around our second objective, which is evolving existing dropbox FSS user experience to seamlessly address customers' workflows around documents and videos.

There are a number of important foundational steps that we're taking here ultimately to make the dropbox family of products easier to try buy and use.

Last quarter I talked about our rollout of Google one tap to reduce friction in the onboarding process and in Q1, we had tangible results with sign ups and sign ins exceeding our expectations.

And we continue to take steps to improve user retention by improving the reliability and usability of our product we have.

Identify customer pain points around the many forms of sharing and made improvements to provide a more consistent experience across mobile web and desktop, making it easier for users to manage who can access to share content.

We also made some enhancements around mobile upload performance and the reliability of the Dropbox, App, which drove improvements in mobile plus retention exiting the quarter.

Okay.

We're also making changes to address the increased downhole pressure, we've observed with our teams customers.

And while difficult employment trends and cost cutting initiatives among many of our teams customers way on our user counts, we've identified an opportunity to drive higher retention for our self serve teams customers by leveraging outsource sales support.

We're optimistic that this higher touch sales assisted motion will be an efficient way to mitigate some of the retention pressures we've seen with some of our self serve teams customers.

Moving to our workflow businesses, which now operate within our core division to improve execution and increase alignment across our teams in order to deliver a more holistic experience for our customers.

<unk> continued to see growth moderate in its ongoing challenges in the fundraising environment and we're actively working on diversifying into new verticals, such as sales and professional services as well as internationally.

We're also making progress on removing friction for our docks and users on Dropbox.

For example, we eliminated multiple terms of service gate and we've seen encouraging results with a healthy increase in trial starts for docs and among dropbox users.

Dropbox sign growth also continues to moderate against the challenging backdrop in esignature.

Might that we've continued to see higher win rates. So their dropbox sign API offering with customer, citing a better developer experience and a more customizable platform than our competitors.

And as we rightsize many areas of our business to Orion align with our growth outlook, we're shifting investments towards the dropbox sign API and towards deeper integration with the core Dropbox product.

We also see synergy potential of Dropbox sign and our PDF editing capabilities, which continue to gain traction among core FSS users as well as our recent acquisition of form Swift, which provides an online library of forums and tablets for small businesses and individuals.

And farm sweat in its first full quarter as part of Dropbox exceeded our expectations on users and Asps.

And the teams are already working quickly on integration, taking learnings from our past acquisitions, we've already launched Dropbox branded SCM pages and associated marketing campaigns to drive traffic to the <unk> site with encouraging early results.

I am pleased to see this integration off to a strong start and we'll continue to push for rebranding efforts and deeper product integrations later this year.

And finally, moving to our video workflow products, starting with replay, which allows video production teams to edit and collaborate on video projects simultaneously wherever they are.

In this era of distributed work replay has helped many creative professionals stay connected with our teams and deliver media projects faster more efficiently by avoiding time switching between editing and review tools.

I'm excited to announce that last week, we launched Dropbox replay to all users with premium features made available for an add on subscription.

We see a natural fit for replay to connect to the core Dropbox experience as a caters to many of the highly engaged creators who use dropbox FSS for work.

This is now the second video collaboration tool that we've created in house and launched into general availability. After we may drop box capture available to all users last fall.

Dropbox capture the video communication tool that helps team, saying think while avoiding meetings and long E mails to present material and offer educational and training content.

In Q1, we saw dropbox capture users grow significantly again quarter over quarter and we're excited to see its viral adoption continue driving both retention benefits and network effects across existing and prospective dropbox users.

In closing, we have been making a number of changes to setup dropbox for long term success.

And while I know these transitions are never easy and the macro environment remains challenging I believe our best days are ahead of us.

The AI era of computing has finally arrived and I personally haven't been this excited about what we're building since I started the company.

It's been really rewarding to be so hands on and developing our product roadmap alongside our leadership team.

We're strengthening our foundation, while innovating our next act.

We have a strong brand with hundreds of millions of users recognizing dropbox as a platform. They can trust with their most secure content and I'm excited about our path forward as we work to transform the way customers organize all of their cloud content and ultimately organize their working lives.

And with that I'll pass it on to Tim.

Thank you drew.

Today I'll walk through some financial highlights for Q1 and.

And provide an outlook for Q2 as well as an update.

On our 2023 guidance and our financial targets for 2024.

All within the context of the current macro environment and last week's restructuring which threw discussed.

I'll start with our first quarter results.

