Dropbox, Inc.
Q4 2020 Earnings Call Transcript

Published: 18 Feb 2021

[Operator:]

Good afternoon, ladies and gentlemen. Thank you for joining Dropbox’s Fourth Quarter 2020 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 Mr. Rob Bradley, Head of Investor Relations for Dropbox. Mr. Bradley, please go ahead.

[Rob Bradley:]

Thank you and good afternoon and welcome to Dropbox’s fourth quarter 2020 earnings call. 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 user growth and retention by enhancing our products, developing and offering new products or features and through strategic partnerships; our strategy as well as the ability of our key employees to execute our strategy and overall future prospects and ability to generate shareholder value.

[Drew Houston:]

Thanks, Rob. Good afternoon everyone and welcome to our Q4 2020 earnings call. I am here with Tim Regan, our Chief Financial Officer. I’ll start our call today by recapping our accomplishments from 2020 and providing an overview of our priorities for 2021. Then I’ll hand the call over to Tim, who will review financial results for the fourth quarter and full year, give guidance for Q1 and fiscal year 2021 and share some thoughts on our long-term model. 2020 was a transformational year for Dropbox as the world abruptly shifted to working from home due to the pandemic. We helped many of our customers through this transition. We adapted quickly to the new environment ourselves and we reoriented our product roadmap to address many of the new challenges and opportunities that distributed work presents. Even with the changing landscape, our business performed well. For the full year, we delivered more than $1.9 billion in revenue, we crossed $2 billion in ARR and we meaningfully increased our profitability. We ended 2020 with more than 15 million paying users and 525,000 business teams. And throughout the course of the year, we remain focused on launching new features and products to help people organize their lives, both at home and at work. To start, we introduced several features in the first half of 2020 to help our customers protect and secure their most important content. The first feature to highlight is Dropbox Passwords. With Passwords our users can store passwords in one secure place, sync across devices and access passwords from anywhere with zero-knowledge encryption.

[Tim Regan:]

Thank you, Drew. I want to begin with a reminder of our investment thesis and our financial North Star as this provides the context for what we focus on and where we are headed. Here are the core principles of our investment thesis; 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 align 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. We believe that execution against these objectives will generate long-term value for our shareholders. With this context, I'd like to talk through our fourth quarter and full year 2020 results, which demonstrate our continued progress against our long-term targets. Total revenue for the fourth quarter increased 13% year-over-year to $504 million. Foreign exchange rates did not have an impact on year-over-year revenue growth for this period. Total ARR for the fourth quarter was $2.022 billion, up 11% year-over-year. We continued to drive growth in ARR through the release of value-enhancing features, the introduction of new SKUs and add-on products and continued growth across HelloSign subscription plans. We ended the year with 15.48 million paying users and added approximately 230,000 new paying users in the fourth quarter. Average revenue per paying user for the quarter was $130.17. Before I turn to the P&L, I wanted to highlight some customer wins we had in the fourth quarter where the team had success driving the adoption of new add-on products that we introduced in 2020. First, we are pleased to announce that we signed one of the largest energy providers in the United States with a Dropbox customer. They turned to Dropbox to transform how they provide a secure, cloud-based content storage solution for their on-site and field workers.

[Drew Houston:]

Thank you, Tim. And thank you all for joining us today. 2020 was an unpredictable year and I'm proud of how our team responded. We delivered 15% growth while making improvements in profitability and made necessary changes to ensure our business is operating with focus and efficiency as we pursue our long-term targets. We’re excited about the road ahead and believe we’re uniquely suited to help our users thrive in the new world of distributed work. And with that, I’d like to open up the call for Q&A. Operator?

[Operator:]

Thank you. Our first question comes from Mark Murphy with JPMorgan. Your line is now open.

[Mark Murphy:]

Yes. Thank you. Drew, what are you assuming for 2021 in terms of any lingering headwinds or tailwinds from the pandemic? I think you had previously given us some insight into trends with trials and conversion rates. How do you see that playing out? And importantly, how do you think it will net out this year? More of a headwind or more of a tailwind?

