Dropbox, Inc. (DBX) Earnings Call Transcript & Summary
September 9, 2020
Earnings Call Speaker Segments
Rishi Jaluria
analystAll right. Good afternoon, everyone. Let's go ahead and get started. My name is Rishi Jaluria. I cover software here at D.A. Davidson. I'm delighted to have with me from Dropbox, VP of Finance, Lev Finkelstein. Any investors that would like to ask questions to Lev, please either submit them through the chat function, and I'm going to continue to monitor that or feel free to email me directly at rjaluria@dadco.com. That's R-J-A-L-U-R-I-A @dadco.com. With that, Lev, thank you so much for joining us.
Lev Finkelstein
executiveThank you, Rishi, and thanks, everyone, for joining us for this webcast.
Rishi Jaluria
analystAll right. Let's start a little bit with just a brief overview of Dropbox. And I think more importantly, the evolution of the company from being a just file storage company that was started because Drew forgot his thumb drive into this broader content management and cloud operation platform that you are today.
Lev Finkelstein
executiveAbsolutely. Thank you. So Dropbox was founded in 2007. Initially, we were a very new and kind of unique way of accessing your content from the cloud from any device, from anywhere and spread very virally throughout the world and across all kinds of use cases, personal use cases and work use cases. But over time, as we sort of observed where users found the most value, where there were kind of unaddressed problems, we started focusing more and more on work use cases for both individuals and for teams. We then expanded our set of paid SKUs where we introduced kind of concepts of a standard and premium set of SKUs for individuals and teams. That has been a big driver of our ARPU expansion over time. More recently, we acquired HelloSign to extend the type of workflows that people can engage in with their content without leaving Dropbox. We also have been investing in IT admin functionality and partnerships to expand our ecosystem. Throughout all of that, from a kind of product ethos and design standpoint, we always have been focused on ease-of-use, bottom-up adoption, kind of go-to-market model and being in the middle of all critical content-based workflows. And as a result, we've sort of steadily been moving away -- not away, but from file sync and share to a much broader collaboration platform capabilities. So the way we think about the market we address today is we think of it as a $50 billion-plus addressable market, it expands content management, document workflow and eSignature, collaborative applications and project and task management. And the way we think about our opportunity and why we exist is that no one is truly addressing our users need to have one organized place for a family or a team. All teams need a workspace that connects their content, their communications and their project plans together in kind of one organized place that's platform-agnostic and accessible in any device, on any OS platform. And we see as a major collaboration challenge to date is this sort of idea of content fragmentation, whether it's traditional files like office docs and PDFs or even cloud files, like Google Docs, Paper, et cetera. These content types are scattered across a number of different platforms. And so we are building Dropbox to be a platform agnostic, organizing layer for all of your content that brings it together, and we're moving higher in the stack and handling more and more of the workflows that people have to do around that content. So we think we have a long runway in our core business. Majority of our work users are still on basic and individual subscription, and they're moving on to teams and teams are expanding, and we're putting a lot of investment into these team expansion and removing friction kind of opportunities as we onboard users and encourage them to share and invite others onto our platform. And so today, we've got over 500,000 Dropbox business teams and sort of the shift to distributed work that we're living through today, we also believe it's a transformational opportunity for us kind of like the shift to cloud and mobile.
Rishi Jaluria
analystRight. That's a great overview. So I want to go to the topic that's, unfortunately, top of mind for every investor, which is going to be COVID and thinking through the impacts. Maybe can you walk us through what you're seeing in terms of both headwinds and tailwinds. And maybe there's always a question of, well, what about exposure to SMBs, what about 20% of your customer base being consumers. Just how do we think about all those pieces?
Lev Finkelstein
executiveSure. Thank you. And we believe we're fortunate to be a company that kind of got started and designed a product for this sort of like virtual work environment where people can collaborate asynchronously, across different platforms and devices. So our go-to-market model is oriented towards that and our product design has always been about that. But Dropbox really plays an important role in managing kind of critical business content, which we believe makes us more resilient than some other more discretionary products. And so while we are certainly in a challenging business environment, we kind of are skewed towards knowledge workers and just that cohort of users and customers has just been less disruptive than some other businesses that have been more disruptive, unfortunately, in this environment. So we've seen a nice increase in demand when COVID set in kind of at the end of Q1 and Q2, where a lot of people and companies have to scramble to find solutions to enable distributed work. We talked about in Q2, seen trial volumes to individual and team plans going 20% higher relative to pre-COVID levels and conversion rates for these cohorts have remained pretty consistent with our historical figures. HelloSign also saw the usage of their API product and end-user product spike up by 25%. And the surge in demand for core Dropbox has subsided a little bit back to kind of pre-COVID levels. HelloSign continues to be actually quite elevated because it's just a much more kind of whitespace market that we're addressing. And obviously, we have some parts of our customer base that have been impacted. For those customers who are trying to take proactive measures to address churn, whether it's enhanced kind of cancellation workflows where we're able to do some retention on those customers, offering some support and selective financial relief to minimize any disruption from that. And similarly, with our outbound sales force, of course, it's been a little bit more difficult for them to expand accounts as everybody is very cost-conscious about what seats they sign up for and where people used to kind of buy ahead of demand, they now kind of are buying seats as they kind of hire on employees. There's a little bit of impact from that. But net-net, we've seen kind of consistent net revenue retention and churn across the whole base. And we've just been busy with our product introductions. Q2 was a really busy quarter for us. With new products, we introduced a lot of high-impact features into our plus plan like Password and Vault. Computer backup, we introduced a Family plan. We've continued to drive adoption of the smart workspace among teams. And we're seeing really nice, it's very early, but pretty nice pickup from those new products. In fact, we're observing that through some of our campaigns, whether it's in product or outside of the product, people seem to be kind of attracted more and more to these new features as opposed to just going to the core Dropbox kind of value prop, which to us indicates that we continue to build value in these features and we're planning kind of to introduce kind of the next iteration of the smart workspace later this year based on all the learnings that we've had so far this year. So net-net, we've been kind of fortunate to be able to deliver fairly consistent performance throughout this period of time.