Total revenue for the first quarter increased eight 7% year over year.

$611 million.

Beating our guidance range.

$600 million to $603 million.

Foreign exchange rates provided an approximate $16 million headwind to growth.

In line with our previous guidance.

On a constant currency basis revenue grew 11, 6% year over year.

The upside to our revenue guidance was driven by outperformance from form Swift.

As well as some improving trends in our individuals' plans exiting the quarter.

Total <unk> for the quarter grew seven 8% year over year.

For a total of 246 8 billion.

On a constant currency basis, <unk> grew by $37 million sequentially.

And 11, 6% year over year, primarily driven by form Swift.

And pricing and packaging changes our teams plans that we announced last June .

We exited the quarter with $17 9 million paying users and.

<unk> added approximately 120000 net new paying users sequentially.

Average revenue per paying user for Q1.

Was $138 97.

An increase of over $4 compared to Q4 2022.

Driven by another quarter of teams customers renewing at higher prices, which we announced last June .

As well as a full quarter of forms with revenue.

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 .

We exclude stock based compensation amortization of purchased intangibles.

And certain acquisition related expenses.

Our non-GAAP net income also includes the income tax effect of the aforementioned adjustments.

Moving to our real estate strategy, where we have been taking steps to <unk>, our real estate portfolio as a result of our transition to a virtual first model.

In the first quarter, we continued to actively seek sub leases and considered buyouts of our San Francisco headquarters.

We did not incur any additional impairment charges in the quarter with our cumulative impairment incurred to date remaining at $604 million.

Given the current corporate real estate market, we have maintained our assumption that we will not enter into additional sub leases in San Francisco in the next few years.

Let's continue with the first quarter P&L.

Gross margin was 82% for the quarter, representing an increase of one percentage point on a year over year basis.

The improvement in our gross margin was primarily driven by a greater mix of higher density storage that can store more data within the same physical space, which resulted in lower depreciation as a percentage of revenue.

Operating margin was 28, 6% down nearly two percentage points year over year.

Mostly driven by an approximately approximate 80 basis point headwind from FX.

And a 50 basis point headwind from foreign Smith.

We exceeded our operating margin guidance by approximately two points.

Mainly due to our revenue outperformance and lower than expected workforce path.

Operating expenses were $329 million.

Up about 15% year over year.

Driven by increased R&D hiring in 2022.

As you mentioned, we've been adding engineers and early stage product leaders as we invest in our longer term growth initiatives around organizing all cloud content, leveraging artificial intelligence and machine learning.

In addition, our operating expenses increased year over year due to higher advertising expenses associated with forms with.

Net income for the first quarter was $146 million up 3% versus the first quarter of 2022.

As higher operating expenses offset most of the revenue increase.

Diluted EPS was <unk> 42.

Per share.

Based on 349 million diluted weighted average shares outstanding.

Up from 38 per share based on 373 million diluted weighted average shares outstanding for the first quarter of 2022.

Moving onto our cash balance and cash flow, we ended the quarter with cash and short term investments of $1 3 billion.

Cash flow from operations was $140 million in the first quarter.

Capital expenditures were $2 million during the quarter.

This resulted in quarterly free cash flow of $138 million.

Third to $131 million.

In Q1 of 2022.

In the quarter, we also added $35 million to our finance leases for data center equipment.

Let's turn to our share repurchase activity.

In Q1, we continued executing against the $1 $2 billion authorization.

That was approved in 2022 by repurchasing 8 million shares spending approximately $175 million.

As of the end of the first quarter, we have approximately $573 million.

Remaining under the current authorization.

I'd like to now share our guidance for the second quarter and provide an update to our full year 2023 guidance.

I will also provide some context on the thinking behind this guidance.

So the second quarter of 2023, we expect revenue to be in the range of.

612 $615 million.

On a constant currency revenue basis, we expect revenue to be in the range of 627.

$630 million.

We are assuming a currency headwind of approximately $15 million in the second quarter.

Which translates to over a 250 basis point headwind to growth.

We expect non-GAAP operating margin to be approximately 31, 5%.

This margin guidance excludes approximately $40 million related to severance and benefits, we expect to pay to employees.

Impacted by a reduction in force in Q2.

This also includes a roughly 130 basis points of headwind from FX and 50 basis points of headwind from foreign Smith.

Finally, we expect diluted weighted.

Average shares outstanding to be in the range of $343 million 348 million shares based on our trailing 30 day average share price.

For the full year 2023.

