Q2 2024 Dropbox Inc Earnings Call
I will now turn the call over to Peter Stabler. Please go ahead.
Peter Stabler: Thank you good afternoon, and welcome to Dropbox in second quarter 2024 earnings call.
Speaker Change: 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 forecast for our third quarter and fiscal year 2024, and our expectations regarding our revenue growth profitability and operating margin.
Peter Stabler: And free cash flow.
Peter Stabler: As well as our expectations regarding our business assets products strategies technology employees users demand and the macroeconomic environment.
Peter Stabler: These statements are subject to risks and uncertainties that could cause actual results to differ materially.
Peter Stabler: 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.
Peter Stabler: Factors and risks that could cause our actual results to differ materially from these forward looking statements.
Peter Stabler: As set forth in todays earnings release and in our quarterly report on Form 10-Q filed with the SEC.
Peter Stabler: We will also discuss non-GAAP financial measures, which are not prepared in accordance with generally accepted accounting principles.
Peter Stabler: A reconciliation of GAAP and non-GAAP results is provided in our earnings release and on our website at investors Dot Dropbox Dot com.
Peter Stabler: I'll now turn the call over to Dropbox as co founder and CEO drew Houston.
Drew Houston: Thanks, Peter and good afternoon, everyone welcome to our Q2 2024 earnings call joining.
Jim Reagan: Joining me today is Jim Reagan, 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 and provide an updated outlook for the remainder of the year.
Tim: I'll start with our business performance revenue.
Tim: Revenue for the quarter was slightly better than we anticipated with growth in self serve individual plans offsetting continued challenges within our teams business.
Tim: Net new paying user growth improved quarter over quarter, but we expect some volatility to return in the second half of the year.
Tim: Within our individual Skus, we're encouraged with the performance of our essentials product, which posted strong growth in the quarter.
Tim: Among our document workflow products performance was largely as expected as strong adoption of <unk> events data room helped to offset expected seasonal pressure in our farms business.
Tim: While we continue our work to improve our core FSS performance and prepare for an expanded rollout of dash, our AI powered universal search product we have.
Unknown Executive: site following this call.
Drew Houston: Remain focused on driving shareholder returns through spending discipline and our commitment to returning excess free cash flow to shareholders via our share repurchase program.
Peter Stabler: I will now turn the call over to Peter Stabler. Please go ahead. Thank you.
Drew Houston: I'll now share some additional thoughts on our top priorities.
Drew Houston: As a reminder, this year in our core business, we're primarily focused on improving our team's performance in.
Unknown Executive: Good afternoon and welcome to Dropbox's second quarter, 2024 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 2024. And our expectations regarding our revenue growth, profitability, operating margin, and free cash flow, as well as our expectations regarding our business assets, products, strategies, technology, employees, users, demand, and the macro economic environment.
Drew Houston: In parallel we continue our work to improve the features and functionality of dash, our AI enabled universal search product.
Drew Houston: As we shared previously the health of our teams business is important because our teams plans future higher net revenue retention rates greater customer lifetime value and more opportunities for license expansion and cross selling with new products like dash.
Unknown Executive: 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. Factors and risks that could cause our actual results to differ materially from these forward-looking statements are set forth in today's earnings release, and in our quarterly report on forum 10Q filed with the SEC. We'll also discuss non-gap financial measures, which are not prepared in accordance with generally accepted accounting principles.
Drew Houston: As part of our investments here in Q1, we made progress on driving improved trial starts teams invitations and higher weekly engagement.
Drew Houston: And now in Q2, we made further improvements to Onboarding, an invitation flows which helped increase the number of users activated within new teams.
Drew Houston: This increase in activation is important because we've seen that the earlier, we demonstrate value to multiple team members more likely that team's customers retain and expand.
Drew Houston: These positive indicators reflect some of the progress we're making to improve the health of our teams top of funnel.
Drew Houston: However, we continue to face headwinds from factors, including the challenging macro environment for Smbs.
Unknown Executive: A reconciliation of gap and non-gap results is provided in our earnings release, and on our website at investors.dropbox.com.
Drew Houston: Sensitivity following our recent team's price increase and changes we've made to the storage limits for our advanced teams plan.
Drew Houston: I'll now turn the call over to Dropbox's co-founder and CEO, Drew Houston. Thanks, Peter, and good afternoon, everyone. Welcome to our Q2 2020 quarter earnings call.
Drew Houston: These headwinds have thus far have largely offset the progress we've made across our top of funnel initiatives.
Drew Houston: To combat these headwinds and to ensure tighter alignment of our product development and go to market efforts. We recently concluded an in-depth refinement of our customer segmentation model.
Drew Houston: Joining me today is Tim Regan, 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, and provide an updated outlook for the remainder of the year. I'll start with our business performance. Revenue for the quarter was slightly better than we anticipated, with growth and self-serve individual plans offset and continue challenges within our teams business. Net new paying user growth improves quarter over quarter, but we expect some volatility to return in the second half of the year.
Drew Houston: The segmentation work informs our product road maps and guidance, both our self serve motion an outbound sales teams as we build integrated sales campaigns targeted at key user profiles across our priority industries in GFS.
Drew Houston: For example, we know that our most passionate customers are often those whose professional work centers on external sharing or people, who work with large files and create media for a living.
Speaker Change: Or some of our most loyal users who rely on dropbox for years, because of Dropbox as upload speeds and performance and.
Drew Houston: Within our individual skews, we're encouraged for the performance of our essentials product, which posted strong growth in the quarter. Among our document workflow products, performance was largely expected, as strong adoption of DocSense Advanced Data Room helped to offset expected seasonal pressure in our forms with business. While we continue our work to improve our core FSS performance, and prepare for an expanded rollout of Dash, our AI-powered universal search product, we remain focused on driving shareholder returns through spending discipline and our commitment to returning the excess free cash flow to shareholders via our share repurchase program.
Speaker Change: And we're committed to all of these customers and are focusing our product development and go to market efforts to support them across priority industries and verticals like professional services manufacturing for media.
Speaker Change: All of these customers are United in meeting Dropbox to do three primary jobs for them.
Drew Houston: Securing organizing and sharing all the digital content.
Drew Houston: And in April we launched several new features that are aligned with these customer jobs to be done.
Drew Houston: First we launched the FSS end to end encryption and docs and advanced data rooms to help customers secure their content and share multiple thousands of single link we launched Microsoft co offering to help our customers stay organized with their content and third we improved our replay functionality to help users share and comment on video content.
Drew Houston: We'll now share some additional thoughts on our top priorities. As a reminder, this year in our core business, we're primarily focused on improving our teams performance. In parallel, we continue our work to improve the features and functionality of Dash, our AI-enabled universal search product. As we shared previously, the health of our team's business is important because our team's plans feature higher net revenue retention rates, greater customer lifetime value, and more opportunities for licensed expansion and cross-selling of new products, like Dash.
Drew Houston: We continue to invest in these themes during the second quarter, specifically, we focused on improving the sharing experience for our customers given that over 50% of new customer sign ups are driven by share.
Drew Houston: And over the year.
Speaker Change: We've expanded the number of surfaces, we addressed the sharing experience Gabe became somewhat fragmented and consistent which introduce some unnecessary friction and led to some declines in sharing activity.
Drew Houston: As part of our investments here in Q1 we made progress on driving improved trial starts, teams invitations, and higher weekly engagement. And now in Q2 we made further improvements to onboarding and invitations flows which helped increase the number of users activated within new teams. This increase in activation is important because we've seen that the earlier we demonstrate value to multiple team members more likely that teams customers retain and expand. These positive indicators reflect some of the progress we're making to improve the health of our teams top of final.
Drew Houston: By better aligning our customer experience across platforms, we've been able to reverse these declines driving year over year increases in sharing during Q2.
Drew Houston: We're excited to see how the focus on improving the user experience translates to increased customer engagement and will continue this work to further reduce sharing friction for our users in the quarters ahead.
Speaker Change: And while it seems that the primary focus for us individuals remain an important part of our business.
Drew Houston: However, we continue to face headwinds from factors including the challenging macro environment for SMBs, price sensitivity following our recent teams price increase, and changes we made to the storage limits for our advanced teams plan. These headwinds have thus far largely offset the progress we've made across our top of funnel initiatives. To combat these headwinds and to ensure a tight alignment of our product development and go to market efforts, we recently concluded an in depth refinement of our customer segmentation model.
Drew Houston: In particular, we continue to see more of our individual user or sign up to their mobile devices and it's critical that we offer a compelling experience to these customers.
Drew Houston: To that end in Q2, we launched a redesigned mobile web experience extending the experience we launched through our web based customers last fall.
Drew Houston: We also rolled out of a redesigned mobile upsell experience focused on educating the user on how trials work and giving them peace of mind that there'll be reminded before their trial.
Drew Houston: Collectively these changes led to a sizable increase in trial starts and helped contribute to our additions in paying users this quarter.
Drew Houston: The segmentation work informs our product road maps and guides both our self serve motion and outbound sales teams as we build integrated sales campaigns targeted keys or profiles across our priority industries and geos. For example, we know that our most passionate customers are often those whose professional work centers on external sharing or people who work with large files and create media for a living or some of our most low users who rely on dropouts for years because the job boxes upload speeds and think performance.
Drew Houston: I also wanted to highlight some of the foundational work, we're doing on our platform to make it easier for customers to purchase multiple products from us.
Drew Houston: Historically customers, who purchased an additional product like replay had to connect and mirror their FSS subscription with these new licenses, so as an all or nothing proposition with limited flexibility.
Drew Houston: We've now addressed this challenge by launching partial provisioning, providing customers the ability to add products for subsets of the teams and.
Drew Houston: And we're committed to all these customers and are focusing our product development and go to market efforts to support them across priority industries and verticals like professional services manufacturing for media. All these customers are united in needing dropouts to do three primary jobs for them, securing, organizing, and sharing all their digital content. In April, we launched several new features that aligned with these customer jobs to be done. First, we launched the FSF end-to-end encryption and docs and advanced data rooms to help customers secure their content and share multiple files with a single link, to launch Microsoft co-authoring to help customers stay organized with their content.
Drew Houston: And later this year, we expect to rollout standalone purchasing of products untethered from an FSS subscription as we aim to give our customers the option to purchase the products that are best suited for them.
Drew Houston: Partial provisioning and Standalone purchasing will not only provide greater flexibility when selling our current products will be critical to the expanded rollout of dash, which we expect to offer as both an add on feature to existing FSS plans as well as a standalone product.
Drew Houston: Additionally, we continue to iterate on our bundling strategy.
Drew Houston: As we've discussed our launch of product bundles last October fell short of our expectations. In response, we have lowered our pricing on some of these bundles last quarter.
Drew Houston: This change in price mitigated some of the pressures that we had been seeing but did not lead to a meaningful inflection in users converting to these plants.
Drew Houston: And third, we improved our replay functionality to help users share and comment on video content. We continue to invest in these names during the second quarter. Specifically, we focused on improving the sharing experience for our customers, given that over 50% of new customer signups are driven by sharing. In over the years, as we expanded the number of surfaces we addressed, the sharing experience became somewhat fragmented and inconsistent, which introduced some unnecessary friction and led to some declines and sharing activity.
Drew Houston: Therefore, devoting our efforts to ensuring that we're offering a compelling mix of features and functionality of these plans across our mobile desktop and web services, whereas our initial our initial strategy was primarily web focused.
Drew Houston: By better aligning our customer experience across platforms, we've been able to reverse these declines, driving year over year increases and sharing during Q2. We're excited to see how the focus on improving this user experience translates to increased customer engagement and will continue this work to further reduce sharing friction for our users in the corners of the head.
Drew Houston: Done a lot of valuable experience and beginning to introduce bundles to our customers, including extending our commerce and identity platforms to enable bundled products.
Drew Houston: These foundational improvements will enable us to offer future combinations of features and functionality as we launch or acquire new products.
Drew Houston: I'll now provide a quick update on dash, our AI powered universal search product.
Drew Houston: This quarter, we made great product ton, improving the dash product and capabilities and evolving our go to market approach.
Drew Houston: For example, the team once again drove double digit increases in search access rates for new and existing users and nearly double at some of our search relevance metrics.
Drew Houston: And while teams is a primary focus for us, individuals remain an important part of our business. In particular, we continue to see more of our individual users sign up through their mobile devices and it's critical that we offer a compelling experience, to these customers. To that end, in Q2, we launched a redesign mobile web experience, extending the experience we launched to our web-based customers last fall. We also ruled out a redesign mobile upsell experience focused on educating the user on how trials work and giving them peace of mind that they'll be reminded before their trial ends.
Drew Houston: The team also drove engagement increases in key features such as stack from the start page and all of these are positive signs that we are building a performance and high quality product.
Drew Houston: We also continued to engage deeply with potential customers and incorporate their feedback into our road map for.
Drew Houston: For example, based on user feedback.
Drew Houston: Enriching das with deeper AI summarization capabilities, and continuing our work to maximize efficiency.
Drew Houston: Beyond potential end users. We're also closely partnering with it administrators as they play a central role in deployment across organizations.
Drew Houston: Collectively, these changes led to a sizable increase in trial starts and helped contribute to our additions and paying users this quarter. I also wanted to highlight some of the foundational work we're doing on our platform to make it easier for customers to purchase multiple products for us. Historically, customers who purchased an additional product like Replay had to connect and mirror their FSS subscription with these new licenses, so it's an all or nothing in proposition with limited flexibility.
Speaker Change: Based on these conversations it's clear that it admins have a lot of unmet needs. When it comes to securing their teams content across multiple content platforms security is therefore, a central focus on our dash development efforts and we're confident we're going to have a competitive offering that provides edmunds with a lot of new control and transparency that they need.
Drew Houston: We've now addressed this challenge by launching partial provisioning, providing customers the ability to add products for success of their teams. And later this year, we expect to roll out standalone purchasing of products untethered from an FSS subscription, as we aim to give our customers the option to purchase the products that are best suited for them. Partial provisioning and standalone purchasing will not only provide greater flexibility when selling your current products, it will be critical to the expanded rollout of Dash, which we expect to offer as both an add-on feature to existing FSS plans as well as a standalone product.
Drew Houston: We've also been working on a plan to go to market strategy.
Speaker Change: Over half a million paying teams trust dropbox to secure organize and share digital assets.
Speaker Change: Our teams are already busy identifying the best prospects for our outbound sales motion, where we're already seeing strong signals of interest from our FSS customers.
Drew Houston: And as awareness of Universal search indexes capabilities grow we'll also lean into a self store sales motion.
Drew Houston: In closing, we continue to make progress on improving the user experience of our core access product and we're seeing some positive response in our funnel.
Drew Houston: At the same time, we're investing in capabilities that will improve the purchasing flexibility for our customers who want to buy multiple products from us.
Drew Houston: Additionally, we continue to iterate on our bundling strategy. As we've discussed, our launch of product bundles last October fell short of our expectations. In response, we lowered our pricing on some of these bundles last quarter. This change in price mitigated some of the pressures that we had been seeing, but did not lead to a meaningful inflection and users converting to these plans. We're therefore devoting our efforts to ensuring that we're offering a compelling mix of features and functionality of these plans across our mobile, desktop and web surfaces, whereas our initial strategy was primarily web-focused.
Drew Houston: We are still facing headwinds and we expect the second half of the year to include some volatility we're confident that the investments, we're making better position us to help our customers secure organize and share all of their digital content.
Drew Houston: We're also excited by the improvements we've made to our dash product, we'll have more to share in the coming months as we move closer to expanding our rollout.
Drew Houston: While we work to achieve both improved core performance and a successful dash expansion, we remain committed to driving shareholder returns seeking efficiency gains and investing prudently.
Drew Houston: We've gotten a lot of valuable experience in beginning to introduce bundles for our customers, including extending our commerce and identity platforms to enable bundled products. These foundational improvements will enable us to offer future combinations of features and functionality as we launch or acquire new products.
Drew Houston: I want to thank everyone on the Dropbox team for working hard to fulfill our vision and also thank our shareholders for their support.
Drew Houston: I'll now turn the call over to Tim to share a recap of our second quarter financial performance as well as our expectations for the remainder of the year.
Tim: Thank you drew.
Drew Houston: I'll now provide a quick update on Dash, our AI Power Universal Search product. This quarter, we made great products on improving the Dash product and capabilities and evolving our go-to-market approach. For example, the team, once again, drove double-digit increases in search success rates for new and existing users and nearly doubled some of our search relevance metrics. The team also drove engagement increases in key Dash features, such as stacks on the start page, and all these positive signs that were building a performance and I-quality product.
Tim: I'll cover our financial highlights from Q2.
Tim: <unk> guidance for Q3 and offer some updated thoughts.
Tim: On a full year 2020 for outlook.
Tim: Starting with our results for the second quarter.
