Dropbox, Inc.
Q1 2021 Earnings Call Transcript

Published: 6 May 2021

[Operator:]

Good afternoon, ladies and gentlemen. Thank you for joining Dropbox’s First Quarter 2021 Earnings Conference Call. All participants will be in a listen-only mode. After today's presentation, there will be an opportunity to ask questions. As a reminder, this conference call is being recorded and will be available for replay from the Investor Relations section of Dropbox’s website following this call. I will now turn it over to Page Portas, Investor Relations for Dropbox. Mr. Portas, please go ahead.

[Page Portas:]

Today Dropbox will discuss the quarterly financial results that were distributed earlier. Statements on this call include forward-looking statements including future financial results including our goals and expectations regarding future revenue growth, profitability and our ability to generate and sustain positive free cash flow; our expectations regarding anticipated benefits to our business and the impact to our financial results including estimated impairment charges as a result of our shift to a Virtual First work model; expected performance of our business, operational efficiencies we may achieve as a result of changes to our organizational structure; our expectations regarding remote work trends, related market opportunities and our ability to capitalize on those opportunities; our capital allocation plans, including expected timing and volume of share repurchases, future M&A opportunities and other investments; Our ability to drive future user growth, upgrades and retention by enhancing our products, developing and offering new products or features through our acquisitions, our strategy and the effectiveness of strategy and achieving our business goals and overall future prospects and ability to generate shareholder value.

[Drew Houston:]

Good afternoon, everyone, and welcome to our Q1 2021 Earnings Call. On the call with Tim Regan, our chief financial officer today I'll share our business and product highlights from the quarter. Tim will then review our Q1 financial results, provide guidance for the second quarter and update our outlook for the remainder of the year. And before we get to our results, I'd like to thank our employees, customers, and partners for their support and their contribution to a successful quarter. Around this time, last year, we along with many of our customers were managing through an unprecedented global pandemic and the sudden shift to distributed work. It was certainly a challenging time and I'm proud of the way our team showed up and supported our customers. While many companies are still adjusting to this shift in grappling with decisions about hybrid flexible or remote work, one thing is clear, the traditional way of working has changed forever. We've made decisions about our home workforce adopting what we're calling virtual first way of working combining the best of both fully remote and in person collaboration. And as I shared previously, we reoriented our entire product roadmap to address the challenges that our customers face in this new environment. At the same time, we also reorganized and streamlined our teams against some new strategies. And now we're focused on execution. This new era of distributed work has given rise to new opportunities for us instead of several trends that were already in play.

[Tim Regan:]

Thank you drew, as I've done before, I want to begin with a reminder of our financial objectives as this provides the context for how we operate the business and outlines, where we are headed. The core tenants of our financial plan are as follows doubling free cash-flow to $1 billion annually by 2024, investing for continued revenue growth, driving annual improvements in operating margins targeting 28% to 30% allocating capital to organic initiatives and acquisitions that aligned with our strategic and financial objectives and returning capital to shareholders by allocating a significant portion of our annual free cash flow to share repurchases with the goal of reducing our share count.

[Drew Houston:]

Thank you, Tim. And thank you all for joining us today. As our Q1 results demonstrate, we remain focused on executing at 2021 priorities, our long-term financial goals and our commitment to our shareholders. We believe we're well positioned to meet the opportunity ahead of us. As customers continue to look for technology that helps them adapt to the rapidly evolving working environment. On behalf of our management team, I'd like to thank our customers, our partners, and the entire Dropbox team. And with that, I'd like to open up the call for Q&A, operator?

[Operator:]

Thank you. The question comes from Mark Murphy with JP Morgan. Your mind is open.

[Mark Murphy:]

Yes. Thank you very much. And congratulations on a healthy result, so I'm noticing that the rate of deceleration is improving quite a bit. You know, you have three consecutive quarters where revenue growth is basically 12 and a half to 13 and a half percent and you're lifting it on a year. Can you shed any light on which levers you're pulling to influence that in other words, the conversion retention, new products, et cetera, and just how sustainable do you think this improvement is in terms of you know, kind of, improving that, that rate of diesel?

[Drew Houston:]

Sure. Well, thanks mark. This is true and I can start in, Tim can build on building and comes from the specifics, but I mean, the way we look at it is we have a lot of opportunity in the core business and we're driving growth from a broader portfolio of products. So in the core business, we spoke to some of the improvements we've been making and we see KC lots of levers there to drive conversion and retention and improve the experience and things like transfer and passwords, family plan, all good examples. And then we're growing the portfolio. So HelloSign has been one of our fastest growing businesses. We're just at a dock scent. And we'll continue to have a broader innovation pipeline those organic and organic bets on M&A. So they're all added to say, we have a lot of different levers. We're pulling many of, and we're excited about the progress we've been making.