Due to the strengthening of the U S dollar since our last update.

We are revising our as reported revenue guidance range down by $5 million.

The 2.470.

The two point or eight 5 billion.

From a previous range of 2.4 dollars 75.

The two 490 billion.

However, on a constant currency revenue basis, we.

We are maintaining our prior guidance range of 2510.

The 252 5 billion.

Now estimated full year 2023 currency headwind of approximately $40 million.

Or approximately 170 basis point headwind to growth.

With the FX headwinds moderating significantly in the second half.

We expect gross margin to be approximately 81, 5% to 82%.

Which is up from our prior guidance of 81% to 82%.

We expect non-GAAP operating margin to be between 31% to 32%.

Up from our prior guidance of approximately 30%.

This also excludes the aforementioned severance and benefits we expect to pay in Q2.

This is inclusive of an approximately 80 basis point headwind from FX.

As well as an approximate 50 basis point headwind from our forms with acquisition.

We are revising the midpoint of our free cash flow guidance down by $10 million and narrowing the range to $820 million to $840 million.

From our previous guidance range of 825 to.

$855 million.

This includes cash outflows of approximately $23 million in cash outflows.

For the 2023 installments of acquisition related deal consideration holdback for docs and in command.

One time severance payments of approximately $40 million related to a reduction in force.

And consistent with our initial guidance. This includes an approximate $50 million of headwinds.

As a result of R&D tax legislation.

As it related to our capital expenditures, we are maintaining our prior guidance. We continue to expect our additions to finance leases.

To be approximately 5% of revenue and for cash capex to be in the range of $25 million.

$35 million in 2023.

Finally, we expect 2023 diluted weighted average shares outstanding to be in the range of $340 million.

345 million shares down from our previous guidance range of.

346 to 351 million shares.

This reduction in our share count reflects our commitment to an anticipated impact of our share repurchase program.

Here's some additional context on this guidance, let me first elaborate on our restructuring decisions, where our intent is to identify and address areas of inefficient spend.

And then to rotate our investments towards areas of higher future potential growth.

The reductions were thus largely targeted towards R&D and sales and marketing teams supporting our mature.

<unk> think in share category.

As well as some reductions against business lines that are facing distinct macroeconomic and competitive pressures.

We also intend to be more efficient with our marketing spend across these same areas.

In light of these changes and as it related to revenue we are maintaining our constant currency revenue guidance for 2023.

We saw outperformance in Q1, largely stemming from form Swift as well as some improving trends in our individual plans exiting the quarter.

Conversely, we continue to see macro headwinds weighing on our teams customers as well as both docks ensign.

These opposing trends combined with the potential impact to billings as a result of our reduced levels of head count and marketing investments.

Stemming from our restructuring are leading us to maintain our full year guidance. Despite the first quarter outperformance.

As related to operating margins, we are raising our operating margin guidance to approximately 31% to 32%.

Up over 150 basis points at the midpoint.

As compared to our prior guidance driven by net savings from a reduction in force.

As drew mentioned, while we are restructuring our existing business lines to increase their efficiency. We will also be investing in long term growth initiatives around organizing all cloud content.

Thus some of the savings will be offset by hiring talented skilled in AI and early stage product development, which has been factored into this guidance.

As it related to full year free cash flow, we are lowering our free cash flow expectations by $10 million at the midpoint.

There are a few factors leading to this reduced estimate.

First.

While we will derive cash savings from our restructuring events over time.

The benefit in 2023 is largely offset by severance payments and the timing of bonus payments Amy savings.

Which will be a benefit next year.

Additionally, as mentioned above.

We may see an impact to our billings in the second half of 2023 as.

As a result of our reduced levels of head count and marketing investments given our restructuring.

Which would have a more pronounced impact on cash as opposed to revenue this year.

Lastly, this guidance incorporates an approximately $8 million deterioration.

Foreign exchange rates since our initial guidance.

Which brings me to our long term financial targets of delivering gross margins of 80% to 82% operating margins of 30% to 32%.

At $1 billion of annual free cash flow by 2024.

We continue to operate within our long term margin ranges, where our recent restructuring activities are pushing us to the top end of these ranges.

While we are not offering more specific 2020 for guidance at this time.

We expect to see continued net savings in 2024.

For operating margins to be at or above the 2023 levels.

As it related to our $1 billion of annual free cash flow by 2024 target.

We are maintaining our $1 billion target at this time.

Our restructuring activities will increase our efficiency and will be a benefit to free cash flow in 2024.