Tim: Total revenue for Q2 increased one 9% year over year to $635 million.
Tim: Slightly ahead of the high end of our prior guidance range.
Tim: As expected foreign exchange rates had a minimal impact on revenue for the quarter.
Drew Houston: We also continued to engage deeply with potential customers and incorporate their feedback into our roadmap. For example, based on user feedback, we're enriching Dash with deeper AI summarization capabilities and continuing our work to maximize search efficiency. Beyond potential end users, we're also closely partnering with IT administrators as they play a central role in deployment across organizations. Based on these conversations, it's clear that IT admins have a lot of unmet needs when it comes to securing the team's content across multiple content platforms.
Tim: Yielding a one 8% year over year constant currency growth rate.
Tim: Total <unk> grew to a total of $2 $5 73 billion up two 9% year over year.
Tim: On a constant currency basis growth was two 2% year over year.
Drew Houston: Security is therefore a central focus in our Dash development efforts and we're confident we're going to have a competitive offering that provide with a lot of new control and trends. We've also been working on our planned-go-to-market strategy. Over half a million paying teams trust Dropbox to secure, organize, and share digital assets. Our teams are already busy identifying the best prospects for our outbound sales motion, where we're already seeing strong signals of interest from our FSS customers. And as awareness of universal search and dashescape abilities grow, we'll also lean into a self-sales motion.
Tim: We exited the quarter with $18, two 2 million paying users.
Tim: Adding approximately 63000 net new paying users on a sequential basis.
Tim: Average revenue per paying user was $139 93.
Tim: Relative paying user strength across our self serve individual plans was offset by continued challenges for our teams product.
Tim: And expected seasonality and other pressures weighing on our form Swift and signed businesses.
Speaker Change: Before we continue with further discussion of our P&L I would like to note that unless otherwise indicated.
Speaker Change: All income statement figures mentioned our non-GAAP.
Drew Houston: In closing, we continue to make progress on improving the user experience of our core access product, and we're seeing some positive response in our funnel. At the same time, we're investing in capabilities that will improve the purchasing flexibility for our customers who want to buy multiple products from us. We're still facing headwinds and we expect a second half of the year to include some volatility, we're confident that the investments we're making better position us to help our customers secure, organize, and share all of their digital content.
Tim: And exclude stock based compensation Ameren.
Speaker Change: Amortization of purchase intangibles.
Speaker Change: Acquisition related expenses.
Speaker Change: Net loss on real estate assets and workforce reduction expenses.
Tim: Our non-GAAP net income also includes the income tax effect of the aforementioned adjustments.
Tim: Okay.
Speaker Change: With that let's continue with the second quarter P&L.
Drew Houston: We're also excited by the improvements we've made to our dash product. We'll have more to share in the coming months as we move closer to expanding our rollout. While we work to achieve both improved core performance and a successful dash expansion, we remain committed to driving shareholder returns, seeking efficiency gains, and investing pretty easily.
Speaker Change: Gross margin was 84, 5% for the quarter.
Speaker Change: As mentioned previously the primary driver of the year over year increase in gross margin.
Tim: Was the increase in the useful life of our servers from four to five years effective January one of this year.
Drew Houston: I want to thank everyone on the Dropbox team for working hard to fulfill our vision, and also thank our shareholders for their support.
Speaker Change: This change resulted in approximately $9 million of benefit to gross profit in the second quarter.
Timothy Regan: I'll now turn the call over to Tam to share a recap of our second quarter financial performance, as well as our expectations for the remainder of the year. Thank you Drew. I'll cover our financial highlights from Q2, provide guidance for Q3, and offer some updated thoughts on our full year 2024 outlook.
Speaker Change: The impact of this change was weighted towards the first half of this year.
Tim: For the full year, we expect a benefit of approximately $30 million.
Speaker Change: Okay.
Speaker Change: Operating expenses were $308 million up approximately 2% year over year.
Speaker Change: Operating margin was 35, 9% ahead of our guidance of 33%.
Timothy Regan: Starting with our results for the second quarter. Total revenue for Q2 increased 1.9% year-over-year to $635 million. Blightly ahead of the high end of our prior guidance range. As expected, foreign exchange rates had a minimal impact on revenue for the quarter, yielding a 1.8% year-over-year constant currency growth rate. Total RR grew to a total of $2.573 billion, up 2.9% year-over-year. On a constant currency basis, growth was 2.2% year-over-year. We exited the quarter with 18.22 million paying users, adding approximately 63,000 net new paying users on a sequential basis.
Speaker Change: And up 170 basis points from the year ago period.
Speaker Change: Compared to our guidance, we ended the quarter with modestly lower marketing and outside services spend.
Speaker Change: Hiring in the quarter was also lower than originally anticipated as we've identified additional efficiency opportunities across our operations.
Speaker Change: Net income for the second quarter was $194 million up 12% year over year.
Speaker Change: Diluted EPS for the first quarter was <unk> 60 <unk>.
Speaker Change: Based on the 324 million diluted weighted average shares outstanding compared.
Speaker Change: Compared to <unk> 51.
Speaker Change: In the year ago quarter, representing an 18% year over year increase.
Speaker Change: Moving on to our cash balance and cash flow we.
Speaker Change: We ended the quarter with cash and short term investments of $1 1 billion.
Timothy Regan: Average revenue per paying user was $139.93. Relative paying users' strength across our self-serve individual plans was offset by continued challenges for a team's product and expected seasonality and other pressures weighing on our form swift and signed businesses.
Speaker Change: As a reminder, in the second quarter, we paid the second tranche of our partial San Francisco headquarters lease buyout totaling $14 9 million.
Speaker Change: Second quarter cash flow from operations was $231 million, an increase of 23% versus the year ago period.
Timothy Regan: Before we continue with further discussion of our P&L, I would like to note that unless otherwise indicated, all income statement figures mentioned are non-gap. And exclude stock-based compensation, amortization of purchasing tangibles, certain acquisition related expenses, net loss on real estate assets and workforce reduction. Action Expenses. Ardon gap net income also includes the income tax effect of the aforementioned adjustments.
Speaker Change: Capital expenditures in the quarter totaled $6 million.
Speaker Change: This resulted in quarterly free cash flow of $225 million.
Speaker Change: Compared to $185 million in Q2 of 2023.
Speaker Change: Free cash flow per share was <unk> 69.
Speaker Change: Representing a 28% year over year increase.
Speaker Change: In the quarter, we also added $35 million to our finance leases for data center equipment.
Timothy Regan: With that, let's continue with the second quarter P&L. Gross margin was 84.5% for the quarter. As mentioned previously, the primary driver of the year of your increase in gross margin was the increase in the useful life of our servers from four to five years effective January 1st of this year. This change resulted in approximately $9 million of benefit to gross profit in the second quarter. The impact of this change was weighted towards the first half of this year.
Speaker Change: In Q2, we repurchased just over 11 million shares spending $260 million.
Speaker Change: As of the end of the second quarter, we had approximately $868 million remaining under our current repurchase authorization.
Speaker Change: Our philosophy on share repurchases has not changed.
Speaker Change: We remain committed to returning a significant portion.
Speaker Change: Of our free cash flow to shareholders in the form of share repurchases.
Speaker Change: With the intention of reducing our share count over time.
Timothy Regan: For the full year, we expect a benefit of approximately $30 million. Operating expenses were $308 million up approximately 2% year over year. Operating margin was 35.9% ahead of our guidance of 33% and up 170 basis points from the year ago period. Compared to our guidance, we ended the quarter with modestly lower marketing and outside services spend. Eiring in the quarter was also lower than originally anticipated as we've identified additional efficiency opportunities across our operations.
Speaker Change: I would now like to share our 2020 for third quarter and updated full year guidance.
Speaker Change: I will also provide some context on the thinking behind this guidance.
Speaker Change: For the third quarter of 2024, we expect revenue to be in the range of.
Speaker Change: 635.
Speaker Change: $638 million.
Speaker Change: We expect an FX tailwind of less than a half a million dollars.
Speaker Change: We expect non-GAAP operating margin to be approximately 32%.
Speaker Change: Finally, we expect diluted weighted average shares outstanding to be in the range of $317 million.
Timothy Regan: That income for the second quarter was $194 million, up 12% year over year. Diluted EPS for the first quarter was 60 cents based on 324 million diluted weighted average shares outstanding compared to 51 cents in the year ago quarter, representing an 18% year over year increase.
Speaker Change: 322 million shares.
Speaker Change: Based on our trailing 30 day average share price.
Speaker Change: For the full year, we are narrowing our full year revenue outlook on an as reported and constant currency basis.
Speaker Change: Raising the bottom of our ranges by $5 million.
Speaker Change: As a result, our reported revenue guidance adjust two to $5 four zero.
Timothy Regan: Moving on to our cash balance and cash low, we ended the quarter with cash and short term investments of $1.1 billion. As a reminder, in the second quarter, we paid the second tranche of our partial San Francisco headquarters lease by out totaling $14.9 million. Second quarter cash low from operations was $231 million and increase of 23% versus the year ago period. Capital expenditures in the quarter totaled $6 million. This resulted in quarterly free cash low of $225 million compared to $185 million in Q2 of 2023.
Speaker Change: The two 550 billion.
Speaker Change: While our constant currency guidance suggest to.
Speaker Change: To $5 37.
Speaker Change: $254 7 billion.
Speaker Change: Consistent with prior guidance, we expect gross margin to be in the range of 83 to 83, 5%.
Speaker Change: For non-GAAP operating margin, we now expect to land between $33 five and 34% for.
Speaker Change: For the full year.
Speaker Change: Up from our prior guidance of $32, 5% to 33%.
Speaker Change: Our expectation for free cash flow is unchanged at 910.
Timothy Regan: Free cash low per share was 69 cents, representing a 28% year of year increase. In the quarter, we also added $35 million to our finance leases for data center equipment. In Q2, we repurchased just over 11 million shares spending $260 million. As of the end of the second quarter, we had approximately $868 million remaining under our current repurchased authorization. Our philosophy on share repurchases has not changed. We remain committed to returning a significant portion of our free cash low to shareholders in the form of share repurchases, with the intention of reducing our share counts, over time.
Speaker Change: $950 million.
Speaker Change: We continue to expect between 20 and $30 million of capital expenditures for the year.
Speaker Change: Our outlook for finance lease additions is unchanged at approximately 7% of revenue for the full year.
Speaker Change: Finally, we expect diluted weighted average shares outstanding to be in the range of 323 to 328 million shares based on our trailing 30 day average share price.
Speaker Change: This represents a reduction of 3 million shares for each of the range when compared to our previous full year guidance of 302006.
Speaker Change: The 331 million shares.
Speaker Change: I'll now share some additional context regarding our outlook.
Timothy Regan: I now like to share our 2024 third quarter and updated full-year guidance where I will also provide some context on the sinking behind this guidance. For the third quarter of 2024, we expect revenue to be in the range of 635, 638 million dollars. We expect an FX tailwind of less than a half a million dollars. We expect non-gath operating margin to be approximately 32%. Finally, we expect eluded weighted average shares on standing to be in the range of 317 million to 322 million shares based on our trailing 30-day average share price.
Speaker Change: Consistent with our historical approach our guidance reflects what we have a high degree of visibility into today.
Speaker Change: The operating environment remains challenging for small businesses and our outlook Embeds our expectations for some increased near term volatility.
Speaker Change: Particularly with regard to our teams business, where we anticipate near term downside risks associated with some larger accounts.
Speaker Change: That will likely impact our paying user count in Q3 and Q4.
Speaker Change: In addition, we also expect seasonal pressure on forms with paying user count as customers that primarily use form slipped during tax season.
Speaker Change: The part the platform.
Speaker Change: And to a lesser extent some headwinds within our siding business.
Timothy Regan: For the full year, we are narrowing our full-year revenue outlook on an as reported in constant currency basis by raising the bottom of our ranges by 5 million dollars. As a result, our reported revenue guidance adjust to 2.540 to 2.550 billion dollars, while our constant currency guidance adjust to 2.537 to 2.547 billion dollars. Consistent with prior guidance, we expect gross margin to be in the range of 83 to 83.5%. For non-gath operating margin, we now expect to land between 33.5 and 34% for the full year, up from our prior guidance at 32.5 to 33%.
Speaker Change: Coming from the security incident, we mentioned last quarter.
Speaker Change: Each of these factors will serve as headwinds to our revenue billings and paying user numbers.
Speaker Change: Thus, we expect to end the year with total paying users roughly flat.
Speaker Change: From where we ended the second quarter.
Speaker Change: Regarding non-GAAP operating margin our raised full year outlook reflects our performance year to date and our continued hiring discipline along with an emphasis on hiring in low cost locations.
Speaker Change: Sequentially, we expect some incremental expense as we invest in marketing initiatives.
Speaker Change: And prepare for our annual customer focused event in the fourth quarter.
Speaker Change: While also maintaining some optionality to spend behind discrete initiatives.
Speaker Change: Additionally, our second half outlook Embeds, a decreasing benefit to gross margin from the aforementioned change in the useful life of our servers.
Timothy Regan: Our expectation for free cash flow is unchanged at 910 to 950 million dollars. We continue to expect between 20 and 30 million dollars of capital expenditures for the year. Our outlook for finithly conditions is unchanged at approximately 7% of revenue for the full year.
Speaker Change: We are maintaining our full year free cash flow guidance.
Speaker Change: While we're pleased with the improved outlook for full year non-GAAP operating margin.
Speaker Change: There are several factors that impact flow through to free cash flow.
Speaker Change: For example, the aforementioned items impacting our paying user numbers have a more immediate impact on billings and cash.
Timothy Regan: Finally, we expect eluded weighted average shares upstanding to be in the range of 323 to 328 million shares based on our trailing 30-day average share price. This represents a reduction of 3 million shares for each end of the range, one compared to our previous full year guidance of 326 to 331 million shares.
Speaker Change: Similarly.
Speaker Change: X rates have deteriorated since our initial guidance, which also has a more immediate impact on billings and cash.
Speaker Change: We also expect to earn less interest income given our increased share repurchase activity, which impacts free cash flow, but does not impact operating margins.
Speaker Change: In conclusion, we continue to focus on solidifying our core file sync and share business.
Timothy Regan: I'll now share some additional context regarding our outlook. Consistent with our historical approach, our guidance reflects what we have a high degree of visibility into today. The operating environment remains challenging for small businesses and our outlook embeds our expectations for some increased near-term volatility, particularly with regard to our team's business, where we anticipate near-term down-cell risk associated with some larger accounts that will likely impact our paying user count in Q3 and Q4.
Speaker Change: By focusing on our core competencies and bringing more value to our customers.
Speaker Change: Our objective with the core business as it continue to drive revenue growth.
Speaker Change: And lay the foundation for our future, while concurrently generating profitability and increasing cash flow per share.
Speaker Change: We also continue to invest in new sources of long term growth most notably dash.
Speaker Change: Where we are getting closer to introducing dysfunctionality more broadly to our customers.
Speaker Change: We are making progress across these objectives and believe that these efforts will culminate in creating long term value for our shareholders.
Timothy Regan: In addition, we also expect seasonal pressure on forms with paying user count as customers that primarily use forms with their impact, season, Depart the platform, and to a lesser extent, some headwinds within our sign business, stemming from the security incident we mentioned last quarter. Each of these factors will serve as headwinds to our revenue, buildings, and paying user numbers. Thus we expected in the year with total paying users roughly flat from where we ended the second quarter.
Speaker Change: With that operator, please open the line for questions. Thank you and as a reminder to ask a question press star one on your telephone and wait for your name to be announced.
Speaker Change: To remove yourself from the queue Press star one again.
Speaker Change: For our first question that comes from the line of Brent Thill with Jefferies. Please proceed.
Love Soda: Hi, drew hi, Tim. Thank you again for taking my question. This is love soda on for Brent Thill.
Speaker Change: Maybe the first one for you drew.
Timothy Regan: Regarding non-gap operating margin, our raised full-year outlook reflects our performance year-to-date and our continued hiring discipline, along with an emphasis on hiring and low-cost locations. Sequentially, we expect some incremental expense as we invest in marketing initiatives, and prepare for our annual customer-focused event in the discreet initiatives. Additionally, our second half outlook embeds a decreasing benefit to gross margin from the aforementioned change in the useful life of our servers.
Speaker Change: As we look at a bunch of the horizontal application.
Speaker Change: Been a big investor debate around.
Speaker Change: <unk> based pricing versus volume based pricing in the age of AI.
Speaker Change: As you look at that could you just share your thoughts on the monetization plans there and how do you think you are injecting more volume based pricing to make up for any.
Speaker Change: Seek base degradation that you might see.
Love Soda: Sure.
Speaker Change: So the question I mean, so to be clear dashes pre revenue it's in beta right now.