[Tim Regan:]

That's exactly right. And maybe to build on that, so our guidance does have us growing at about 11% at the mid-point, which is a 1% increase from the guidance we shared in February, where half of that is from DocSend and the other half is from the expected organic performance. And it's really attributed to all the factors that drew discussed in his prepared remarks, the family plan, adding passwords to our basic plan, launching the standalone and transfer skew, HelloSign DocSend, or we have many initiatives we're working on to drive growth, and we're not overly reliant on the success of any one initiative. And we absolutely will continue to invest to drive sustainable revenue growth where we are seeing a compelling ROI.

[Mark Murphy:]

Okay. So it sounds like it's, it's a diversified kind of portfolio effect across the, across the products I wanted to just ask one other quick one the, which is the top of the funnel activity. I recall that had spiked at the onset of the pandemic. And then I think logically we were expecting that that would start to subside. I'm just wondering now, how has the top of funnel behaving into, you know, return to the office activity and business cycle recovery?

[Drew Houston:]

Sure. so I mean, there's a certain, as you, as you mentioned, there's a surge of demand in Q2 last year. But overall, our business has been pretty stable. I mean our customers need a Dropbox before lockdown during lockdown and they'll need it afterwards is kind of the way I see it. And that said, I mean, it's been a big tailwind for hello sign as lots of customers started adopting e-signature for the first time. So in total we think the world moving to distributed work will be a big deal and for our business. And as, as we move towards reopening, as most companies have some kind of hybrid model, there's a lot of room for improvement in the tools we use to manage that. So you know, health sign doc center, a couple of examples, but we're thinking much more broadly to.

[Operator:]

Thank you. Our next question comes from Brent Thill with Jeffrey. Your line is open.

[Unidentified Analyst:]

Hi, this is on for Brent to thank you guys for taking my questions and congrats on a great quarter. Wanted to ask one on send, if you could maybe talk a little bit about the vision with the acquisition and maybe give us too many, any insight into the number of users or the ER, contribution from DocSend for you.

[Drew Houston:]

Sure. I can start just at a high level. So we think DocSend's is a great fit and they help customer docs and helps customers manage and share their, does this critical documents. They give Misys leaders more control and visibility, powerful engagement analytics. And the reasoning was that this is a national expansion opportunity for, for us for Dropbox where there's tens of billions of documents in Dropbox. Our customers want to do a lot of things with them. The more we can help with workflows these are natural adjacencies and then production. We can help them accelerate their growth and reach a larger audience. And and then more broadly the combination of Dropbox plus DocSend plus HelloSign means that we can address the whole, the whole life cycle of a document or address these workflows on end. So you can start with a contract saved in Dropbox, you can share it and iterate on it through docs and get feedback analytic, and then sign it in hello sign. And so being able to handle the whole experience, and then we think there's an opportunity where the where it's additive and there's an overall, these are individually big markets collectively they're big and growing, and there's lots of natural alignment on many dimensions, but it was documented in particular the product strategy, their go to market motion. They similarly have a self-serve environment model it's really efficient and scalable. Silver, obviously a really great fit particularly as the world moves to the shooter to work and needs better ways of managing content, can't rely on being in the office together. CVS is really exciting opportunities. And then let me try to give you some color on their financial impact. So we purchased Doxepin for roughly $165 million with about $30 million held back for key executives to be paid over a three-year period, similar to how we structured the deal with HelloSign. And some further insight Docksin contributed about $15 million to ARR in the quarter. Whereas a reminder, we record the ARR from acquired companies in the period. We closed the acquisition. We also added about 35,000 paying users to our totals. And then as related to the P&L the impact of Q1 was nominal as the deal closed on March 22nd for the full year, we do expect that revenue contribution to be roughly half a point to our total revenue. And we are absorbing their expenses into our P&L where this has been factored into our guidance.

[Unidentified Analyst:]

Got it. Great. And maybe one quick followup on the top of the funnel question that was asked earlier, I guess you know, in terms of the overall demand, are you seeing like SMB span, comeback? I know obviously last year, you know, you might've seen some impact from, from the SMB side, so will, will that sort of be a tailwind going forward?