However, we still have work to do to achieve our target.

We need to closely monitor the impact of our restructuring decisions and any corresponding impact on billings to ensure that we maintain an appropriate pace of growth across our existing business lines.

Additionally, we need to monitor our investments and organizing cloud content and AI to ensure that we are remaining disciplined with our spend and to validate that our new products are gaining an appropriate level of customer traction.

Lastly, we need to.

We continue to need to navigate numerous exogenous factors such as R&D tax legislation.

Softer sub leasing environment and deteriorating FX rates that continue to serve as headwinds.

Thus, while we are taking actions that bring us closer to our targets.

We need to execute well and remain disciplined with our spend amidst these varying dynamics.

In conclusion as drew mentioned we.

<unk> been making a number of changes to setup dropbox for long term success.

We are mindful of the difficult macro environment and the inherent challenges that come with businesses in transition and.

And we remain optimistic about our strategy as we improve our execution, while investing towards our future in this new.

Zero.

We will remain focused on our customers' operating the business efficiently and driving long term value for our shareholders.

With that I'll now turn it over to the operator for Q&A.

Thank you.

And as a reminder, ladies and gentlemen to ask a question simply press star one on your telephone and wait for your name to be Nm to withdraw your question simply press Star one again.

One moment, while we compile the Q&A Ralston.

And our first question comes from.

<unk> <unk> with RBC capital markets. Please proceed.

Hi, This is Richard polling on for Rishi. Thanks for taking my question.

So the first one is you talked a little bit about some of the investments that might have less potential today.

Outside of I guess some of the core FSS is there anything in particular that you identified that maybe wasn't working to Alan you want to shift away from.

Yeah.

Sure.

<unk>.

So I can start.

So we're continuing to invest.

That had been affected beyond the core business would conclude sign and docs and.

And they're still promising businesses, but as we see each.

Each of their categories affected in different ways.

Then if the prospective returns are and then we've trimmed some of our investment in those areas.

Mostly to free up resources to invest in.

Some of our future growth levers, but we're certainly not stopping investment in those areas and a lot of ways, where you take something like docs and.

In response to maybe true that the fundraising environment is there's lots of other.

Fundraising going on which means.

Lower demand for the for the production and the fundraise in context, but the underlying use case of.

Sure rich sharing with analytics and extra security features and a lot of what <unk> does.

Broad applicability to a lot of professional services. So we are diversifying and docs and and we're investing in docks and.

To both support other verticals and other geographies so.

So that's a little bit of the context behind some of the shifts and investment, but we continue to.

Be confident in the potential of these businesses.

And then this is Tim just to briefly add on to that we did take a hard look across the company, where we took this opportunity to consolidate or eliminate some roles and also to address lower performers.

And we also looked at where we had too many layers that we could streamline which are slowing down execution in decision making.

It's mainly the vast majority of the cuts were across R&D with additional cuts in sales and marketing and more minor cuts in G&A.

Got it Super helpful. And then just as a follow up impressed.

Impressive to see the good performance at our farms to ask then.

Really good acquisition on that side.

With the strong balance sheet and the continued free cash flow generation are there any other areas that you'd think about maybe investing more on the inorganic side and maybe maybe it's AI, but just anything you could talk to just around the inorganic.

Strategy from here.

Yes, so we're.

Certainly had a lot of success with our acquisitions are.

Happy with a lot of acquisitions, we've made and.

I wouldn't say, there's like a change in approach.

<unk> had successful acquisitions kind of a different scale. So that's bringing in great teams, our great products, great businesses and that will continue and as you pointed out we have a strong balance sheet cash flow. So we can.

<unk>.

So we have a lot of optionality there. So yes, and then certainly in the AI space. There's a lot of interesting early stage startups, where we.

We see opportunity and are spending a lot of time or there's a greater supply of AI startups, because there's a lot of interest and then we're.

We're certainly interested.

And adding adding there but at the same time, we'll continue to be disciplined.

And we got a lot of good places to put capital.

Got it thank you.

Thank you one moment for our next question. Please.

And it comes from the line of Mark Murphy with JP Morgan.

<unk>.

Thank you very much so I think it's a surprisingly solid quarter considering the environment do you have the 12% gross margin upside and solid free cash flow number we might have expected more do you sell just as well given the recent head count actions and so I'm wondering if.

You can expand on that a bit how much of that reduction might flow through to margins.

Maybe next year.

Versus how much is earmarked for incremental AI investments because.