Timothy Regan: We are maintaining our full-year free cash flow guidance. While we're pleased with the improved outlook for full-year non-gap operating margin, there are several factors that impact the flow through to free cash flow. For example, the aforementioned items impacting our paying user numbers have a more immediate impact on buildings and cash. Similarly, FX rates have deteriorated since our initial guidance, which also has a more immediate impact on buildings and cash. We also expect to earn less interest income, given our increased share-reperture activity, which impacts free cash flow, but does not impact operating margins.
Speaker Change: But the way we're thinking about it is.
Love Soda: Or the way, we're thinking about pricing and packaging and a lot of ways it will be.
Love Soda: Heavily informed by what works what worked with Dropbox, one point now.
Love Soda: And a lot of the playbook that we had around freemium and self serve and sharing driven virality and then bridging too.
Love Soda: Self serve team accounts and moving up market into managed accounts.
Love Soda: Envision.
Love Soda: Taking advantage of a lot of the same levers.
Love Soda: With dash and.
Speaker Change: We expect that it should the pricing model should be pretty straightforward I mean, obviously, if there is if we need somewhat.
Timothy Regan: In conclusion, we continue to focus on solidifying our core file-sync and shared business by focusing on our core competencies and bringing more value to our customers. Our objective with the core business is to continue to drive revenue growth and lay the foundation for our future while concurrently generating profitability in increasing cash low-per-share. We also continue to invest in new sources of long-term growth, most notably Dash, where we are getting closer to introducing this functionality more broadly to our customers. We are making progress across these objectives and believe that these efforts will culminate in creating long-term value for our shareholders.
Love Soda: If there are different knobs and dials in terms of like AI usage or volume based pricing.
Love Soda: <unk>.
Love Soda: But we're not.
Love Soda: Dogmatic about any one model, but our preference is to keep things simple for our customers and so far we haven't when talking to prospects, we haven't seen a lot of pushback or concerns.
Love Soda: On a pretty straightforward subscription model.
Speaker Change: Got it and then just a quick follow up on the team the challenges that youre seeing on the team side.
Speaker Change: I guess.
Speaker Change: Is there a way to dig deeper and parse out like how much of this is macro versus.
Love Soda:
Love Soda: The pricing reaction.
Love Soda: <unk>.
Love Soda: Is there an element of competitive.
Unknown Executive: With that operator, please open the line for questions. Thank you, NSI reminder, to ask a question, press star 11 on your telephone and wait for your name to be announced. To remove yourself from the queue, press star 11 again.
Speaker Change: Sure and losses on that side, just additional thoughts there would be appreciated. Thank you.
Love Soda: Yes.
Love Soda: So I'd say, it's largely what we saw last quarter as a continuation of prior trends.
Luv Sodha: One moment for our first question that comes from the line of Brent, Phil with Jeffries, please proceed. Hi, Drew, hi, Tim. Thank you again for taking my questions.
Love Soda: We saw that some of the price increases we've made over the years over the last few years.
Love Soda: <unk> ended.
Love Soda: We ended up pulling.
Love Soda: On balance there are beneficial.
Drew Houston: This is Love Soda on for Brent Till. Maybe the first one for you, Drew, as we look at a bunch of the horizontal applications, there's been a big investor debate around seed-based pricing versus volume-based pricing in the age of AI. As you look at Dash, could you just share your thoughts on the monetization plans there and how do you think you're injecting more volume-based pricing to make up for any seed-based degradation that you might... Sure.
Love Soda: But they pulled forward there they represented something of a pull forward and then for new customers.
Love Soda: Higher prices plus more price sensitivity generally.
Love Soda: Has led to a weakening.
Love Soda: Top of funnel, which we spend.
Love Soda: Addressing in a number of ways and we won by reverting some of the.
Love Soda: Pricing changes, we made last October when we introduce some of the bundles.
Love Soda: And then second is just the nuts and bolts just the fundamentals of buildup removing friction from the Onboarding experience.
Love Soda: And we found that when we look at and we just watch when we sort of sit down as a customer or watch a customer.
Drew Houston: Thanks for the question. I mean, so to be clear, where Dash is pre-revenue, it's in beta right now. But the way we're thinking about it is, or the way we're thinking about pricing and packaging, and in a lot of ways will be heavily informed by what's worked, what worked with Dropbox 1.0. And a lot of the playbook that we had around freemium and self-serve and sharing driven virality, and then bridging to self-serve team accounts and moving up market into managed accounts.
Love Soda: Walk through the Onboarding experience, there's still a lot of steps that we could simplify.
Love Soda: So we've seen a lot of good early returns.
Love Soda: And green shoots around okay.
Love Soda: As we simplify the team Onboarding experience as we make it easier to invite other folks to your team and get set up as we rationalize some of the sharing features.
Speaker Change: Some of the stuff that I talked about in my <unk>.
Speaker Change: Earlier remarks, but just really tuning those basic yeah.
Speaker Change: User and viral loops.
Drew Houston: We envision taking advantage of a lot of the same levers with Dash. And we expect that the pricing model should be pretty straightforward. I mean, obviously, if there's, if we need somewhat, if there are different nods and dials in terms of like AI usage or volume-based pricing. We're not dogmatic about any one model, but our preference is to keep things simple for our customers and so far we haven't, when talking to prospects we haven't seen a lot of pushback or concerns on a pretty straightforward subscription model.
Speaker Change: That theres still a lot of headroom, there and when we look at different funnel metrics on the team's business.
Speaker Change: And compare them to other SaaS products with similar similar characteristics, we still see some headroom there.
Speaker Change: But that said, we're not out of the woods I would say these improvements haven't yet offset some of the bigger picture.
Speaker Change:
Speaker Change: Just like macro pressure or.
Speaker Change:
Love Soda: Or other factors.
Love Soda: But they are ahead of where it's headed in the right direction.
Speaker Change: Got it and none of it is a competitive rate.
Love Soda: Well I'm sure some of its competitive although I wouldnt say theres like a <unk>.
Love Soda: I mean, we've had kind of we've competed against the.
Drew Houston: Got it. And then just a quick follow up on the team, the challenges that you're seeing on the team side. I guess, is there a way to dig deeper and parse out like how much of this is macro versus, you know, versus the pricing reaction? And, you know, is there an element of competitive share losses on that side? I just additional thoughts there would be appreciated. Thank you. Yep. So I say it's largely what we saw last quarter is a continuation of prior trends.
Love Soda: Microsoft's and googles of the world for since the company was founded so I wouldn't say, there's any new competitive dynamics, but for sure.
Love Soda: Platform companies or whats the product that's bundled in the office suite is going to be our primary competitor in most cases.
Love Soda: So that's definitely a factor, but that's kind of been a thought whether that would have also been a factor 10 years ago.
Speaker Change: Got it thank you so much.
Love Soda: Thank you.
Steven <unk>: Our next question comes from the line of Steven <unk> with Citi.
Speaker Change: Please go ahead.
Drew Houston: We saw that some of the price increases we've made over the year over the last few years. Ended up pulling, they're on balance. They were beneficial, but they pulled forward. They represented something of a pull forward and then for new customers. Higher prices and plus more price sensitivity generally has led to a weakening of top of funnel, which we've been addressing in a number of ways. We won by reverting some of the pricing changes we made last October when we introduced some of the bundles.
Steven <unk>: Okay, great. Thanks for taking the questions here.
Steven <unk>: I guess, maybe just to start just on dash on on the AI product set I guess, what's kind of the feedback you've gotten so far.
Steven <unk>: <unk>.
Steven <unk>: For how customers might be thinking about adopting that and utilizing it and I guess secondarily, how are you thinking about the monetization.
Love Soda: For that at this point.
Love Soda: And trying to drive share of wallet within within customers.
Speaker Change: Yep. So early feedback has been good I mean, I think the first thing we look for.
Drew Houston: And then second is just the nuts and bull or just the fundamentals of build of removing friction from the onboarding experience. And we found that when we look at, you just watch when we sit down as a customer or watch a customer walk through the onboarding experience. There's still a lot of steps that we could simplify. And so we've seen a lot of good early returns and green shoots around. As we simplify the team onboarding experience, as we make it easier to invite other folks to your team and get set up as we rationalize some of the sharing features, some of the stuff that I talked about in my earlier remarks, but just really tuning those basic user and viral loops.
Love Soda: Is that the value prop clearly resonates right.
Speaker Change: It's hard to hard to find someone that doesn't have these issues of having 100 tabs open in 10 different search boxes.
Speaker Change: And kind of the.
Speaker Change: Mayhem of the.
Love Soda: New world of distributed work.
Love Soda: So.
Love Soda: And then once you show customers that this is actually a solvable addressable problem.
Love Soda:
Love Soda: They're pleasantly surprised so I think the value prop resonates and then dashed specifically.
Love Soda: We've made a lot of progress in.
Love Soda:
Love Soda: Getting the product to where we wanted to be from a quality standpoint. So for example.
Love Soda: In Q2, we made big advances in continuing to make double digit percentage point improvements in search success rates.
Drew Houston: That there's still a lot of headroom there and when we look at different funnel metrics on the team's business and compare them to other SaaS products with similar characteristics, we still see some headroom there. But that said, we're not out of the woods. I would say these improvements haven't yet offset some of the bigger picture. Like Macro Pressure or other factors, but it's head in the right direction. Carter, and not of it is competitive, right?
Love Soda: Search ranking quality things like that which is important because the first the first thing. We do is get the product experience right. Then we look at engagement and retention and then once those are in good shape, then we turn on.
Love Soda: Then we turn on distribution and monetization so I'm really happy with the progress, we're making on the product quality side and it's great to see customers.
Love Soda: It's great to see that really product resonate with customers.
Drew Houston: Well, I'm sure some of it's competitive, although I wouldn't say there's like a diff, I mean, we've had kind of, we've competed against the, you know, Microsoft's and Google's the world for, since the company was founded. So, I wouldn't say there's any new competitive dynamics. But for sure, the platform companies are, you know, what the product that's bundled in the office suite is going to be our primary competitor in most cases. So, that's definitely a factor, but that's kind of been a, that would have also been a factor 10 years ago. Carter, thank you so much.
Love Soda: Who are kind of using it for their like search box for their for their private information and people understand that there's.
Unknown Executive: Yes, thank you.
Speaker Change: It's a bunch of chat GBT is great, but there's a lot of questions that chat GPT can't answer you know if you're asking like what's my windows.
Love Soda: My lease expire or whereas that slide from last year's product deck or product launch.
Speaker Change: Existing tools can't really solve that but but dash can so.
Love Soda: And then I'd say there's also.
Love Soda: <unk>.
Love Soda: On.
Love Soda: And another area that's something that's that's been interesting is that the I T edmunds have a lot of unmet needs around.
Steven Enders: Our next question comes from the line of Steven and there's with city, please go ahead. Okay, great. Thanks for taking the questions here. I guess maybe just to start just on a dash on the AI products that I guess what kind of the feedback you've gotten so far. For, you know, how customers might be thinking about adopting that and utilizing it. And I guess secondarily, how are you thinking about the monetization for that at this point and trying to drive share wallet within customers?
Love Soda: Keeping track of what everybody sharing across multiple platforms.
Love Soda: And so we see a lot of opportunity to solve some new or to address some new unmet needs.
Love Soda: On the security side.
Love Soda: So we're very excited about the roadmap for dash in and where we will have a lot more to share on the specifics of both the product functionality.
Love Soda: And some of the.
Love Soda: And things like pricing and packaging in the coming months this year.
Love Soda: Okay.
Love Soda: Contacts.
Speaker Change: I guess I'll look forward to what the what those look like.
Steven Enders: Yep, so early feedback's been good. I mean, I think the first thing we look for is that the value prop clearly resonates, right? It's hard to find someone that doesn't have these issues of having 100 tabs open and 10 different search boxes and kind of the mayhem of the new world of distributed work. So a lot, and then once you show customers that this is actually a solvable addressable problem, they're pleasantly surprised.
Speaker Change: I guess on some of the document workflow product it sounds like.
Love Soda: <unk> seen a bit of an impact with sign in.
Love Soda: Swift is yes.
Love Soda: I guess, one on a pre tax season, but can you give a little more clarity on.
Love Soda: What happened or what the customer activity was post post security challenges with sign in <unk>.
Speaker Change: The impact that that's having on the outlook here.
Love Soda:
Speaker Change: So pretty contained I mean to begin with.
Steven Enders: So I think the value prop resonates and then dashed specifically, we've made a lot of progress in getting the product to where we want to be from a quality standpoint. So for example, in Q2, we made big advances in continuing to make double digit percentage point improvements in search success rates, search ranking quality, things like that. Which is important because the first thing we do is get the product experience, right? Then we look at engagement and retention and then once those are in good shape, then we turn on distribution and monetization.
Speaker Change: The Si business is a low single digit percentage of our overall revenue.
Love Soda: And then it was you know what we see.
Love Soda: <unk>.
Love Soda: No.
Love Soda: Minimal impact on the business around the same business overall, and then importantly, it just affected.
Love Soda: Our all in all everything we know indicates that the incident it was isolated to the dropbox sign infrastructure, meaning it didn't impact the other dropbox products.
Love Soda: So overall the incident hasn't had a material impact on our overall revenue of our operations and we don't believe it's likely too.
Speaker Change: Okay Alright.
Speaker Change: The other commentary there.
Speaker Change: Thanks for taking the question.
Steven Enders: So I'm really happy with the progress we're making on the product quality side and it's great to see customers or it's great to see the really product resonate with customers who are kind of using it for their search box for their private information. And people understand that, oh yeah, there's a bunch of chat GPT is great, but there's a lot of questions that chat GPT can answer. You know, if you ask her like, what's my when does my lease expire or where's that slide from last year's product launch existing tools can't really solve that, but dashed can.
Speaker Change: Thank you.
Love Soda: Our next question comes from the line of Kash Rangan with Goldman Sachs. Please proceed.
Kash Rangan: Hi, Thank you very much good to talk to you drew and team I was curious to get your thoughts on a couple of things so the.
Love Soda: Yeah.
Speaker Change: The right to win for Dropbox with Dash kind of mitigates.
Speaker Change: It's not out yet, but what Gibbs dropbox the right to win in this space and do you think this new subcategory youre trying to honor.
Speaker Change: Actually bring in a new category of use of that.
Speaker Change: That may not be initially spurred by document sharing the things that Dropbox has been always good with ultimately do you think there is maybe an unmet need in the market for perhaps a dropbox like not that you would not have considered I'm sure. Your pop through all this stuff, where you have a lower price point.
Steven Enders: So very, and then I'd say there's also In another area that's been interesting is that the IT admins have a lot of unmet needs around keeping track of what everybody's sharing across multiple platforms. And so we see a lot of opportunity to solve some new or to address some new unmet needs on the security side.
Speaker Change: A fraction of the functionality, but then these folks get used to the system, maybe throw an alcohol free.
Speaker Change: Then youre up sell them to the Premier versions of Dropbox I'm, just wondering how youre thinking about potential.
Drew Houston: So we're very excited about the roadmap for Dash and we'll have a lot more to share on the specifics of both the product functionality and some of the things like pricing and packaging in the coming months this year. Okay, that's a couple of contacts and, you know, I just will look forward to what those look like. I guess some of the document workload products sounds like, you know, seeing a bit of an impact with sign and, you know, forms with as well for tax season, but can you give a little more clarity on, you know, what happened or what the customer activity was post security challenges with sign and the impact is that's kind of having on the outlook here.
Speaker Change: Uh huh.
Love Soda: Decision path down the line. Thank you so much once yeah sure sure yeah. Thanks Kash.
Speaker Change: So first on dash.
Speaker Change: I mean, the origin of dash is really kind of solving the.
Speaker Change: It kind of modern equivalent of or today's equivalent of the problem I started with.
Speaker Change: When I founded the company I mean, which is really.
Speaker Change: In the beginning like I felt like myself with everywhere couldnt find it back.
Speaker Change: Back then it looks like my files around these different devices and operating systems.
Speaker Change: And the solution was like let's think everything to the cloud.
Speaker Change: But today kind of back to that familiar problem like my stuff is everywhere can't find it.
Speaker Change: But in addition to filed obviously, we do a lot of work and our browsers now and so what used to be honored files on my desktop is now also.
Drew Houston: So pretty contained. I mean, to begin with, the sign business is a low single digit percentage of our overall revenue. And then it was, you know, we've seen a pretty minimal impact on the business or on the sign business overall. And then importantly, it just affected all everything we know indicates that the incident was isolated to the Dropbox sign infrastructure. Meaning it didn't impact the other Dropbox products. So overall, the incident hasn't had a material impact on our overall revenue or operations and we don't believe it's likely to. Okay, I appreciate the commentary there. And thanks for the question. Thank you.
Speaker Change: Tabs in my browser.
Speaker Change: And it's really that's kind of first principles.