[Drew Houston:]

Yes, so thanks, Mark, for the question. So as we shared last year, we had a surge in demand during the onset of the pandemic, elevated trial starts, things like that, which was mostly isolated to the first half. I mean engagement broadly, has been up. And then we think in the – we think more broadly in – for this year and beyond that the pandemic will be a tailwind, given that folks are shifting to distributed work and Dropbox becomes a lot more important when you're working out of the screen instead of . So we see a lot of – as we've shared before, we see a lot of opportunity to address new pain points in the virtual work experience. Everybody has a need to keep all their content organized. It's very fragmented and distracting and overwhelming experience now. So we think it's a huge opportunity for us.

[Mark Murphy:]

Okay. Thank you, Drew. And Tim, as a follow-up, when we dissect Q4, you arrive at this level of revenue growth through roughly 8% growth in paying users and 4% growth in ARPU. And I know you're trying to deemphasize too much scrutiny on that, but I'm just wondering at a high level, how do you envision that balance when we look across the multiyear framework? Do we think it's going to balance out eventually sort of mid- single-digit growth for each? Or do you think there could be some periods where that ARPU growth is sort of crossing above the paid user growth at some point?

[Tim Regan:]

Sure. Thanks for the question, Mark. And as you know, we do focus on ARR as our primary metric. We don't optimize for a given lever between paying users and ARPU, as overly focusing on one or the other may not best reflect our strategy. And while we don't formally guide to paying users, I did provide some additional commentary in my prepared remarks, where this year, we may see some variability in our net new paying user additions. Stemming from a few things, our strategy to minimize the pursuit of larger deals that may carry lower ASPs, higher acquisition costs and greater degrees of customization, where conversely, we are seeing some early positive signals on the adoption of our Family plan, which we just launched last November. So again, we may see more variability in our net new paying users this year, where overall, we continue to focus on our most efficient and profitable go-to-market strategies while investing in our existing and new products. And these types of competing dynamics between ARPU and paying users is indicative of why we do focus on ARR as our key metric.

[Mark Murphy:]

Thank you very much.

[Operator:]

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

[Luv Sodha:]

Hi. This is Luv Sodha on for Brent Thill. I wanted to ask one on the go-to-market motion. Wanted to – was there any benefit from the branding campaign? I remember you guys initiated it at the end of Q3. So did that have any positive impact, if any? And more specifically on the go-to-market motion, would these changes mean that you're less focused on team’s users in the future?

[Drew Houston:]

Sure. I can take this. I mean, as – for context, we did have a brand campaign in Q4 highlighting Dropbox as a solution for teams at work and for businesses. And the campaign ran well, basically to our expectations and we continue to invest in marketing to drive awareness and to drive all elements of the funnel and have had success there. As far as focus on businesses and teams, I mean, as we've shared, 80% of our subscribers using Dropbox at work, we're very focused on teams. I'd say we're proportionately a big strength of ours is that we have this really efficient, scalable self-serve engine. We have another strength, which is that Dropbox has brought into organizations of all shapes and sizes. But as far as where our dollars of investment go, we're going to prefer – or we're going to allocate more – we see higher returns in optimizing our self-serve engine and just maintaining cost discipline across all our different channels. Because we see that – I mean, the self-serve channel, just as one example of higher ASPs, lower acquisition costs, really scalable and viral. So it's really a refinement more than a major shift in strategy, incremental dollars going into the area of highest return.

[Luv Sodha:]

Got it. And maybe one quick follow-up, if I may, on the NNPU side, will – what do you see in terms of like SMB spend? Can we expect some type of normalization in 2021? So will that be kind of a tailwind to net new paid users? Thank you.

[Tim Regan:]

It's a great question. And I think I would have to just point back to the commentary that I gave to Mark on what we expect from an NNPU perspective. And then just look to our revenue guidance for how this should all play out as far as SMB.

[Drew Houston:]

And we saw a lot of stability with SMBs in general, while the macro environment – well, there's a lot happening in the macro environment, we find that a lot of Dropbox customers, SMBs are knowledge workers and have been able to continue working from home. So we're relatively less impacted than other sectors, for sure.

[Luv Sodha:]

Thank you.

[Operator:]

Thank you. Our next question comes from DJ Hynes with Canaccord. Your line is now open.

[DJ Hynes:]

Hey, thanks guys. Drew, I want to ask about free user conversion and the levers that you have there, right? I mean, look, we obviously saw a slowdown in the number of net new users added this year, at least relative to the last couple of years. And what I would have thought would be a pretty decent demand environment for Dropbox, right, given the move to distributed work. So I guess the question is there's still this huge free user base out there, is it that the triggers have become less effective? Are we just getting deeper into the base and that there's a segment that's just never going to pay for the service? Like what are the levers that you can pull to reaccelerate that free user conversion?