Typically if we see a <unk>.

16% type of reduction.

It's going to yield a little more margin than that so I'm just trying to understand that particular equation and then I have a follow up.

Yeah, I'd look to our 2023 margin guidance, which is up 150 basis points from our prior guidance at the midpoint, it's an indication of the net savings. We expect this year and then note that we will continue to see some of the benefits carryforward into 2024 as the savings annualized and were not give.

In 2024 guidance right now, but I did indicate that I expect our margins to be at or above. These 2023 levels and this is where we are increasing our investments around AI and early stage product development, which were partially offset those savings and then we also did take the opportunity to address some performance manner.

<unk> with this risk where in some of these cases will be adding.

Backfill for those positions as part of it.

Action.

And so Tim.

We maybe think of the 150 basis points is a little more of the half year, if youre doing I don't know exactly when the.

When the costs and expenses Theyre kind of come kind of roll off the books, but is that one way to think about it like a hawk.

More like a 300 basis points annualized type of effects perhaps.

Yeah.

I'm going to elaborate much more on 24 just yet.

There's many factors that will go into our thinking for our guidance next year I think I'd just fall back on what I previously stated as far as I expect our margins to be at or above the 2023 levels.

Okay Fair enough and then.

Drew is it possible to provide an example of what is what you're picturing in your mind as you build out.

AI product you mentioned search you mentioned personalization I'm just trying to envision.

What the product would be or maybe how the how the user experience would feel.

As you start.

Steering relatively more investments into your AI Road map.

Sure.

So we'll have more specifics to share with the forthcoming launches but.

I think at a high level.

New products that we're creating and then Theres also applications of AI across our existing product portfolio.

Re imagine those experiences I think one of the most straightforward is really.

When you look at.

Everyone you use tools like chat TVT, there, they're not really personalized to you.

So if you ask a question like that.

You want to ask you a question like what's my passport number again or like <unk>.

Who in my company is working on this thing.

Why did we make this certain decision.

It is now possible we have the we have the.

Technical foundation to actually build and experience where you can use natural language and basically have the silicon brain that knows about you and your stuff in your company.

Sort of a personalized chachi P T.

We find ourselves very well positioned to build that kind of capability and we've been building towards that for many years.

So that's been I mean, there are other examples because theres a lot of other exciting applications beyond taxes are pretty much all of the different multimodal capabilities.

There's like then breakthroughs in.

And how you can do the things you can do with images and things you can do with video and things you can do with audio.

So there's a lot of different potential applications that were working on and we'll have more to sharing in the coming months.

Okay.

<unk> around Silicon, Brian maybe that's something we'll see from you in the future.

You got it rolls off the tongue pretty well thanks, a lot congrats on all the success. Thank you.

Thank you one moment please.

Okay.

And our next question comes from the line of Steve Anderson with Citi. Please proceed.

Okay, great. Thanks for thanks for taking my question.

I guess, maybe following up on the AI discussion a little bit I know Russell search and just kind of being rolled out there and tested but I guess, what's kind of in the early early feedback from.

From the customers that are trialing, it and I guess, how would you kind of thinking about.

If I could mean from like a monetization lever and how youre thinking about packaging.

Around that down the line.

Sure.

So we're just it's just reaching outside customers literally two days ago. So I want to let some of the feedback rolling a little more before.

But we're having a more comprehensive response.

Certainly using internally and that's a bit.

Ben It really helpful tool.

For us to kind of battle tested the product and make sure it's really great before rolling out to customers. So we've been some.

So milestones like like that closed beta.

We're really excited about that.

As far as pricing and packaging I mean, we certainly believe it will be.

Incremental revenue, we believe this will unlock new categories, the customer who might not otherwise be buying FSS or might not be either current or future FSS customers. So we think it's the big unlock on that front, but as far as well.

We'll have more to share on the specific pricing and packaging.

At the actual launches.

And then maybe just briefly from a financial perspective, we certainly plan to stay disciplined and closely monitor customer adoption and feedback as we consider further investment on this on this side. Our focus this year is on bringing a quality product to market and driving adoption and we do expect it will take several quarters before we start seeing any contribution to revenue.

These products.

Okay. That's helpful helpful context on.

That front.

I guess, maybe dig in a little bit more on just the.

Our upside upside in the quarter I guess, how do we think about some of the moving parts around there.

The farm Swift outperformance individual plan it sounds like the relatively strong versus maybe some of the headwinds that youre seeing.