Speaker Change: And just like frustration as an end user personally around like it is so hard to find just the basic information I need at work and this is a problem that's getting worse not better.
Speaker Change: As as sort of one of the unintended consequences of this of the proliferation of all the different tools and platforms that we're using.
Speaker Change: And a recognition that no one's solving this problem at scale like Microsoft hasn't solved this problem Google Hasnt No one has.
Speaker Change: And it didn't seem like there was anyone really putting the necessary firepower.
Speaker Change: On on solving this problem and this was also before like generative AI really took off but.
Kasthuri Rangan: Our next question comes from the line of cash rangan with Goldman Sachs. Please proceed. Hi, thank you very much. Good to talk to you, Drew and team. Drew is curious to get your thoughts on a couple of things. So the right to win for Dropbox with dash, I know.
Speaker Change: I'd summarize by saying this is a universal knowledge worker need I mean, when we talk to our customers. It is like hard to again hard to find someone who doesn't have this problem.
Speaker Change: Our right to win is it's a natural evolution for our customers I mean, especially exist certainly dropbox customers it doesn't.
Speaker Change: It doesn't take a lot to explain that we're evolving from.
Speaker Change: Helping you organize your files to organizing all your cloud content, that's a pretty straightforward logical leap for people and then.
Drew Houston: It's not out yet, but what gives Dropbox the right to win in the space and do you think this new subcategory you're trying to honor, but actually bring in a new category of users that may not be initially spurred by document sharing the things that Dropbox has been always good with. Ultimately, do you think there's maybe an unmet need in the market for perhaps a Dropbox sign, not that you would not have considered.
Speaker Change: Two people, who arent dropbox files that can share customers. It gives us a big reason to be relevant to new generations of folks that.
Speaker Change: <unk>.
Speaker Change: I grew up in the browser instead of the file system.
Speaker Change: So we think it's a big opportunity to reach like truly not user net new users and get them on our platform and then.
Drew Houston: I'm sure you pop through all this stuff where you have a lower price point, fraction of the functionality within these folks get used to the system. You may be throwing a aqua free and then you upsell them to the premier versions of Dropbox and just wondering how you're thinking about potential. Discussion passed down the line. Thank you so much. Sure. Yeah. Thanks, Keshe. So first on dash. I mean, the origin of dash was really kind of solving the kind of modern equivalent of or today's equivalent of the problem I started with when I found at the company, which is really in the beginning.
Speaker Change: Certainly not the only company working on this but our scale.
Speaker Change: And our privacy and security track record.
Speaker Change: <unk> are a big advantage when we talk to customers. So for them as a first example, I mean, we are now unlike dropbox one point, though is we're launching dash, we already have half a million paying business accounts already an 18 million subscribers and so once we're happy with the product experiences.
Speaker Change: You can believe that we'll be turning on distribution and introducing our existing customer base.
Speaker Change: To dash as rapidly as possible. We also see some promising early signal that folks that are paying file sync and share subscribers adopt and retain.
Drew Houston: Like I felt like myself was everywhere couldn't find it back then it looked like my files around these different devices and operating systems. And the solution was like let's think everything to the cloud. But today kind of back to that familiar problem like my stuff is everywhere can't find it. But in addition to files, obviously we do a lot of work in our browsers now and so you know what used to be under files on my desktop is now also under tabs in my browser.
Speaker Change: Dash at twice the rate as people, who are just kind of visiting the website or who arent.
Speaker Change: And.
Speaker Change: And then on the on the trust side I mean this is.
Speaker Change: I mean is.
Speaker Change: In General Security is top of mind for every customer.
Speaker Change: And people are entrusting us with their most important information and have been for a long time.
Drew Houston: And it's really that kind of first principles and frustration as an end user personally where I'm like it is so hard to find just the basic information I need at work. And this is a problem that's getting worse, not better as sort of one of the unintended consequences of this of the proliferation of all the different tools and platforms that we're using. And a recognition that no one solving this problem at scale like Microsoft hasn't solved this problem, Google hasn't, no one has.
Speaker Change: And then AI as you'd imagine amplifies these concerns even more people.
Speaker Change: One a lot of transparency and control about where their data goes.
Speaker Change: As they put it into these new apps or new AI systems and so.
Speaker Change: The fact that we're very transparent about this.
Speaker Change: And and have a track record and we already have all these companies are storing their most important information on Dropbox makes us a lot more of a natural evolution for us.
Drew Houston: And it didn't seem like there was anyone really putting the necessary firepower on on solving this problem. And this was also before like you know generative AI really took off. But I summarize I think this is a universal knowledge worker need. I mean when we talk to our customers it's like hard to find someone who like doesn't have this problem. Our right to win is it's a natural evolution for our customers.
Speaker Change: Then someone starting from scratch or start up or even a growth stage startup and then compared to platform companies are.
Speaker Change: Sure.
Speaker Change: So far what we're seeing.
Speaker Change: Is that a.
Speaker Change: As you see like Microsoft Copilot, or or Google's, similar features and workspace they worked super well within their ecosystem, but don't work outside.
Drew Houston: I mean, especially exist. Certainly Dropbox customers. It doesn't take a lot to explain that we're evolving from helping you organize your files to organizing all your cloud content. That's a pretty straightforward logical leap for people. And then to people who aren't Dropbox files, I can share customers that give us a big reason to be relevant to you know new generations of folks that grew up in the browser instead of the file system.
Speaker Change: And Universal search is by definition a platform agnostic thing because at the end of the day, we all.
Speaker Change: Use tools from many of the different ecosystems, it's very rare that you or your team or just in one.
Speaker Change: So we think that's a big advantage for Dropbox and it's been in our DNA to tie together all of these disparate tools and ecosystems and that's just something that we're that we put a lot more attention to.
Speaker Change: Then any individual.
Speaker Change: And then even the bigger companies.
Drew Houston: So we think it's a big opportunity to reach like truly net user net new users and get them on our platform. And then you know we're certainly not the only company working on this but our scale and our privacy and security track record. Our big advantage when we talk to customers. So for as a first example of me we are unlike Dropbox 1.0 as we're launching Dash, we already have half a million paying business accounts already and you know 18 million subscribers.
Speaker Change: And then you had a second part around.
Speaker Change: What I would say just creativity on pricing and packaging.
Speaker Change: Do we get people in the <unk>.
Speaker Change: Can we.
Speaker Change: Give certain things away for free or otherwise.
Speaker Change: Explore other levers beyond just like subscription like a basic subscription the answer is absolutely.
Speaker Change: We innovated a lot on that playbook in the beginning.
Speaker Change: I'm sure we will innovate on it again, we'll sort of take the best parts, but I am sure some aspects.
Speaker Change: Will be different.
Drew Houston: And so once we're happy with the product experiences, you can believe that we'll be turning on distribution and introducing our existing customer base to Dash. Dash is you know as rapidly as possible. We also see some promising early signal that folks that are paying files and can share subscribers adopt and retain on Dash at twice the rate as people who are just kind of visiting the website or who aren't. And then on the trust side I mean this is I mean in general security is top of mind for every customer and people are entrusting us with their most important information and have been for a long time.
Speaker Change: Earlier talked about volume based pricing versus seat based pricing.
Speaker Change: Using free or loss leader type things.
Speaker Change: Using bundling, we're going to explore all of that.
Speaker Change: Thanks, so much for the detailed thoughtful guys. Thank you so much.
Josh: Great. Thanks, Josh thank.
Speaker Change: Thank you.
Speaker Change: Next question comes from the line of Patrick Wall Ravens with citizens JMP. Please go ahead.
Austin KOL: Great. Thanks for taking my question. This is Austin KOL on for Pat So drew when you think about some of the things.
Drew Houston: And then AI as you'd imagine amplifies these concerns even more as people want a lot of transparency and control about where their data goes as they put it into these new apps or new AI systems. And so the fact that we're very transparent about this and have a track record and you know we already have all these companies storing their most important information on Dropbox makes this a lot more of a natural evolution for us.
Speaker Change: <unk> been working through whether it's the go to market for the individual plans and the pricing on bundles.
Speaker Change: I mean, what what.
Speaker Change: What inning do you feel like Youre in on plugging some of these holes and getting to a place where you really have the right fit across these plans. Thank you.
Speaker Change: Yeah.
Speaker Change: Yep.
Speaker Change: Okay.
Speaker Change: I don't know if I have like a specific number for you I think theres still.
Speaker Change: We're showing progress I think this year is like our first conservative effort and some of these parts of the funnel.
Speaker Change: And we're seeing some of those efforts bear fruit and I think there's still a lot of headroom there, but it's a it's.
Drew Houston: Then someone starting from scratch or you know a startup or even a growth stage startup and then compared to platform companies or. You know so far what we're seeing is that a lot as you see like Microsoft co-pilot or Google's similar features and workspace they work super well within their ecosystem but don't work outside. And universal search is by definition a platform agnostic thing because at the end of the day we all use tools from many of the different ecosystems.
Speaker Change: It's hard to speculate beyond what we've kind of already reflected in our guidance, but we certainly see lots of opportunities to.
Speaker Change: We continue and reducing friction in the Onboarding experience the team expansion experience in sharing we have had some good milestones that we hit last quarter or so as I said earlier.
Drew Houston: It's very rare that you or your team are just in one. So we think that's a big advantage for Dropbox and it's been in our DNA to tie together all these disparate tools and ecosystems and that's just something that we're that we put a lot more attention to than any individual then even even the bigger companies. And then you had a second part around you know what I'd say just like creativity on pricing and packaging.
Speaker Change: Sharing is up year on year.
Speaker Change: Which is in sort of reversing what was kind of stable or slightly declining. So that's the kind of thing I'd like to see and then also we're gearing you know I think one of the best things, we can do to grow the business is really get our.
Speaker Change: A lot of these platform improvements are really important so.
Speaker Change: Some of the things around our billing engine, having more flexibility in subscriptions and continuing to tune up our.
Speaker Change: Technical infrastructure to be able to support cloud content and go beyond just filed so these are long term investments that are going to bear fruit or can be really valuable as we start to scale up dash.
Speaker Change:
Drew Houston: How do we get people in there and can we give certain things away for free or otherwise explore other lovers beyond just like subscript like a basic subscription to answer absolutely we innovated a lot on that playbook in the beginning. I'm sure we'll innovate on it again we'll sort of take the best parts when I'm sure some aspects will be different and you know we earlier talked about volume based pricing versus seat based pricing you know using free or loss later type things level will be using bundling will we're going to explore all that. Thanks so much for the detail. Thank you so much. Thank you.
Speaker Change: So I think there's a lot of different.
Speaker Change: I'm excited about the portfolio of investments we have in.
Speaker Change: Some of them are kind of incremental optimizations and some of the funnel things I had mentioned in some we believe are really big new growth levers like dash.
Speaker Change: Great. Thank you.
Speaker Change: Thank you and as a reminder, if you do have a question simply press star one line to get into queue.
Speaker Change: Our next question is from Mark Murphy with JP Morgan.
Mark Murphy: Okay. Thank you very much Tim you had mentioned that hiring was slower than anticipated and I think you said due to recognizing additional efficiencies I'm wondering if you can elaborate on the nature of the.
Patrick Walravens: Our next question comes on the line of Patrick Wall Ravens with citizens JMP please go ahead. Great thanks for taking my question this is often call on for Pat so Drew when you think about some of the things you guys been working through whether it's the go to market for individual plans or the pricing on bundles. I mean like what any you feel like you're in on on plugging some of these holes and getting to a place where you really have the right fit across these plans.
Mark Murphy: Efficiencies for instance are you using some lower cost regions or you are.
Speaker Change: Are you seeing some productivity gains from internal use of Gen AI baby maybe.
Speaker Change: Yes.
Speaker Change: Github copilot or something along those lines or is it something.
Speaker Change: Is there something different that you're enabling.
Speaker Change: Okay.
Mark: Sure. Good question, Mark I think it's a little bit of all of those things. So our barging outperformance was largely driven by lower head count related costs as we have identified efficiencies across our operations that does include slowing the pace of hiring in some areas as well as prioritized.
Drew Houston: Thank you. Yep. I don't know if I have like a specific ending number for you I think they're still and we're showing progress I think this year is like our first conservative effort in some of these parts of the funnel. And we're seeing some of those efforts bear fruit and I think there's still a lot of headroom there but it's it's hard to speculate beyond what we've kind of already reflected in our our guidance.
Speaker Change: Hiring in lower cost locations exactly to your point so.
Speaker Change: And maybe lastly, I'll note that we're managing our vendor and software spend closely. So those are some of the efficiencies, we're driving and will continue to look for additional opportunities.
Mark: Okay understood and then drew I appreciate it.
Drew Houston: But we certainly see lots of opportunities to continue in reducing friction in the onboarding experience the team expansion experience and sharing. We've had some good milestones that we hit last quarter or so as I said earlier sharing is up year on year which is in so sort of reversing what was kind of stable or slightly declining. So that's the kind of thing I like to see and then also we're gearing I think one of the best things we can do to grow the business is really get our.
Speaker Change: All of the insights you provided where you were where you are answering Catherine's question can you remind us.
Speaker Change: If there is any update on when do you think gas is going to.
Speaker Change: <unk> and where your thoughts are on the.
Speaker Change: On the pricing strategy for dash that we might be able to.
Speaker Change: Kind of run that through our models.
Speaker Change: And start to think about a potential contribution ramp.
Speaker Change: Yep.
Speaker Change:
Drew Houston: A lot of these platform improvements are are really important so some of the things around our billing engine having more flexibility and subscriptions and continue to tune up our technical infrastructure to be able to support cloud content and go beyond just files these are long term investments that are going to bear fruit are going to be really valuable as we start to scale up dash. So I think there's a lot of different or I'm excited about the portfolio investments we have and some of them are kind of incremental optimizations and some of the funnel things I mentioned and some we believe are really big new growth levers like that.
Speaker Change: So we'll have a lot more to share after the after our launches later this year.
Speaker Change: But I think in principle.
Speaker Change: It will be drawing heavily from that playbook over the things that have worked with.
Speaker Change: With pricing and packaging with Dropbox, so well.
Speaker Change: We will certainly make dash available standalone and as a standalone subscription.
Unknown Executive: Great, thank you. Thank you.
Speaker Change: There will obviously be will be interested in introducing it to our file sync and share customers in different ways.
Speaker Change: But it's a little early to give you specific numbers or two.
Speaker Change: To plug the sales into the spreadsheet.
Speaker Change: Thank you.
Unknown Executive: In a sorry reminder, if you do have a question, simply press star one one to get in the queue.
Speaker Change: Thank you and it appears that there is no further questions in queue I will turn the call back to Peter Stabler for closing remarks.
Mark Murphy: Our next question is from Mark Murphy with JP Morgan. Thank you very much, Tim. You had mentioned that hiring was slower than anticipated, and I think you said due to recognizing additional efficiencies. I'm wondering if you can elaborate on the nature of the efficiencies for you, for instance, are you using some lower cost regions? Are you seeing some productivity gains from internal use of Gen AI, maybe from GitHub Co-Pilot or something along those lines? Is there something different that you're enabling?
Peter Stabler: Thanks, everyone for joining us today, we look forward to speaking with you next quarter Hope you all have a great afternoon.
Speaker Change: And thank you for participating in today's conference you may now disconnect.
Speaker Change: Yes.
Speaker Change: [music].
Speaker Change: Yeah.
Speaker Change: Yes.
Speaker Change: [music].
Timothy Regan: Sure, good question, Mark. I think it's a little bit to all of those things. Our barging out performance was largely driven by lower headcount related costs as we have identified efficiencies across our operations that does include slowing the pace of hiring in some areas, as well as prioritizing hiring in lower cost locations exactly to your point. So, and maybe lastly, I'll note that we're managing our vendor and software spend closely. So those are some of the efficiency we're driving and we'll continue to look for additional opportunities.
Speaker Change: Yeah.
Speaker Change: Yes.
Speaker Change: [music].
Timothy Regan: Okay, I understand. And then, Andrew, I appreciate all the insights you provided while you were answering a cashless question. Can you remind us if there is any update on when you think gas is going to reach GA and where your thoughts are on the pricing strategy for data so that we might be able to run that through our models and start to think about a potential contribution ramp? Yep. So we'll have a lot more to share after our launches later this year.
Speaker Change: Okay.
Timothy Regan: But I think in principle, we'll be drawing heavily from the playbook over the things that have worked with pricing and packaging with Dropbox. So we'll certainly make Dash available standalone and as a standalone subscription, there will obviously be, we'll be introducing it to our Felsing and Share customers in different ways. But it's a little early to give you specific numbers or to plug the cells into the spreadsheet. Thank you. And it appears that there's no further questions in the queue.
Speaker Change: [music].
Speaker Change: [music].
Speaker Change: [music].