[Drew Houston:]

Sure. I mean, we still see a lot of headroom with free users, and we have continuously been improving our ability to convert free users. And as you pointed out, we have a number of levers to drive conversion. So I mean, we start with customer value, just building a great product experience, adding more. So when you look at some of the things we launched last year, we've launched a portfolio of new features around, for example, helping individuals keep their content secure. So Computer Backup, Passwords, Vault, things like that, and we've seen those features and things like them drive paid trials, drive more conversions and so on. And then as teams expand, that's another lever and the list goes on. So there are a number of different levers that we – and we optimize basically, all of them. And it also often takes time for free users to convert. So there are time constants involved, like sometimes you – it can take some time for you to fill up your Dropbox. So that if you're – the storage is one hurdle, or you might start using it at home and then start using at work and then you join a team. So there is some – we're basically – there are a number of levers, and they're – and it can take some time for folks to convert, and we're optimizing for a balance of driving more engagement and growth of the user base with monetizing them as effectively and quickly as possible. And there's a bit of a trade-off there.

[DJ Hynes:]

Yes. Yes. Okay. And then a question on Spaces. So what are you seeing users do in Spaces that they weren't doing with the platform before it became available in private beta? And I guess as outsiders to the organization, like what should we be paying attention to that says the Spaces strategy is working?

[Drew Houston:]

Sure, well, the Spaces is pretty early in its evolution. Last year, we decided to evolve it into a stand-alone experience. And we'd started experimenting in this area with the new desktop app, so adding more collaborative features and shared folders and things like that. And what we realize is that there's enough room for a dedicated experience and one that where cloud content is a little bit more in the foreground instead of just files and it's a workspace for a project, more than a folder full of content or files. So it's – what we're looking for with Spaces is to give teams one place for all their Google docs and Dropbox files and Air Tables and everything else. And to be able to organize their work around projects. And so those kinds of – some of that engagement is – these are new problems that we're solving for our customers. So – but that's the kind of engagement we want to see. So all that said Spaces is pretty early, where we will have more to share on it in the coming quarters. We're also excited about with Spaces; some of the new surface area we'll be working on is deepening partnerships with Zoom and Webex so that with Spaces, you'll be able to bring your content into the video meeting experience in new ways. So stay tuned for more on that.

[DJ Hynes:]

Okay, great. Thanks for the color.

[Operator:]

Thank you. Our next question comes from Rishi Jaluria with DA Davidson. Your line is now open.

[Rishi Jaluria:]

Hi, guys. Thanks so much for taking my questions. I wanted to start by going to a comment made during prepared remarks Drew, which was about M&A as a potential opportunity. And I know you've made some smaller acquisitions in the past, mostly technological. But can you give us a sense if you were to consider inorganic, where would those adjacencies that make the most sense be? Would it be something akin to like what you did with HelloSign? Would it be more product based? Maybe give us some color on how you're thinking about M&A? And then I've got a follow-up.

[Drew Houston:]

Sure, well, M&A has been an important lever to help us grow the business across the whole spectrum, from adding talent to the team, adding accelerating our product roadmap and adding new businesses like HelloSign. So I think HelloSign is a great example of where that's worked well. So we're always on the lookout for these opportunities. And our user base and distribution is a big advantage. As far as where we're looking, there are a lot of different user workflows around content and helping people do more with the content in their Dropbox. And I think HelloSign is a great example of that. So in addition to being able to store and share and access your content, being able to handle the eSignature workflows and more broadly document workflows, is a natural adjacency for us. So we'll continue to look for opportunities and grow the portfolio through M&A.

[Rishi Jaluria:]

Okay, great. That's helpful. And then just continuing down the path on HelloSign, could you give us a sense – you did talk about how HelloSign ARR growth has been strong this year. Maybe can you talk a little bit more specifically about what you've seen in terms of demand environment for HelloSign? How you're thinking about that business going forward? And how meaningful a contributor you can expect it to be? And maybe alongside that, you saw one of your competitors buy a small vendor in the digital signature space. Just maybe how you're thinking about any changes in the competitive environment for HelloSign? Thanks.