And other aspects of it like any any kind of further kind of breakdown for the strength there.

Sure. So <unk> Swift did outperform our expectations. We continue to expect that it will contribute about two five points to our growth. This year and we're excited about the progress we're making on the integration front with form Swift I think we're also seeing improving sign up trends as a result of our rollout of Google one tap.

Rich reduces friction in the sign up and Onboarding process.

Also did see churn improve across our individual plans, particularly as we exited the quarter and then of course, we continue to see a contribution from the pricing and packaging changes that we announced in June on our team's clients.

Okay perfect I appreciate you taking.

Taking my questions here.

Thank you.

Our next question please.

Yeah.

And our next question comes from the line of Brent.

Jeffrey Please proceed.

Hey, this is <unk> on for Brent Thill. Thank you for taking my question.

First.

What are you seeing out there in the market and what considerations are factored into your guide.

What are you seeing in terms of churn.

Let's see as far as the macro trends I'd say that we're seeing trends that are roughly consistent with what we saw in the fourth quarter. We continued to see elevated price sensitivity and downhole pressure from our teams customers, particularly those that had layoffs themselves.

And then sign and docs and also continue to face macro related headwinds Doc.

<unk> in particular is exposed to the fund raising community, where the recent banking events or adding some volatility to that vertical and.

And we continue to see elevated levels of churn from our individual skus, though again, we did see those trends improve exiting the quarter. We also saw incremental FX headwinds in Q1, and we expect a similar impact in Q2.

From.

Our guidance philosophy perspective, we do remain prudent and continue to factor in an appropriate level of conservatism given the challenging macro landscape, we've assumed that key trends such as a degree of elevated churn and customer price sensitivity will continue.

Throughout 2023, so certainly factoring in these latest signals and not assuming any level of improvement in the economy and our guidance and certainly also mindful of our reduction in force and the potential impact that this could have on our billings given our reduced levels of investment in head count and marketing. So again all of these considerations are factored into our guidance.

Thanks <unk>.

Super helpful color and lastly, how should we be thinking about the mix of paid user growth and <unk> to drive future growth.

Sure so from a paid user perspective.

We added about 120000 paid users in the first quarter family plan was a significant contributor to that form Swift also added to net new paying users in Q1, particularly as this business does have a seasonal increase due to tax season.

As far as forward looking expectations, we don't formally guide to that new paying users.

And particularly as we navigate our pricing and packaging changes and the current macro environment I'd continue to expect.

Something in the neighborhood of roughly 100000, net new paying users per quarter with our <unk> expansion being more pronounced this year as we saw in the first quarter.

Okay.

Yes.

Thanks Super helpful.

Thank you so much.

And as a reminder to ask a question simply pay Taiwan, one on your telephone.

One moment for our next question please.

And it comes from the line of Matt Wallach with Bank of America. Please proceed.

Hi, Thanks. Thanks for the question I wanted to double tap on the command E opportunity here is there anything you can give us in terms of the competitive environment for Universal search or who you expect to compete most directly with.

Sure So I mean at a high level.

Yeah.

Yeah.

I'd say, it's very early for the category I think they're startups.

We're going to pursue ideas in this.

In this space.

And we believe that we're well positioned there because of our scale our distribution are able to our ability to make significant technical infrastructure investments.

And the fact that we already have these type of distress relationship with customers and that Theyre already trusting their most important information in Dropbox. So then when you think about.

Universal search and content.

We think we have big advantages versus versus startups, and then of course the platform companies.

Folks that provide office suites of various kinds.

They.

We'll certainly do things in this area as well, but I think the fact that we're platform agnostic and then also aspects of our trust and privacy brand.

The fact that we're a subscription business and not advertising.

Our track record with them.

And privacy and trust I think those are big advantages against the larger incumbents as well.

Excellent. Thank you and then just quickly was there anything to call out in terms of the <unk>. This quarter. It was a nice beat relative to expectations was that just the form swift tailwind or anything else.

Sure. So <unk> increased just over $4 sequentially and maybe breaking down some of the components of that increase was primarily driven by benefits from our pricing initiatives. So I'd say, that's about $2 50.

And our acquisition of form Swift that contributed about $2 and this was partially offset by the continued growth in our family plan.

Excellent. Thank you very much.

Thank you.

I'm not showing any further questions in the queue team.

Thank you everyone for.

Dialing in for your support and we'll see you next quarter.

And with that we thank you for participating in today's conference you may now disconnect.

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