Speaker Change: Good afternoon, ladies and gentlemen, and thank you for joining Dropbox as second quarter 2024 earnings Conference call.
Speaker Change: 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 the session you will need to press star one on your telephone.
Speaker Change: As a reminder, this conference call is being recorded and will be available for replay from the Investor Relations section of Dropbox. This website. Following this call.
Speaker Change: I will now turn the call over to Peter Stabler. Please go ahead.
Peter Stabler: Thank you good afternoon, and welcome to Dropbox in second quarter 2024 earnings call.
Speaker Change: 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 forecast for our third quarter and fiscal year 2024, and our expectations regarding our revenue growth profitability and operating margin.
Peter Stabler: And free cash flow as well as our expectations regarding our business assets products strategies technology employees users demand and the macroeconomic environment.
Speaker Change: These statements are subject to risks and uncertainties that could cause actual results to differ materially.
Speaker Change: 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.
Speaker Change: Factors and risks that could cause our actual results to differ materially from these forward looking statements.
Speaker Change: Set forth in todays earnings release and in our quarterly report on Form 10-Q filed with the SEC.
Speaker Change: We will also discuss non-GAAP financial measures, which are not prepared in accordance with generally accepted accounting principles.
Speaker Change: A reconciliation of GAAP and non-GAAP results is provided in our earnings release.
Speaker Change: And on our website at investors Dropbox Dot com.
Speaker Change: I will now turn the call over to Dropbox as co founder and CEO drew Houston.
Drew Houston: Thanks, Peter and good afternoon, everyone welcome to our Q2 2024 earnings call.
Jim Reagan: Joining me today is Jim Reagan, our Chief Financial Officer, I will first share our business and product highlights from the quarter and then Tim will review, our Q2 financial results and provide an updated outlook for the remainder of the year.
Speaker Change: I'll start with our business performance.
Jim Reagan: Revenue for the quarter was slightly better than we anticipated with growth in self serve individual plans offsetting continued challenges within our teams business.
Jim Reagan: Net new paying user growth improved quarter over quarter, but we expect some volatility to return in the second half of the year.
Jim Reagan: Within our individual Skus, we're encouraged with the performance of our essentials product, which posted strong growth in the quarter.
Jim Reagan: Among our document workflow products performance was largely as expected as strong adoption of <unk> advanced data helped to offset expected seasonal pressure in our farms business.
Jim Reagan: While we continue our work to improve our core FSS performance and prepare for an expanded rollout of dash, our AI powered universal search product we have.
Peter Stabler: I will turn the call back to Peter Stabler for closing remarks.
Jim Reagan: Remain focused on driving shareholder returns through spending discipline and our commitment to returning excess free cash flow to shareholders via our share repurchase program.
Jim Reagan: I'll now share some additional thoughts on our top priorities.
Jim Reagan: As a reminder, this year in our core business, we're primarily focused on improving our team's performance in.
Jim Reagan: In parallel we continue our work to improve the features and functionality of dash, our AI enabled universal search product.
Jim Reagan: As we shared previously.
Jim Reagan: Previously the health of our teams business is important because our teams plans future higher net revenue retention rates greater customer lifetime value and more opportunities for license expansion and cross selling with new products like dash.
Jim Reagan: Part of our investments here in Q1, we made progress on driving improved trial starts Haynes invitations and higher weekly engagement.
Jim Reagan: And now in Q2, we made further improvements to Onboarding, an invitation flows which helped increase the number of users activated within new teams.
Jim Reagan: This increase in activation is important because we've seen that the earlier, we demonstrate value to multiple team members more likely that team's customers retain and expand.
Jim Reagan: These positive indicators reflect some of the progress we're making to improve the health of our teams top of funnel.
Jim Reagan: However, we continue to face headwinds from factors, including the challenging macro environment for Smbs.
Jim Reagan: Sensitivity following our recent team's price increase and changes we made to the storage limits for our advanced teams plan.
Jim Reagan: These headwinds have thus far have largely offset the progress we've made across our top of funnel initiatives.
Jim Reagan: To combat these headwinds and to ensure tighter alignment of our product development and go to market efforts. We recently concluded an in-depth refinement of our customer segmentation model.
Unknown Executive: Thanks everyone for joining us today. We look forward to speaking with you next quarter. Hope you all have a great afternoon. And thank you all for participating in today's conference. You may now disconnect. [inaudible] a lot of work to do. He's got a lot of work to do. Michael Ftolovic, Peter Stabler, Andrew Houston, Luv Sodha, Michael Funk, Peter Stabler, Andrew Houston, Luv Sodha, Andrew Houston, Luv Sodha, Michael Funk, Peter Stabler, Andrew Houston, Luv Sodha, Andrew Houston, Michael Funk, Peter Stabler, Andrew Houston, Luv Sodha, Michael Funk, Peter Stabler, Andrew Houston, Luv Sodha, Andrew Houston, Michael Funk, Peter Stabler, Andrew Houston, Luv Sodha, Andrew Houston, . .
Unknown Executive: Thank you. Good afternoon and welcome to Dropbox's second quarter, 2024 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 2024 and our expectations regarding our revenue growth, profitability, operating margin, and free cash. As well as our expectations regarding our business assets, products, strategies, technology, employees, users, demand, and the macro economic environment.
Unknown Executive: 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. Factors and risks that could cause our actual results to differ materially from these forward-looking statements are set forth in today's earnings release and in our quarterly report on form 10Q filed with the SEC. We'll also discuss non-gap financial measures, which are not prepared in accordance with generally accepted accounting principles. A reconciliation of gap and non-gap results is provided in our earnings release. And on our website at investors.dropbox.com.
Jim Reagan: The segmentation work informs our product Roadmaps and guidance, both our self serve motion an outbound sales teams as we build integrated sales campaigns targeted at key user profiles across our priority industries in GFS.
Drew Houston: I'll now turn the call over to Dropbox's co-founder and CEO, Drew Houston. Thanks Peter and good afternoon everyone. Welcome to our Q2 2024 earnings call. Joining me today is Tim Regan, 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 and provide an updated outlook for the remainder of the year. I'll start with our business performance. Revenue for the quarter was slightly better than we anticipated with growth and self-serve individual plans offset and continue challenges within our teams business.
Jim Reagan: For example, we know that our most passionate customers are often those whose professional work centers on external sharing or people, who work with our clients and create media for a living.
Drew Houston: Net new paying user growth improves quarter over quarter, but we expect some volatility to return in the second half of the year. Within our individual skews, we're encouraged for the performance of our essentials product, which posted strong growth in the quarter. Among our document workflow products, performance was largely as expected as strong adoption of doc sends, advanced data room, help to offset expected seasonal pressure in our forms with business. While we continue our work to improve our core FSS performance and prepare for an expanded rollout of dash our AI power universal search product, we remain focused on driving shareholder returns through spending discipline and our commitment to returning the excess free cash flow to shareholders via our share of purchase program.
Speaker Change: Or some of our most loyal users who rely on dropbox for years because of Dropbox as upload speeds and take performance.
Jim Reagan: And we're committed to all of these customers and are focusing our product development and go to market efforts to support them across priority industries and verticals like professional services manufacturing media.
Jim Reagan: All of these customers are United in needing Dropbox to do three primary jobs for them, securing organizing and sharing all the digital content.
Jim Reagan: And in April we launched several new features that are aligned with these customer jobs to be done.
Jim Reagan: First we launched the FSS end to end encryption and docs and advanced data rooms to help customers secure their content and share multiple thousands of single link.
Drew Houston: I'll now share some additional thoughts on our top priorities. As a reminder, this year in our core business, we're primarily focused on improving our teams performance. In parallel, we continue our work to improve the features and functionality of dash our AI enabled universal search product. As we shared previously, the health of our teams' business is important because our teams plans feature higher net revenue retention rates, greater customer lifetime value, and more opportunities for licensed expansion and cross selling of new products, like Dash.
Jim Reagan: Launched Microsoft co offerings to help our customers stay organized with their content and third we improved our replay functionality to help users share and comment on video content.
Jim Reagan: We continue to invest in these themes during the second quarter, specifically, we focused on improving the sharing experience for our customers given that over 50% of new customer sign ups are driven by share.
Jim Reagan: And over the year.
Speaker Change: <unk> expanded the number of surfaces, we address the sharing of experience Gabe became somewhat fragmented and consistent which introduced some unnecessary friction and led to some declines in sharing activity.
Drew Houston: As part of our investments here in Q1, we made progress on driving improved trial starts, teams invitations, and higher weekly engagements. And now in Q2, we made further improvements to onboarding and invitation flows, which helped increase the number of users activated within new teams. This increase in activation is important because we've seen that the earlier we demonstrate value to multiple team members more likely that teams customers retain and expand. These positive indicators reflect some of the progress we're making to improve the health of our teams top of final.
Jim Reagan: By better aligning our customer experience across platforms, we've been able to reverse these declines driving year over year increases in sharing during Q2.
Jim Reagan: We're excited to see how the focus on improving the user experience translates to increased customer engagement and will continue this work to further reduce sharing friction for our users in the quarters ahead.
Jim Reagan: And while it seems as a primary focus for us individuals remain an important part of our business.
Drew Houston: However, we continue to face headwinds from factors including the challenging macro environment for SMDs, price sensitivity following our recent teams price increase, and changes we made to the storage limits for our advanced teams plan. These headwinds have thus far largely offset the progress we've made across our top of final initiatives. To combat these headwinds and to ensure a tight alignment of our product development and go to market efforts, we recently concluded an in-depth refinement of our customer segmentation model.
Jim Reagan: In particular, we continue to see more of our individual user or sign up to their mobile devices and it's critical that we offer a compelling experience to these customers.
Jim Reagan: To that end in Q2, we launched a redesigned mobile web experience extending the experience we launched through our web based customers last fall.
Jim Reagan: We also rolled out a redesign mobile upsell experience focused on educating the user on how trials work and giving them peace of mind that there'll be reminded before the trial ends.
Jim Reagan: Collectively these changes led to a sizable increase in trial starts and helped contribute to our additions in paying users this quarter.
Drew Houston: The segmentation work informs our product road maps and guides both our self-serve motion and outbound sales teams as we build integrated sales campaigns targeted keys or profiles across our priority industries and GEOs. For example, we know that our most passionate customers are often those whose professional work centers on external sharing, or people who work with large files and create media for a living, or some of our most loyal users, who've relied on dropouts for years because of dropouts with upload speeds and tank performance, and we're committed to all these customers and are focusing our product development and go to market efforts to support them across priority industries and verticals like professional services, manufacturing, or media.
Jim Reagan: I also wanted to highlight some of the foundational work, we're doing on our platform to make it easier for customers to purchase multiple products from us.
Jim Reagan: Historically customers, who purchased an additional product like replay had to connect and mirror their FSS subscription with these new licenses, so as an all or nothing proposition with limited flexibility.
Jim Reagan: We've now address this challenge by launching partial provisioning, providing customers the ability to add products for subsets of the teams and.
Jim Reagan: And later this year, we expect to rollout standalone purchasing of products untethered from an FSS subscription as we aim to give our customers the option to purchase the products that are best suited for them.
Drew Houston: All these customers are united in needing Dropbox to do three primary jobs for them, securing, organizing, and sharing all their digital content. In April, we launched several new features that aligned with these customer jobs to be done. First, we launched the FSF end-to-end encryption and docs and advanced data rooms to help customers secure their content and share multiple files with a single link, the launch Microsoft co-offering to help customers stay organized with their content, and third, we improved our replay functionality to help users share and comment on video content.
Jim Reagan: Partial division in Standalone purchasing will not only provide greater flexibility when selling our current products, but will be critical to the expanded rollout of dash, which we expect to offer as both an add on feature to existing access plans as well as a standalone product.
Jim Reagan: Additionally, we continue to iterate on our bundling strategy.
Jim Reagan: As we've discussed our launch of product bundles last October fell short of our expectations. In response, we've lowered our pricing on some of these bundles last quarter.
Jim Reagan: This change in price mitigated some of the pressures that we had been seeing but did not lead to a meaningful inflection in users converting to these plants were therefore, devoting our efforts to ensuring that we're offering a compelling mix of features and functionality of these plans across our mobile desktop and web surfaces, whereas our initial our initial strategy was primarily web focused.
Drew Houston: We continue to invest in these themes during the second quarter. Specifically, we focused on improving the sharing experience for our customers, given that over 50% of new customer signups are driven by sharing. In over the years as we expanded the number of services we addressed, the sharing experience became somewhat fragmented and inconsistent, which introduced some unnecessary friction and led to some declines in sharing activity. By better aligning our customer experience across platforms, we've been able to reverse these declines, driving year-over-year increases in sharing during Q2.
Jim Reagan: Got a lot of valuable experience and beginning to introduce bundles to our customers, including extending our commerce and identity platforms to enable bundled products.
Jim Reagan: These foundational improvements will enable us to offer future combinations of features and functionality as we launch or acquire new products.
Speaker Change: I'll now provide a quick update on dash, our AI powered universal search product.
Speaker Change: This quarter, we made great products on improving the dash product and capabilities and evolving our go to market approach.
Drew Houston: We're excited to see how the focus on improving this user experience translates to increased customer engagement, and we'll continue this work to further reduce sharing friction for our users in the quarters ahead. And while themes is a primary focus for us, individuals remain an important part of our business. In particular, we continue to see more of our individual users sign up through their mobile devices, and it's critical that we offer a compelling experience, to these customers.
Speaker Change: For example, the team once again drove double digit increases in search access rates for new and existing users and nearly doubled some of our search relevance metrics.
Speaker Change: The team also drove engagement increases in key features such as stacks in the start page and all of these are positive signs that we are building a performance and high quality product.
Drew Houston: To that end, in Q2, we launched a redesign mobile web experience, extending the experience we launched to our web-based customers last fall. We also rolled out of a redesign mobile upsell experience focused on educating the user on how trials work and giving them peace of mind that they'll be reminded before their trial ends. Collectively, these changes led to a sizable increase in trial starts and help contribute to our additions and paying users this quarter.
Speaker Change: We also continued to engage deeply with potential customers and incorporate their feedback into our road map for.
Jim Reagan: For example, based on user feedback where we're in.
Jim Reagan: Enriching that with deeper AI summarization capabilities and continuing our work to maximize searches efficiency.
Jim Reagan: Beyond potential end users. We're also closely partnering with it administrators as they play a central role in deployment across organizations.
Jim Reagan: Based on these conversations it's clear that it <unk> have a lot of unmet needs. When it comes to securing their teams content across multiple content platforms security is therefore, a central focus on our dash development efforts and we're confident we're going to have a competitive offering that provides edmunds with a lot of new control and transparency that they need.
Drew Houston: I also wanted to highlight some of the foundational work we're doing on our platform to make it easier for customers to purchase multiple products from us. Historically, customers who purchased an additional product like Replay had to connect and mirror their FSS subscription with these new licenses, so it's an all or nothing in proposition with limited flexibility. We've now addressed this challenge by launching partial provisioning, providing customers the ability to add products for success of their teams.
Jim Reagan: We've also been working on a plan to go to market strategy.
Drew Houston: And later this year, we expect to roll out standalone purchasing of products untethered from an FSS subscription, as we aim to give our customers the option to purchase the products that are best suited for them. Partial provisioning and standalone purchasing will not only provide greater flexibility when selling their current products, it will be critical to the expanded rollout of Dash, which we expect to offer as both an add-on feature to existing FSS plans as well as a standalone product.
Speaker Change: Over half a million paying teams trust dropbox to secure organize and share digital assets.
Speaker Change: Our teams are already busy identifying the best prospects for our outbound sales motion, where we're already seeing strong signals of interest from our FSS customers.
Speaker Change: And as the awareness of Universal search indexes capabilities grow we'll also lean into a self store sales motion.
Speaker Change: In closing, we continue to make progress on improving the user experience of our core access product and we're seeing some positive response in our funnel.
Speaker Change: At the same time, we're investing in capabilities that will improve the purchasing flexibility for our customers who want to buy multiple products from us.
Drew Houston: Additionally, we continue to iterate on our bundling strategy. As we've discussed, our launch of product bundles last October fell short of our expectations in response. We lowered our pricing on some of these bundles last quarter. This change in price mitigated some of the pressures that we had been seeing, but did not lead to a meaningful inflection in users converting to these plans. We're therefore devoting our efforts to ensuring that we're offering a compelling mix of features and functionalities these plans across our mobile, desktop and web surfaces, whereas our initial strategy was primarily web-focused.
Speaker Change: We are still facing headwinds and we expect the second half of the year to include some volatility, but we're confident that the investments, we're making better position us to help our customers secure organize and share all other digital content.
Speaker Change: We're also excited by the improvements we've made to our dash product, we will have more to share in the coming months as we move closer to expanding our rollout.