[Drew Houston:]

Yeah. Fortunate to have a lot of stability in, and then right. The, the SMBs that are on Dropbox tend to be knowledge workers, so they're relatively less impacted which, which has been a good thing. And then I mean, one thing, one dynamic we are seeing is our professional skew has been doing really well. So it's been growing 30% year over year. And one big strength that we have is we as Dropbox through our self-serve and viral motion we can reach and we can profitably acquire small business. So this is customers, freelancers VSN views more than if we had a nuclear, more reliant on the conventional Salesforce. So part of the tailwind is just falling demand. There's a whole passion economy, creators rising freelancers that we're seeing contribute to demand and we expect.

[Operator:]

Thank you. Our next question comes from Steve Enders with KeyBank. Your line is open.

[Steve Enders:]

Hi. Great. Thanks for taking my question. Just to follow up a little bit there on, on the on the dock then plans and wondering how you're thinking about incorporating doc sent into, into the rest of the product. If you have plans to incorporate similar to where you at HelloSign, where you build into plans, or what's kind of the, the expectation. Similar to where you do at HelloSign where you but in the plans or what's kind of the, the expectations that are going forward?

[Drew Houston:]

Sure. Well, I immediately we'll start integrating where we're already starting to integrate them into our go-to-market motion. So making DocSend more available to our customers through our sales team and then similar deductions were or sorry, similar to hello sign. We're building integrations into the product experience and bringing those closer together. We see it as we see that. And so mainly we're focused on driving distribution of DocSend towards the same audience. And then in parallel we'll be building trainer integrations.

[Steve Enders:]

Okay. Got you. That's helpful. And then I know you just raised the convert in the last quarter, but I guess how you're kind of thinking about the, the rank order of those plans that I think you laid out a few things from you know, M&A to buybacks to organic growth, but how you kind of think about the rank ordering of importance there, as you think about the plans that are going forward.

[Drew Houston:]

I think we absolutely have the room to do each one of them. So we plan to allocate a significant portion of our annual free cash flow to share repurchases that's absolutely. So the plan M&A that will continue to be important part of our strategy and look at in HelloSign, great examples of the types of deals we're interested in. And we strengthened our balance sheet with a convert where we can continue to pursue those strategies. And we will absolutely continue to be disciplined with valuations. So we structured our business where we continue to be able to invest in growth organic growth, continue to invest in M&A and continued to pursue share repurchases.

[Operator:]

our next question comes from Ben Rose, your line is open.

[Unidentified Analyst:]

Yes. I wanted to ask on a couple of items, one is either temperature or could you speak to the contribution of international revenue during the quarter total international and how that changed from last year? I'm sure that hasn't changed materially. It's about a 50 50 split as far as the international contribution to revenue. And so, yeah, that'll be disclosed as part of a 10 key filing tomorrow, but has not changed materially. Okay. And then just a question on product pricing was just curious to know how you are thinking about the pricing of various different plans, whether you are anticipating or contemplating any price increases for the user base over time?.

[Drew Houston:]

Nothing specific to share about future plans there. I mean, one thing we are focused on is we have an enormous base of for users which represent a big opportunity. We will certainly continue to drive them to the standard Dropbox plans, but we're also creating a broader menu of new subscription options and entry points basically. And optimizing pricing and packaging in general. So Dropbox transfer is an example of a, of a standalone skew. We launched in Q1 and we'll continue to experiment and double down on what's working. So we certainly are looking at pricing or we continue to look at pricing and packaging in general and that that's an important monetization lever for us. Okay. And if I may just ask one additional question, I know that you know, part of the changes over the last several months has been your doubling down on you know, reaching users the self-serve model and sort of less emphasis on direct sales was just curious to know your thoughts on how that has been contributing to the strong growth that we're seeing in recent quarters. Yes. So I mean, our rationale for this is, is, you know, we'll continue to serve larger customers. And one of our strengths is that Dropbox is organically adopted and companies of all sizes, including large companies, that's going to continue. But when it comes to paid customer acquisition, we want to play to our strengths and be disciplined in our investments and streamline some of our efforts. So our land and expand model and self-serve motion is really scalable and profitable in general. And we find that our outbound efforts in mid market or in the mid-market segment, tend to be more efficient and profitable than some of the high end of the enterprise. So these changes are more just about focus and, and really doubling down on our most efficient go to market motions. And we find that the very large customers are the revenue coming from very large customers sees less than 10% of revenue.

[Operator:]

Thank you. And I'm currently showing no further questions at this time. I'd like to turn the call back over to Drew Houston which was on the mark.

[Drew Houston:]

Great. Well, thank you everyone for joining us. We hope you and your family families are staying safe and well, and we'll see you next quarter.

[Operator:]

This concludes today's conference call. You may now disconnect. Thank you everyone for participating. Okay.