[Drew Houston:]

Sure, well, we're really excited about HelloSign. It's the fastest-growing product in the company. We saw strong growth in revenue in paid seats and signature requests last year. And I think the pandemic really accelerated the adoption of eSignature as a category. And so we're – we've made big investments in accelerating HelloSign's growth that we're excited about, including more seamless integration with Dropbox, or with the core Dropbox experience, internationalizing HelloSign adding support for 21 languages. So we see it's pretty early innings, both for HelloSign, specifically in the category in particular, and there's a number of natural adjacencies around eSignature and just drop document workflow and better handling the document life cycle in general. As far as the competitive environment, one aspect of HelloSign that's really valuable to us is they have a similar customer base and similar go-to-market motion. They're driven by self-serve. It's a self-serve viral go-to-market motion and – which is really efficient and scalable. And we see Dropbox – compared to smaller competitors, we see Dropbox as scale and HelloSign's scale as a big advantage as now the time when a lot of folks are going to be making decisions about which solution they go with.

[Rishi Jaluria:]

Got it. Wonderful. Thank you so much.

[Operator:]

Thank you. Our next question comes from Jack Nichols with KeyBanc Capital Markets. Your line is now open.

[Jack Nichols:]

Hi, guys. Can you talk about the expectation built in around the mix of personal versus business accounts? And the ability to drive up sales? And then I have a follow-up.

[Drew Houston:]

Sure. I'll give you an update on the teams and individual mix with where the mix between teams and individuals has remained relatively consistent. On a revenue basis, our individual revenue mix grew in 2020 as a result of the Plus pricing initiative. Of course, that said, we continue to see progress in our teams plan. As we do now have over 540,000 teams and growing teams is certainly part of our long-term strategy, and all of this has been factored into our 2021 guidance.

[Jack Nichols:]

Okay, thank you guys. Super helpful. And what's the best way to think about ARR growth expectations going forward for the net new customers or upselling plans and higher ARPU?

[Tim Regan:]

I think the best way to think about it is to look again to our revenue guidance, where – maybe just specifically on ARR, we, of course, crossed an important threshold in Q4, passing over $2 billion in ARR and finishing the year at $2.022 billion. And of course, this is the primary metric we look at, but we don't specifically guide to this, where – again, I'd look to our revenue guidance for our expectations.

[Jack Nichols:]

Thanks guys.

[Operator:]

Thank you. Our next question comes from Zane Chrane with Bernstein Research. Your line is now open.

[Zane Chrane:]

Hi. I was hoping to dig in a little bit more on the net revenue retention rate. You guys gave, I believe, a value of 90% around the time of IPO and update of 95% at the Analyst Day in 2019, I believe. Can you give us an update on what that is for the overall business as well as for the customers that are on business plan?

[Tim Regan:]

Sure. So we don't update this metric quarterly. Again, our revenue guidance factors in the latest trends. I can tell you that at a high level, net revenue retention now is in the low 90s, in line with historical levels, where pricing increase do drive some ebbs and flows. And as you know, we've worked through the plus pricing increase at this point. And a reminder, a few factors that do contribute to AN and RR include the migration of existing paying users to premium plans, the mix shift to teams and team expansion, where we are focused on driving this metric in a positive direction.

[Zane Chrane:]

That's helpful. So it sounds like it's declined a couple of percentage points since your last update of 95%. Is that due to an uptick in churn from one particular segment? Or is it kind of a deceleration expansion from the business side?

[Tim Regan:]

It has much more to do with pricing, where we've worked through that pricing increase, and now we're back to our historical levels, absent pricing changes.

[Zane Chrane:]

I see. So just the anniversary effect of that pricing change then?

[Tim Regan:]

That's right.

[Zane Chrane:]

Got it. Okay. And one last thing. I believe last time I look in the K, you had 90% of revenue was through self-service channels. Has that changed materially over the last year?

[Tim Regan:]

No, that has stayed consistent.

[Zane Chrane:]

Okay, great. Thanks very much.

[Operator:]

Thanks. This concludes the question-and-answer session. I would now like to turn the call back to Drew Houston for closing remarks.

[Drew Houston:]

Again, thanks everyone for joining us. I really appreciate your support, and stay safe, and we'll see you next quarter.

[Operator:]

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.