Speaker Change: While we work to achieve both improved core performance and a successful dash expansion, we remain committed to driving shareholder returns seeking efficiency gains and investing prudently I.
Drew Houston: We've gotten a lot of valuable experience in beginning to introduce bundles for our customers, including extending our commerce and identity platforms to enable bundled products. These foundational improvements will enable us to offer future combinations of features and functionality as we launch or acquire new products.
Speaker Change: I want to thank everyone on the Dropbox team for working hard to fulfill our vision and also thank our shareholders for their support.
Speaker Change: I'll now turn the call over to Tim to share a recap of our second quarter financial performance as well as our expectations for the remainder of the year.
Tim: Thank you drew.
Drew Houston: I'll now provide a quick update on Dash, our AI PowerUniversal Search product. This quarter, we made great products on improving the Dash product and capabilities and evolving our market approach. For example, the team, once again, drove double-digit increases in search success rates for new and existing users and nearly doubled some of our search relevance metrics. The team also drove engagement increases in key Dash features such as stacks on the start page and all these positive signs that we're building a performance and I quality product.
Tim: I'll cover our financial highlights from Q2.
Tim: Provide guidance for Q3 and offer some updated thoughts.
Drew Houston: We also continue to engage deeply with potential customers and incorporate their feedback into our roadmap. For example, based on these feedback, we're enriching Dash with deeper AI summarization capabilities and continuing our work to maximize search efficiency. Beyond potential end users, we're also closely partnering with IT administrators as they play a central role in deployment across organizations. Based on these conversations, it's clear that IT admins have a lot of unmet needs when it comes to securing their team's content across multiple content platforms. Security is therefore a central focus in our Dash development efforts and we're confident we're going to have a competitive offering that provides admins with a lot of new control and trends.
Tim: On a full year 2020 for outlook.
Tim: Starting with our results for the second quarter.
Tim: Total revenue for Q2 increased one 9% year over year to $635 million.
Tim: Slightly ahead of the high end of our prior guidance range.
Tim: As expected foreign exchange rates had a minimal impact on revenue for the quarter.
Tim: Yielding a one 8% year over year constant currency growth rate.
Tim: Total <unk> grew to a total of $2 $5 $73 billion.
Tim: Of two 9% year over year.
Tim: On a constant currency basis growth was two 2% year over year.
Tim: We exited the quarter with $18, two 2 million paying users.
Tim: Adding approximately 63000 net new paying users on a sequential basis.
Tim: Average revenue per paying user was $139 93.
Drew Houston: We've also been working on our plan to go to market strategy. Over half a million paying teams trust Dropbox to secure, organize and share digital assets. Our teams are already busy identifying the best prospects for our outbound sales motion, where we're already seeing strong signals of interest from our FSS customers. And at the awareness of universal search and dashes capabilities grow, we'll also lean into a self-sales motion.
Jim Reagan: Relative paying user strength across our self serve individual plans was offset by continued challenges for our team's product and.
Jim Reagan: And expected seasonality and other pressures weighing on our form Swift and signed businesses.
Speaker Change: Before we continue with further discussion of our P&L I would like to note that unless otherwise indicated.
Drew Houston: In closing, we continue to make progress on improving the user experience of our core access product, and we're seeing some positive response in our funnel. At the same time, we're investing in capabilities that will improve the purchasing flexibility for our customers who want to buy multiple products from us. We're still facing headwinds and we expect a second half of the year to include some volatility, we're confident to the investments we're making better position us to help our customers secure, organize and share all of their digital content.
Speaker Change: All income statement figures mentioned our non-GAAP.
Speaker Change: And exclude stock based compensation Ammar.
Speaker Change: Amortization of purchased intangibles certain acquisition related expenses.
Speaker Change: Net loss on real estate assets and workforce reduction expenses.
Speaker Change: Our non-GAAP net income also includes the income tax effect of the aforementioned adjustments.
Tim: With that let's continue with the second quarter P&L.
Drew Houston: We're also excited by the improvements we've made to our Dash product. We'll have more to share in the coming months, as we move closer to expanding our rollout. What we work to achieve both improved core performance and a successful Dash expansion, we remain committed to driving shareholder returns, seeking efficiency gains and investing pretty easily.
Tim: Gross.
Tim: <unk> was 84, 5% for the quarter.
Tim: As mentioned previously the primary driver of the year over year increase in gross margin.
Tim: Was the increase in the useful life of our servers from four to five years effective January one of this year.
Drew Houston: I want to thank everyone on the Dropbox team for working hard to fulfill our vision, and also thank our shareholders for their support.
Tim: This change resulted in approximately $9 million of benefit to gross profit in the second quarter.
Timothy Regan: I'll now turn the call over to Tim to share a recap of our second quarter financial performance, as well as our expectations for the remainder of the year. Thank you Drew. I'll cover our financial highlight from Q2. Provide guidance for Q3 and offer some updated thoughts on our full year 2024 outlook. Starting with our results for the second quarter. Total revenue for Q2 increased 1.9% year over year to $635 million, lightly ahead of the high end of our prior guidance range.
Tim: The impact of this change was weighted towards the first half of this year.
Tim: For the full year, we expect a benefit of approximately $30 million.
Tim: Okay.
Tim: Operating expenses were $308 million up approximately 2% year over year.
Tim: Operating margin was 35, 9% ahead of our guidance of 33%.
Tim: And up 170 basis points from the year ago period.
Tim: Compared to our guidance, we ended the quarter with modestly lower marketing and outside services spend.
Tim: Hiring in the quarter was also lower than originally anticipated as we've identified additional efficiency opportunities across our operations.
Timothy Regan: As expected, foreign exchange rates had a minimal impact on revenue for the quarter yielding a 1.8% year over year constant currency growth rate. Total RR grew to a total of $2.573 billion of 2.9% year over year. On a constant currency basis growth was 2.2% year over year. We exited the quarter with 18.22 million paying users, adding approximately 63,000 net new paying users on a sequential basis. Average revenue per paying user was $139.93. Relative paying users' strength across our self-serve individual plans was offset by continued challenges for a team's product and expected seasonality and other pressures weighing on our form swift and signed businesses.
Tim: Net income for the second quarter was $194 million up 12% year over year.
Tim: Diluted EPS for the first quarter was <unk> 60 <unk>.
Tim: Based on the 324 million diluted weighted average shares outstanding compared.
Tim: Compared to 51.
Tim: In the year ago quarter, representing an 18% year over year increase.
Tim: Moving on to our cash balance and cash flow we.
Tim: We ended the quarter with cash and short term investments of $1 1 billion.
Tim: As a reminder.
Tim: In the second quarter, we paid the second tranche of our partial San Francisco headquarters lease buyout totaling $14 9 million.
Tim: Second quarter cash flow from operations was $231 million, an increase of 23% versus the year ago period.
Timothy Regan: Before we continue with further discussion of our PNL, I would like to note that unless otherwise indicated, all income statement figures mentioned are non-gap and exclude stock based compensation, amortization of purchase and tangibles, certain acquisition related expenses, net loss on real estate assets and workforce reduction. Action Expenses. Ardon Gapneticum also includes the income tax effect of the aforementioned adjustments. With that, let's continue with the second quarter P&L. Gross margin was 84.5% for the quarter.
Tim: Capital expenditures in the quarter totaled $6 million.
Tim: This resulted in quarterly free cash flow of $225 million compared to $185 million in Q2 of 2023.
Tim: Free cash flow per share was <unk> 69 reps.
Tim: Representing a 28% year over year increase.
Tim: In the quarter, we also added $35 million to our finance leases for data center equipment.
Tim: In Q2, we repurchased just over 11 million shares spending $260 million.
Tim: As of the end of the second quarter, we had approximately $868 million remaining under our current repurchase authorization.
Timothy Regan: As mentioned previously, the primary driver of the year of year increase in gross margin was the increase in the useful life of our servers from four to five years effective January 1st of this year. This change resulted in approximately $9 million of benefit to gross profit in the second quarter. The impact of this change was weighted towards the first half of this year. For the full year, we expect a benefit of approximately $30 million.
Tim: Our philosophy on share repurchases has not changed.
Tim: We remain committed to returning a significant portion.
Tim: Of our free cash flow to shareholders in the form of share repurchases.
Tim: With the intention of reducing our share count over time.
Tim: I would now like to share our 2020 for third quarter and updated full year guidance.
Timothy Regan: Operating expenses were $308 million, up approximately 2% year over year. Operating margin was 35.9% ahead of our guidance of 33% and up 170 basis points from the year ago period. Compared to our guidance, we ended the quarter with modestly lower marketing and outside services spend. Hiring in the quarter was also lower than originally anticipated as we've identified additional efficiency opportunities across our operations. The income for the second quarter was $194 million, up 12% year over year. Deluted EPS for the first quarter was 60 cents based on 324 million deluded weighted average shares outstanding. Compared to 51 cents in the year ago quarter, representing an 18% year over year increase.
Speaker Change: I will also provide some context on the thinking behind this guidance.
Tim: For the third quarter of 2024, we expect revenue to be in the range.
Tim: Of 635.
Tim: $638 million.
Tim: We expect an FX tailwind of less than a half a million dollars.
Tim: We expect non-GAAP operating margin to be approximately 32%.
Tim: Finally, we expect diluted weighted average shares outstanding to be in the range of $317 million.
Tim: 322 million shares based on our trailing 30 day average share price.
Tim: For the full year, we are narrowing our full year revenue outlook on an as reported and constant currency basis.
Tim: Raising the bottom of our ranges by $5 million.
Tim: As a result, our reported revenue guidance adjust two to $5 four zero.
Timothy Regan: Moving on to our cash balance in cash low, we ended the quarter with cash and short term investments of $1.1 billion. As a reminder, in the second quarter, we paid the second tranche of our partial San Francisco headquarters lease by out totaling $14.9 million. Second quarter cash low from operations was $231 million and increase of 23% versus the year ago period. Capital expenditures in the quarter totaled $6 million. This resulted in quarterly free cash low of $225 million, compared to $185 million in Q2 of 2023.
Tim: The 2550 $1 billion.
Tim: While our constant currency guidance suggest the two five to $3 seven.
Tim: The 254 7 billion.
Tim: Consistent with prior guidance, we expect gross margin to be in the range of 83.
Tim: 83, 5%.
Tim: For non-GAAP operating margin, we now expect to land between 33, five and 34%.
Tim: For the full year.
Tim: Up from our prior guidance of $32, 5% to 33%.
Tim: Our expectation for free cash flow is unchanged at 910 to.
Timothy Regan: Free cash low per share was $69, representing a 28% year over year increase. In the quarter, we also added $35 million to our finance leases for data center equipment. In Q2, we repurchased just over 11 million shares, spending $260 million. As of the end of the second quarter, we had approximately $868 million remaining under our current repurchased authorization. Our philosophy on share repurchases has not changed. We remain committed to returning a significant portion of our free cash low to shareholders in the form of share repurchases, with the intention of reducing our share counts, over time.
Tim: $950 million.
Tim: We continue to expect between 20 and $30 million of capital expenditures for the year.
Tim: Our outlook for finance lease additions is unchanged at approximately 7% of revenue for the full year.
Tim: Finally, we expect diluted weighted average shares outstanding to be in the range of 323 to 328 million shares based on our trailing 30 day average share price.
Tim: This represents a reduction of 3 million shares for each of the range when compared to our previous full year guidance of 326%.
Tim: 331 million shares.
Tim: I'll now share some additional context regarding our outlook.
Timothy Regan: I now like to share our 2024 third quarter and updated full-year guidance where I will also provide some context on the thinking behind this guidance. For the third quarter of 2024, we expect revenue to be in the range of 635 638 million dollars. We expect an Fx tailwind of less than a half a million dollars. We expect non-gap operating margin to be approximately 32%. Finally, we expect eluded weighted average shares of standing to be in the range of 317 million to 322 million shares based on our trailing 30-day average share price.
Tim: Consistent with our historical approach our guidance reflects what will you have a high degree of visibility into today.
Tim: The operating environment remains challenging for small businesses and our outlook Embeds our expectations for some increased near term volatility.
Tim: Particularly with regard to our teams business, where we anticipate near term downside risks associated with some larger accounts.
Tim: That will likely impact our paying user count in Q3 and Q4.
Tim: In addition, we also expect seasonal pressure on forms with paying user count as customers that primarily use form slipped during tax season.
Tim: Part of the platform.
Tim: And to a lesser extent some headwinds within our siding business.
Timothy Regan: For the full year, we are narrowing our full-year revenue outlook on an as reported and constant currency basis by raising the bottom of our ranges by 5 million dollars. As a result, our reported revenue guidance adjust to 2.540 to 2.550 billion dollars. While our constant currency guidance adjust to 2.537 to 2.547 billion dollars. Consistent with prior guidance, we expect gross margin to be in the range of 83 to 83.5%. For non-gap operating margin, we now expect to land between 33.5 and 34% for the full year.
Tim: From the security incident, we mentioned last quarter.
Tim: Each of these factors will serve as headwinds to our revenue billings and paying user numbers.
Tim: Thus, we expect to end the year with total paying users roughly flat.
Tim: From where we ended the second quarter.
Tim: Regarding non-GAAP operating margin our raised full year outlook reflects our performance year to date and our continued hiring discipline along with an emphasis on hiring in low cost locations.
Tim: Sequentially, we expect some incremental expense as we invest in marketing initiatives and.
Tim: And prepare for our annual customer focused event in the fourth quarter.
Tim: While also maintaining some optionality to spend behind discrete initiatives.
Timothy Regan: Up from our prior guidance of 32.5 to 33%. Our expectation for free cash flow is unchanged at 910 to 950 million dollars. We continue to expect between 20 and 30 million dollars of capital expenditures for the year. Our outlook for finithly conditions is unchanged at approximately 7% of revenue for the full year.
Tim: Additionally, our second half outlook Embeds, a decreasing benefit to gross margin from the aforementioned change in the useful life of our servers.
Tim: We are maintaining our full year free cash flow guidance.
Tim: While we're pleased with the improved outlook for full year non-GAAP operating margin.
Tim: There are several factors that impact flow through to free cash flow.
Tim: For example, the aforementioned items impacting our paying user numbers have a more immediate impact on billings and cash.
Timothy Regan: Finally, we expect deluded weighted average shares of standing to be in the range of 323 to 328 million shares based on our trailing 30-day average share price. This represents a reduction of 3 million shares for each end of the range, one compared to our previous full year guidance of 326 to 331 million shares.
Tim: Similarly.
Tim: X rates have deteriorated since our initial guidance, which also has a more immediate impact on billings and cash.
Tim: We also expect to earn less interest income given our increased share repurchase activity, which impacts free cash flow, but does not impact operating margins.
Tim: In conclusion, we continue to focus on solidifying our core file sync and share business.
Timothy Regan: I'll now share some additional context regarding our outlook. Consistent with our historical approach, our guidance reflects what we have a high degree of visibility into today. The operating environment remains challenging for small businesses, and our outlook embeds our expectations for some increased near term volatility, particularly with regard to our team's business, where we anticipate near term down sell risk associated with some large numbers. We expect larger accounts that will likely impact our paying user count in Q3 and Q4.
Tim: By focusing on our core competencies and bringing more value to our customers.
Tim: Our objective with the core business as it continue to drive revenue growth.
Tim: And lay the foundation for our future, while concurrently generating profitability and increasing cash flow per share.
Tim: We also continue to invest in new sources of long term growth most notably dash.
Tim: Where we are getting closer to introducing dysfunctionality more broadly to our customers.
Tim: We are making progress across these objectives and believe that these efforts will culminate in creating long term value for our shareholders.
Timothy Regan: In addition, we also expect seasonal pressure on forms with paying user count as customers that primarily use forms with during tax, season, Depart the platform, and to a lesser extent, some headwinds within our signed business, stemming from the security incident we mentioned last quarter. Each of these factors will serve as headwinds to our revenue, buildings, and paying user numbers. Thus we expect it in the year with total paying users roughly flat from where we ended the second quarter.
Speaker Change: With that operator, please open the line for questions. Thank you and as a reminder to ask a question press star one on your telephone and wait for your name to be announced.
Speaker Change: To remove yourself from the queue Press star one again.
Speaker Change: For our first question that comes from the line of Brent Thill with Jefferies. Please proceed.
Love Soda: Hi, drew hi, Tim. Thank you again for taking my question. This is love soda on for Brent Thill.
Speaker Change: Maybe the first one for you drew.
Timothy Regan: Regarding non-gap operating margin, our raised full-year outlook reflects our performance year-to-date and our continued hiring discipline along with an emphasis on hiring and low cost locations. Sequentially we expect some incremental expense as we invest in marketing initiatives and prepare for our annual customer-focused event in the fourth quarter, while also maintaining some optionality to spend behind discrete initiatives. Additionally, our second half outlook embeds a decreasing benefit to gross margin from the aforementioned change in the useful life of our servers.
Speaker Change: As we look at a bunch of the horizontal application.
Speaker Change: Been a big investor debate around.
Speaker Change: Fee based pricing versus volume based pricing in the age of AI.
Speaker Change: As you look at that could you just share your thoughts on the monetization plans there and.
Speaker Change: How do you think you are injecting more volume based pricing to make up for any <unk>.
Speaker Change: Base degradation that you might see.
Speaker Change: Sure.
Speaker Change: Thanks for the question so.
Speaker Change: So to be clear, we're dashes pre revenue it's in beta right now.
Timothy Regan: We are maintaining our full-year free cash flow guidance. While we're pleased with the improved outlook for full-year non-gap operating margin, there are several factors that impact the flow-through free cash flow. For example, the aforementioned items impacting our paying user numbers have a more immediate impact on buildings and cash. Similarly, FX rates have deteriorated since our initial guidance, which also has a more immediate impact on buildings and cash. We also expect to earn less interest income given our increased share repurchase activity, which impacts free cash flow, but does not impact operating margins.
Tim: But the way we're thinking about it is.
Speaker Change: Or the way, we're thinking about pricing and packaging and a lot of ways it will be.
Speaker Change: Heavily informed by what works what worked with Dropbox, one point now.
Speaker Change: And a lot of the playbook that we had around freemium and self serve and sharing driven virality and then bridging too.
Tim: Self serve team accounts and moving up market into managed accounts, we envision.
Tim: Taking advantage of a lot of the same levers.
Speaker Change: With dash and.
Speaker Change: We.
Speaker Change: Expect that it should the pricing model should be pretty straightforward I mean, obviously, if there is if we need somewhat.
Timothy Regan: In conclusion, we continue to focus on solidifying our core file sink and share business by focusing on our core competencies and bringing more value to our customers. Our objective with the core business is to continue to drive revenue growth and lay the foundation for our future while concurrently generating profitability in increasing cash low per share. We also continue to invest in new sources of long-term growth, most notably dash, where we are getting closer to introducing this functionality more broadly to our customers.
Speaker Change: If there are different knobs and dials in terms of like AI usage or volume based pricing.
Speaker Change: But we're not.
Speaker Change: Dogmatic about any one model, but our preference is to keep things simple for our customers and so far we haven't when talking to prospects, we haven't seen a lot of pushback or concerns.
Speaker Change: On that pretty straightforward subscription model.
Speaker Change: Got it and then just a quick follow up on the team the challenges that youre seeing on the team side.
Speaker Change: I guess.
Speaker Change: Is there a way to dig deeper and parse out like how much of this is macro versus.
Timothy Regan: We are making progress across these objectives and believe that these efforts will culminate in creating long-term value for our shareholders.
Speaker Change: Versus the pricing reaction.
Speaker Change: <unk>.
Speaker Change: Is there an element of competitive.
Unknown Executive: With that operator, please open the line for questions. Thank you, NSI Reminder, to ask a question, press star 111 on your telephone and wait for your name to be announced.
Speaker Change: The share losses on that side, just additional thoughts there would be appreciated. Thank you.
Luv Sodha: To remove yourself from the queue, press star 111 again. One moment for our first question that comes from the line of Brent Thil with Jeffries. Please proceed. Hi, Drew. Hi, Tim. Thank you again for taking my questions. This is Love Soda on for Brent Thil. Maybe the first one for you, Drew, as we look at a bunch of the horizontal applications, there's been a big investor debate around seed-based pricing versus volume-based pricing in the age of AI.
Tim: Yes.
Tim: So I'd say, it's largely what we saw last quarter as a continuation of prior trends.
Tim: We saw that some of the price increases we've made over the years over the last few years.
Tim: Ended.
Tim: We ended up pulling there.
Tim: On balance they were beneficial.
Tim: But they pulled forward they represented something of a pull forward and then for new customers.
Tim: Higher prices plus more price sensitivity generally.
Tim: Has led to a weakening.
Speaker Change: Top of funnel, which we have been.
Speaker Change: Addressing in a number of ways I mean, one by reverting some of the.
Speaker Change: Pricing changes, we made last October when we introduce some of the bundles.
Luv Sodha: As you look at Dash, could you just share your thoughts on the monetization plans there? How are you thinking of injecting more volume-based pricing to make up for any seed-based degradation that you might see? Sure. Thanks for the question.
Speaker Change: And then second is just the nuts and bolts just the fundamentals of buildup of removing friction from the Onboarding experience.
Speaker Change: And we found that when we look at and we just watch when we sort of sit down as a customer or watch our customer.
Drew Houston: I mean, so to be clear, where Dash is pre-revenue, it's in beta right now. But the way we're thinking about it is, or the way we're thinking about pricing and packaging, and in a lot of ways will be heavily informed by what's worked, what worked with Dropbox 1.0. And a lot of the playbook that we had around freemium and self-serve and sharing-driven virality and then bridging to self-serve team accounts and moving up market into managed accounts.
Tim: Walk through the Onboarding experience, there's still a lot of steps that we could simplify.
Tim: So we've seen a lot of good early returns.
Tim: And green shoots around okay. If we as we simplify the team onboarding experience as we make it easier to invite other folks to your team and get set up as we rationalize some of the sharing features.
Speaker Change: Some of the stuff that I talked about in my <unk>.
Tim: Earlier remarks, but just really tuning those basic.
Tim: <unk> and viral loops.
Drew Houston: We envision taking advantage of a lot of the same levers with Dash. And we expect that the pricing model should be pretty straightforward. I mean, obviously, if there's, if we need somewhat, if there are different knobs and dials in terms of like AI usage or volume based pricing. We're not dogmatic about any one model, but our preference is to keep things simple for our customers. And so far, we haven't, when talking to prospects, we haven't seen a lot of pushback or concerns on a pretty straightforward subscription model. Got it.
Tim: <unk>.
Tim: That theres still a lot of headroom there and then when we look at different funnel metrics on the team's business.
Tim: And compare them to other SaaS products with similar with similar characteristics, we still see some headroom there.
Tim: But that said, we're not out of the woods I would say these improvements haven't yet offset some of the bigger picture.
Tim: Just like macro pressure or.
Tim: Or other factors.
Tim: But they are ahead of where it is headed in the right direction.
Speaker Change: Got it and then none of it is competitive right.
Speaker Change: Well I am sure some of its competitive although I wouldnt say theres like a <unk>.
Tim: I mean, we've had kind of we've competed against the <unk>.
Drew Houston: And then just a quick follow-up on the team, the challenges that you're seeing on the team side. I guess, is there a way to dig deeper and parse out like how much of this is macro versus, you know, versus the pricing reaction? And, you know, is there an element of competitive share losses on that side? I just additional thoughts there would be appreciated. Thank you. Yep. So I say it's largely what we saw last quarter is a continuation of prior trends.
Speaker Change: Microsoft's and googles of the World curve since the company was founded so.
Tim: I wouldn't say, there's any new competitive dynamics, but for sure.
Tim: Platform companies or whats the product that's bundled in the office suite is going to be our primary competitor in most cases.
Tim: So that's definitely a factor, but that's kind of been that would have also been a factor 10 years ago.
Speaker Change: Got it thank you so much.
Speaker Change: Yes. Thank you.
Stephen <unk>: Our next question comes from the line of Stephen <unk>.
Stephen <unk>: <unk> with Citi.
Speaker Change: Please go ahead.
Drew Houston: We saw that some of the price increases we've made over the year over the last few years. Ended up pulling, they're on balance. They were beneficial, but they pulled forward. They represented something of a pull forward and then for new customers, higher prices and plus more price sensitivity generally has led to a weakening of top of funnel, which we've been addressing in a number of ways. We won by reverting some of the pricing changes we made last October when we introduced some of the bundles.
Stephen <unk>: Okay, great. Thanks for taking the questions here.
Stephen <unk>: I guess, maybe just to start just on dash on on the AI product set I guess, what's kind of the feedback you've gotten so far.
Stephen <unk>: <unk>.
Speaker Change: For how customers might be thinking about adopting that and utilizing it and I guess secondarily, how are you thinking about the monetization.
Stephen <unk>: For that at this point.
Stephen <unk>: And trying to drive share of wallet within within customers.
Speaker Change: Yep. So early feedback has been good I mean, I think the first thing we look for.
Drew Houston: And then second is just the nuts and bull or just the fundamentals of build of removing friction from the onboarding experience. And we found that when we look at, you just watch, when we sort of sit down as a customer or watch a customer walk through the onboarding experience, there's still a lot of steps that we could simplify. And so we've seen a lot of good early returns in green shoots around, okay, if we, as we simplify the team onboarding experience, as we make it easier to invite other folks to your team and get set up as we rationalize some of the sharing features, some of the stuff that I talked about in my earlier remarks, but just really tuning those basic user and viral loops, that there's still a lot of headroom there.
Speaker Change: Is that the value prop clearly resonates right.
Speaker Change: It's hard to hard to find someone that doesn't have these issues of having 100 tabs open in 10 different search boxes.
Speaker Change: And kind of the.
Speaker Change: Mayhem of the.
Speaker Change: New world of distributed work.
Speaker Change: So and then once you show customers that this is actually a solvable addressable problem.
Tim:
Tim: They're pleasantly surprised so I think the value prop resonates and then specifically.
Tim: We've made a lot of progress in.
Tim: Getting the product to where we wanted to be from a quality standpoint. So for example.
Tim: In Q2, we made big advances in continuing to make double digit percentage point improvements in search success rates.
Drew Houston: And when we look at different funnel metrics on the team's business and compare them to other SaaS products with similar characteristics, we still see some headroom there. But that said, we're not out of the woods. I would say these improvements haven't yet offset some of the bigger picture, just like macro pressure or other factors, but we're heading in the right direction. Carter, and not of it is competitive, right? Well, I'm sure some of it's competitive, although I wouldn't say there's like a diff, I mean, we've had kind of, we've competed against the, you know, Microsoft and Google's the world for, since the company was founded.
Tim: Search ranking quality things like that which.
Tim: Which is important because the first the first thing we do is get the product experience rate then we look at engagement and retention and then once those are in good shape, then we turn on.
Tim:
Tim: Then we turn on distribution and monetization so I'm really happy with the progress, we're making on the product quality side and it is.
Tim: Hate to see customers.
Tim: It's great to see the early product resonate with customers.
Tim: Who are kind of using it for their like search box for their for their private information and people understand that.
Drew Houston: So I wouldn't say there's any new competitive dynamics, but for sure the platform companies are, you know, what the product that's bundled in the office suite is going to be our primary competitor in most cases. So that's definitely a factor, but that's kind of been, that would have also been a factor 10 years ago.
Tim: There's a bunch of chat GBT is great, but there is a lot of questions that chat GPT can't answer.
Tim: Correct.
Speaker Change: When does.
Tim: My lease expire or whereas that slide from last year's product deck or product launch.
Speaker Change: Existing tools can't really solve that but but dash can so.
Tim: And then I'd say there's also.
Tim: <unk>.
Drew Houston: Carter, thank you so much.
Tim: On.
Tim: And another area that's something that's that's been interesting is that the I T edmunds have a lot of unmet needs around.
Unknown Executive: Thank you.
Steven Enders: Our next question comes from the line of Steven Enders, which city, please go ahead. Okay, great. Thanks for taking the questions here. I guess maybe just to start just on dash on the AI products that I guess what's kind of been the feedback you've gotten so far. For, you know, how customers might be thinking about adopting that and utilizing it and I guess I can directly, how are you thinking about the monetization.
Tim: Keeping track of what everybody sharing across multiple platforms.
Tim: And so we see a lot of opportunity to solve some new or to address some new unmet needs.
Tim: On the security side.
Tim: So we're very excited about the roadmap for dash in and where we will have a lot more to share on the specifics of both the product functionality.
Tim: And some of the.
Tim: And things like pricing and packaging in the coming months this year.
Steven Enders: And for that at this point in trying to drive share wallet within customers. Yep, so early feedback's been good. I mean, I think the first thing we look for is that the value prop clearly resonates, right? It's hard to find someone that doesn't have these issues of having 100 tabs open and 10 different search boxes and kind of the mayhem of the new world of distributed work. So a lot, and then once you show customers that this is actually a solvable, addressable problem, they're pleasantly surprised.
Tim: Okay.
Tim: Contacts.
Speaker Change: I guess I'll look forward to what the what those look like.
Steven Enders: So I think the value prop resonates and then dashed specifically, we've made a lot of progress in getting the product to where we want it to be from a quality standpoint. So for example, in Q2, we made big advances in continuing to make double digit percentage point improvements in search success rates, search ranking quality, things like that.
Tim: I guess on some of the document workflow product it sounds like.
Speaker Change: It's been a bit of an impact with sign in.
Speaker Change: Swift is yes.
Speaker Change: I guess one for tax season, but can you give a little more clarity on.
Tim: What happened or what the customer activity was post post security challenges with <unk> and <unk>.
Speaker Change: The impact that that's having on the outlook here.
Tim: So pretty contained I mean to begin with.
Tim: The Si business is a low single digit percentage of our overall revenue.
Speaker Change: And then it was seen.
Tim: A pretty minimal impact on the business around the same business overall, and then importantly, it just affected.
Tim: Our all in all everything we know indicates that the incident it was isolated to the dropbox sign infrastructure, meaning it didn't impact the other dropbox products.
Drew Houston: Which is important because the first thing we do is get the product experience right, then we look at engagement and retention, and then once those are in good shape, then we turn on distribution and monetization. So I'm really happy with the progress we're making on the product quality side and it's great to see customers or it's great to see the really product resonate with customers who are kind of using it for their search box, for their private information and people understand that, oh yeah, there's a bunch of chat GBT's great, but there's a lot of questions that chat GBT can't answer.
Tim: So overall the incident hasn't had a material impact on our overall revenue our operations and we don't believe it's likely too.
Speaker Change: Okay Alright, great.
Cynthia: Cynthia the commentary there.
Cynthia: Thanks, taking the question.
Cynthia: Thank you.
Speaker Change: Our next question comes from the line of Kash Rangan with Goldman Sachs. Please proceed.
Kash Rangan: Hi, Thank you very much good to talk to you drew and team.
Kash Rangan: Just to get your thoughts on a couple of things so the.
Cynthia: Yes.
Speaker Change: The right to win for Dropbox with that kind of mitigates.
Drew Houston: You know, if you ask me, what's my when does my lease expire or where's that slide from last year's product launch existing tools can't really solve that, but dash can. And then I'd say there's also on in another area that's something that's that's been interesting is that the IT admins have a lot of unmet needs around keeping track of what everybody's sharing across multiple platforms. And so we see a lot of opportunity to solve some new or to address some new unmet needs on the security side.
Kash Rangan: It is not out yet, but what gets dropbox the right to win in this space and do you think this new subcategory youre trying to honor what actually bring in a new category of users.
Speaker Change: That may not be initially spurred by document sharing the things that Dropbox has been always good with ultimately do you think there is maybe an unmet need in the market for perhaps a dropbox like not that you would not have considered I'm sure. Your pop through all this stuff, where you have a lower price point.
Speaker Change: A fraction of the functionality within these folks get used to the system, maybe throw an alcohol free.
Speaker Change: Youre up sell them to the Premier versions of Dropbox I'm, just wondering how youre thinking about potential.
Drew Houston: So we're very excited about the roadmap for dashing and we'll have a lot more to share on the specifics of both the product functionality and some of the and things like pricing and packaging in the coming months this year. Okay, that's a couple of contacts and, you know, I just will look forward to what those look like. I get some of the document workload products sounds like, you know, seeing a bit of an impact with sign and, you know, form swift is as well for taxis.
Speaker Change: Uh huh.
Speaker Change: Decision path down the line. Thank you so much once yeah sure sure yeah. Thanks Kash.
Cynthia: So first on dash.
Speaker Change: I mean, the origin of dash is really kind of solving the.
Tim: Kind of modern equivalent of or today's equivalent of the problem I started with.
Cynthia: When I founded the company I mean, which is really.
Speaker Change: In the beginning like I felt like myself with everywhere couldnt find it back.
Speaker Change: Back then it looks like my files around these different devices and operating systems.
Speaker Change: And the solution was like let's think everything to the cloud.
Drew Houston: But can you give a little more clarity on, you know, what happened or what the customer activity was post security challenges with sign and the impact is that's having on the outlook here. So pretty contained. I mean, to begin with the sign business is a low single digit percentage of our overall revenue. And then it was, you know, we've seen a pretty minimal impact on the business or on the sign business overall. And then importantly, it just affected all everything we know indicates that the incident was isolated to the Dropbox sign infrastructure meaning it didn't impact the other Dropbox products.
Cynthia: But today kind of back to that familiar problem like my stuff is everywhere can't find it.
Cynthia: But in addition to file is obviously, we do a lot of work and our browsers now and so what used to be 100 files on my desktop is now also.
Cynthia: Tabs in my browser.
Cynthia: And is it really that is kind of first principles.
Cynthia: And just like frustration as an end user personally around like it is so hard to find just the basic information I need at work and this is a problem that's getting worse not better.
Cynthia: As as sort of one of the unintended consequences of this of the proliferation of all the different tools and platforms that we're using.
Tim: And a recognition that no one's solving this problem at scale like Microsoft hasn't solved this problem Google Hasnt No one has.
Drew Houston: So overall, the incident hasn't had a material impact on our overall revenue or operations and we don't believe it's likely to. Appreciate the commentary there and thanks for the question.
Tim: And it didn't seem like there was any one really putting the necessary firepower.
Cynthia: On on solving this problem and this was also before like generative AI really took off but.
Kasthuri Rangan: Thank you.
Drew Houston: Our next question comes from the line of cash ran gun with Goldman Sachs, please proceed. Hi, thank you very much to go to talk to you, Drew and team. Drew is curious to get your thoughts on a couple of things. So the right to win for Dropbox with dash and a minute later, it's not out yet. But what gives Dropbox the right to win in the space? And do you think this new sub category you're trying to honor, but actually bring in a new category of users that that may not be initially spurred by document sharing the things that Dropbox has been always good with.
Speaker Change: I'd summarize by saying this is a universal knowledge worker need I mean, when we talk to our customers. It's like hard to again hard to find someone that doesn't have this problem.
Speaker Change: Our right to win is it's a natural evolution for our customers I mean, especially exist certainly dropbox customers. It's it.
Speaker Change: It doesn't take a lot to explain that we're evolving from.
Cynthia: Helping you organize your files to organizing all your cloud content, that's a pretty straightforward logical leap for people and then.
Speaker Change: Two people, who arent dropbox files that can share customers. It gives us a.
Speaker Change: A big reason to be relevant to new generations of folks that.
Speaker Change: <unk> grew up in the browser instead of the file system.
Drew Houston: Ultimately, do you think there's maybe an unmet need in the market for perhaps in Dropbox, right? Not that you would not have considered. I'm sure you pop through all this stuff where you have a lower price point, fraction of the functionality within these folks get used to the system. You maybe throw in a aqua free and then you upsell them to the premier versions of Dropbox and just wondering how you're thinking about potential. Discussion passed down the line. Thank you so much once again. Sure, sure. Yeah. Thanks, Keshe.
Speaker Change: So we think it's a big opportunity to reach like truly not user net new users and get them on <unk>.
Cynthia: Platform and then.
Cynthia: We're certainly not the only company working on this but our scale.
Cynthia: And our privacy and security track record.
Cynthia: Our a big advantage when we talk to customers.
Speaker Change: For the first example, I mean, we are unlike dropbox only point, though is we're launching dash, we already have half a million paying business accounts already an 18 million subscribers and so once we're happy with the product experience.
Drew Houston: So first on dash. I mean, the origin of dash was really kind of solving the kind of modern equivalent of, or today's equivalent of the problem I started with when I found at the company, which is really in the beginning. Like, I felt like my stuff was everywhere couldn't find it. Back then, it looked like my files around these different devices and operating systems. And the solution was like, let's think everything to the cloud.
Cynthia: You can believe that we'll be turning on distribution and introducing our existing customer base.
Cynthia: Dash is as rapidly as possible.
Cynthia: We also see some promising early signal that folks that are paying file sync and share subscribers adopt and retain on dash at twice the rate as people, who are just kind of visiting the website or who arent.
Drew Houston: But today, kind of back to that familiar problem, like my stuff is everywhere, can't find it. But in addition to files, obviously, we do a lot of work in our browsers now. And so, you know, what used to be under files on my desktop is now also under tabs in my browser. And it's really that kind of first principles. There are different tools and platforms that we're using. And a recognition that no one solving this problem at scale, like Microsoft hasn't solved this problem, Google hasn't known has.
Cynthia: And.
Cynthia: And then on the on the trust side I mean this is.
Cynthia: I mean.
Cynthia: In General Security is top of mind for every customer.
Cynthia: And people are entrusting us with their most important information and have been for a long time.
Cynthia: And then AI as you would imagine amplifies these concerns even more as people.
Cynthia: One a lot of transparency and control about where their data goes as.
Cynthia: They put it into these new apps or new AI systems and so.
Cynthia: The fact that we're very transparent about this.
Cynthia: And and have a track record and we already have all these companies are storing their most important information on Dropbox makes us a lot more of a natural evolution for us.
Drew Houston: And it didn't seem like there was anyone really putting the necessary firepower on solving this problem. And this was also before, like, you know, generative AI really took off. But I'd summarize, I think this is a universal knowledge worker need. I mean, when we talk to our customers, it's like hard to find someone who doesn't have this problem. Our right to win is it's a natural evolution for our customers. I mean, especially exist.
Speaker Change: Then someone starting from scratch or startup or even a growth stage startup and then compared to platform companies are.
Speaker Change: So far what we're seeing.
Cynthia: Is that.
Tim: As you see like Microsoft Copilot, or Google's, similar features and workspace they worked super well within their ecosystem, but don't work outside.
Drew Houston: Certainly Dropbox customers. It doesn't take a lot to explain that we're evolving from helping you organize your files to organizing all your cloud content. That's a pretty straightforward logical leap for people. And then to people who aren't Dropbox files, you can share customers that give us a big reason to be relevant to, you know, new generations of folks that grew up in the browser instead of the file system. So we think it's a big opportunity to reach like truly net user, net new users and get them on our platform.
Tim: And Universal search is by definition a platform agnostic thing because at the end of the day, we all.
Cynthia: Use tools from many of the different ecosystems, it's very rare that you or your team or just in one.
Cynthia: So we think that's a big advantage for Dropbox and it's been in our DNA to tie together all these disparate tools and ecosystems and Thats just something that we're that we put a lot more attention to.
Tim: Then any individual.
Tim: And then even the bigger companies.
Speaker Change: And then you had a second part around.
Drew Houston: And then, you know, we're certainly not the only company working on this, but our scale and our privacy insecurity track record are a big advantage when we talk to customers. So for as a first example of me, we are unlike Dropbox 1.0 as we're launching Dash, we already have half a million paying business accounts already and, you know, 18 million subscribers. And so once we're happy with the product experience is, you can believe that we'll be turning on distribution and introducing our existing customer base to Dash as rapidly as possible.
Speaker Change: What I would say just the creativity on pricing and packaging.
Speaker Change: Do we get people in.
Speaker Change: Can we.
Speaker Change: Give us certain things away for free or otherwise.
Speaker Change: Explore other levers beyond just like subscription like a basic subscription the answer is absolutely.
Speaker Change: We innovated a lot on that playbook in the beginning.
Speaker Change: I'm sure it will innovate on it again, we'll sort of take the best parts, but I'm sure some aspects.
Speaker Change: Will be different.
Speaker Change: Earlier talked about volume based pricing versus seat based pricing.
Speaker Change: Using free or loss leader type things.
Speaker Change: Using bundling, we're going to explore all of that.
Cash: Thanks, so much for the detailed thoughtful answer thank you so much cash.
Drew Houston: We also see some promising early signal that folks that are paying files and can share subscribers adopt and retain on Dash at twice the rate as people who are just kind of visiting the website or who aren't. And then on the trust side, I mean, this is, I mean, in general, security is top of mind for every customer and people are entrusting us with their most important information and have been for a long time.
Tim: You.
Speaker Change: Our next question comes from the line of Patrick Wall Ravens with citizens JMP. Please go ahead.
Austin Cole: Great. Thanks for taking my question. This is Austin coal on for Pat.
Drew Houston: And then AI, as you'd imagine, amplifies these concerns even more as people want a lot of transparency and control about where their data goes as they put it into these new apps or new AI systems. And so the fact that we're very transparent about this and have a track record and, you know, we already have all these companies storing their most important information on Dropbox makes this a lot more of a natural evolution for us.
Drew Houston: So drew when you think about some of the things.
Austin Cole: You guys have been working through whether it's the go to market for the individual plans and the pricing on bundles.
Speaker Change: But what inning do you feel like Youre in on plugging some of these holes and getting to a place where you really have the right fit across these plans. Thank you.
Speaker Change: Yep.
Tim: Okay.
Speaker Change: I don't know if I have like a specific inning number for you I think there is still.
Tim: We're showing progress I think this year is like our first concerted effort and some of these parts of the funnel.
Speaker Change: And we're seeing some of those efforts bear fruit and I think there's still a lot of headroom there, but it's.
Drew Houston: Then someone starting from scratch or, you know, a startup or even a growth stage startup. And then compared to platform companies or You know, so far what we're seeing is that a lot as you see like Microsoft co-pilot or Google's similar features and workspace, they work super well within their ecosystem but don't work outside. And Universal Search is by definition a platform agnostic thing because at the end of day we all use tools from many of the different ecosystems.
Tim: It's hard to speculate beyond what we've kind of already reflected in our guidance.
Tim: Guidance, but we certainly see lots of opportunities to.
Tim: Continue reducing friction in the Onboarding experience the team expansion experience in sharing we have had some good milestones that we hit last quarter or so as I said earlier.
Tim: Sharing is up year on year.
Tim: Which is in sort of reversing what was kind of stable or slightly declining.
Drew Houston: It's very rare that you or your team are just in one. So we think that's a big advantage for Dropbox and it's been in our DNA to tie together all these disparate tools and ecosystems. And that's just something that we put a lot more attention to than any individual than even the bigger companies.
Tim: The kind of thing I would like to see and then also we're gearing I think one of the best things, we can do to grow the business is really good.
Tim: Yet.
Tim:
Tim: A lot of these platform improvements are really important so.
Tim: Some of the things around our billing engine, having more flexibility in subscriptions and continuing to tune up our.
Tim: Technical infrastructure to be able to support cloud content and go beyond just filed so these are long term investments that are going to bear fruit or can be really valuable as we start to scale up dash.
Drew Houston: And then you had a second part around, you know, I would say just like creativity on pricing and packaging. How do we get people in the, can we give certain things away for free or otherwise explore other lovers beyond just like subscript, like a basic subscription. The answer is absolutely we innovated a lot on that playbook in the beginning. I'm sure we'll innovate on it again. We'll sort of take the best parts, but I'm sure some aspects will be different.
Tim:
Speaker Change: So I think there's a lot of different.
Speaker Change: I'm excited about the portfolio of investments we have in.
Tim: Some of them are kind of incremental optimizations and some of the final thing as I mentioned in some we believe are really big new growth levers like dash.
Speaker Change: Great. Thank you.
Speaker Change: Thank you.
Speaker Change: A reminder, if you do have a question simply press star one line to get into queue.
Drew Houston: And you know, we earlier talked about volume based pricing versus seat based pricing, you know, using free or loss later type things. Well, we'll be using bundling. We're going to explore all that. Thanks so much for the detailed documents. Thank you so much. Great.
Speaker Change: Our next question is from Mark Murphy with Jpmorgan.
Mark Murphy: Okay. Thank you very much Tim you had mentioned that hiring was slower than anticipated and I think you said due to recognizing additional efficiencies I'm wondering if you can elaborate on the nature of the.
Patrick Walravens: Thank you. Our next question comes on the line of Patrick Wall Ravens with citizens JMP. Please go ahead. Great. Thanks for taking my question. This is Austin Cole on for Pat. So Drew, when you think about some of the things you guys been working through, whether it's the go to market for individual plans or the pricing on bundles. I mean, like, what ending do you feel like you're in on plugging some of these holes and getting to a place where you really have the right fit across these plans?
Mark Murphy: Efficiencies for instance are you using some lower cost regions are you.
Speaker Change: Are you seeing some productivity gain from internal use of Gen AI baby maybe.
Tim: Yes.
Tim: From Github co pilot or something along those lines or is it something.
Speaker Change: Is there something different that you're enabling.
Tim: Sure. Good question, Mark I think it's a little bit of all of those things so.
Speaker Change: Our margin outperformance was largely driven by lower head count related costs as we have identified efficiencies across our operations that does include slowing the pace of hiring.
Patrick Walravens: Thank you. Yep. I don't know if I have like a specific ending number for you. I think there's still. And we're showing progress. I think this year is like our first concerted effort in some of these parts of the funnel. And we're seeing some of those efforts bear fruit. And I think there's still a lot of headroom there, but it's hard to speculate beyond what we've kind of already reflected in our our guidance.
Tim: In some areas as well as prioritizing hiring in lower cost locations exactly to your point so.
Tim: And maybe lastly, I'll note that we're managing our vendor and software spend closely. So those are some of the efficiencies, we're driving and will continue to look for additional opportunities.
Drew Houston: Okay understood and then drew I appreciated all.
Patrick Walravens: But we certainly see lots of opportunities to continue in reducing friction in the onboarding experience, the team expansion experience and sharing. We've had some good milestones that we hit last quarter. So as I said earlier, sharing is up year on year, which is in sort of reversing what was kind of stable or slightly declining. So that's the kind of thing I like to see. And then also we're gearing. I think one of the best things we can do to grow the business is really get our.
Drew Houston: All of the insights you provided where you were when you were answering Catherine's question can you remind us.
Speaker Change: If there is any update on when do you think gas is going to.
Speaker Change: <unk> and <unk>.
Speaker Change: Where your thoughts are on that.
Speaker Change: On the pricing strategy for dash that we might be able to.
Speaker Change: Kind of run that through our models.
Speaker Change: And start to think about a potential contribution ramp.
Tim: Yep.
Patrick Walravens: A lot of these platform improvements are really important. So some of the things around our billing engine, having more flexibility and subscriptions and continuing to tune up our technical infrastructure to be able to support cloud content and go beyond just files. These are long term investments that are going to bear fruit are going to be really valuable as we start to scale up dash. So I think there's a lot of different or I'm excited about the portfolio investments we have and some of them are kind of incremental optimizations and some of the funnel things I mentioned and some we believe are really big new growth levers like that. Thank you. In a sorry reminder, if you do have a question, simply press star 11 to get in the queue.
Tim: So we will have a lot more to share after the after our launches later this year.
Tim: But I think in principle.
Tim: Sure.
Tim: We will be drawing heavily from that playbook over the things that have worked with.
Tim: With pricing and packaging with Dropbox, so well.
Tim: We will certainly make dash available standalone and as a standalone subscription.
Tim: There will obviously be will be interested in introducing it to our file sync and share customers in different ways.
Tim: But it's a little early to give you specific numbers are.
Tim: To plug the sales into the spreadsheet.
Speaker Change: Thank you.
Speaker Change: Thank you and it appears that there is no further questions in queue I will turn the call back to Peter Stabler for closing remarks.
Timothy Regan: Our next question is from Mark Murphy with JP Morgan. Thank you very much, Tim. You had mentioned that hiring was slower than anticipated and I think you said due to recognizing additional efficiencies.
Peter Stabler: Thanks, everyone for joining us today, we look forward to speaking with you next quarter Hope you all have a great afternoon.
Speaker Change: And thank you all for participating in today's conference you may now disconnect.
Timothy Regan: I'm wondering if you can elaborate on the nature of the efficiencies, for instance, are you using some lower cost regions, are you seeing some productivity gains from internal use of Gen AI, maybe get up co-pilot or something along the lines or is there something different that you're enabling? Sure, good question, Mark. I think it's a little bit to all of those things. So our barging out performance was largely driven by lower head count related costs as we have identified efficiencies across our operations that does include slowing the pace of hiring in some areas as well as prioritizing hiring in lower cost locations exactly to your point. And maybe lastly, I'll note that we're managing our vendor and software spend closely.
Timothy Regan: So those are some of the efficiencies you were driving and we'll continue to look for additional opportunities. Okay, I understand.
Drew Houston: And then, Andrew, I appreciate all the insights you provided while you were answering a cash question. Can you remind us if there is any update on when you think gas is going to reach GA and where your thoughts are on the pricing strategy for dash so that we might be able to run that through our model and start to think about that. A potential contribution wrap. Yep. So we'll have a lot more to share after the after our launches later this year.
Drew Houston: But I think in principle, there will be drawing heavily from the playbook over the things that have worked with the pricing and packaging with Dropbox. So we'll certainly make dash available standalone and as a standalone subscription. There will obviously be will be interested introducing it to our files and can share customers and in different ways.
Drew Houston: But it's a little early to give you specific numbers or, you know, to to plug the cells into the spreadsheet. Thank you.
Peter Stabler: I miss up years that there's no further questions in queue. I will turn the call back to Peter Stabler for closing remarks. Thanks everyone for joining us today. We look forward to speaking with you next quarter. Hope you all have a great afternoon. And thank you all for participating in today's conference. You may now disconnect.