Rishi Jaluria
analystYes. Yes. Got it. I want to touch a little bit on HelloSign because you brought that up. Maybe talk a little bit more about what you've seen from the HelloSign during this business -- sorry, during the pandemic and what sort of cross-sell opportunity remains? And look, I think a lot of us look at DocuSign and see the incredible results that they've put up where they've accelerated billings 2 quarters in a row now. I mean, are you seeing a kind of similar uptick in demand because this is what the current environment demands?
Lev Finkelstein
executiveYes. No, we're definitely excited about the HelloSign opportunity for a number of reasons. One, and this was the rationale for us going into this business to begin with, is that we view that this is a really large market that's not yet very well penetrated, and it still primarily competes our product and other products still compete with paper and then processes. So obviously, the digital transformation of companies globally has been accelerated as a result of the pandemic. So that's where I mentioned that both the API product that HelloSign has as well as the end user product have seen really nice upticks in demand, and that's kind of been sustained post kind of the initial kind of shock factor of COVID. So we're excited about that. But also, we're excited about the fact that we're continuing to drive more and more kind of synergy and integration out of this product line. From an integration standpoint, throughout kind of the course of the last kind of 1.5 years, we've been working on integrating some of our go-to-market teams and marketing teams and really sending kind of a more a platform message and focusing on HelloSign and Dropbox are kind of better together. We've also done some things in product, which now HelloSign is natively embedded in a Dropbox product for both basic and paid users. And they also have a freemium model. And so everybody who uses Dropbox can try it out, sign up, do 3 signatures and then they hit a paywall and the back-end process of creating an account and making it easy for somebody to become a paying user is very seamless now that we have this deep integration. We've also now continued to internationalize the product. We think the opportunity outside the U.S. is huge, and it's underpenetrated more so than in the U.S. So we've launched HelloSign in 21 additional languages. This past quarter, we've got our kind of EMEA and APJ support organization supporting HelloSign and are just continuing to execute. So we think it's a long runway for growth for everybody that's participating in this market.
Rishi Jaluria
analystThat's great. I want to turn to your recent win at the University of Michigan. As an example, it's near and dear to me because I went there for B school. Maybe talk about, A, the opportunity you're seeing with the higher ed. And B, alongside it, I think it's really fascinating that Michigan is also a Microsoft customer. They're also a Google customer. And presumably, they could have gotten 1 driver, Google driver for close to free and chose to pay to go with Dropbox. So let's maybe unpack both of those.
Lev Finkelstein
executiveSure. So I mean, maybe the last point first. I think the reality of the world today is we coexist with a lot of these different platforms, whether it's Microsoft, Google or Slack and Zoom and many other productivity type applications. So that's nothing new to us, and that's why kind of we partner closely with them as much as we also compete with each other. But the education space, I mean, it's always been a focus, although we've continued to focus even more on it just because when there's nice tailwinds, all these education institutions really have to also go through their own form of transformation and adaptation to the remote collaboration and learning. And for us, this is really about seeding our product with the next-generation of knowledge workers. We were always strong with kind of the research part and faculty part of education institutions, and we've worked really hard to expand that into the broader student base so that we can, every year, have 1/4 of that population graduating into the workplace and they know how to use Dropbox, they know what we're able to do and we can graduate them to higher-priced kind of professional SKUs. So that's what we're excited about. We offer a specialized SKU. It's got Dropbox for Education. It connects with best-in-class learning management systems like Blackboard and Canvas. The Canvas integration was recently introduced and it's connected to the Slack and Zoom applications, which are also used widely, obviously, in these institutions. So we're excited about this. I think it does drive a lot of users, and it drives a lot of potential for the future.
Rishi Jaluria
analystYes. All right. I want to turn to the new Dropbox, I guess it's not super new anymore, but the desktop application, right? And there's been a lot of talk about this being kind of the central operating system for work. And the common question I get from investors is, why would someone use Dropbox as their central operating system for work versus something like Slack, which I think pitches a similar sort of vision?
Lev Finkelstein
executiveSure, sure. So we think about collaboration as sort of involving 3 types of activities, they're sort of content-related work. And by the way, that often is kind of asynchronous kind of work. And at the end of the day, regardless of what profession you're in, you're working on something that's content like, whether it's a motto or presentation or CAD files and whatever else, right? And at the same time, we need to communicate and you need to coordinate the activity. And so we view this as a very kind of synergistic environment where in Slack or in Zoom, you can have a conversation, you can kind of exchange ideas on the fly. But when you go to come back and kind of do deep work, develop some sort of material for your work with a team, the problem, as I mentioned, is that content fragmentation, version control issues, inability to quickly understand like who did what to what piece of content, what tasks have been assigned to you, what app mentions came at you, sort of like what's the metadata around that content, or what is most relevant to you for a particular team or for a particular collaborator that you're working with? And this is where we come in. We sort of view the combination of us with some of these sort of synchronous communication platforms is really kind of the next-generation, best-of-breed productivity suite and that's what people need to get their work done. So our strategy with our smart workspace vision has been to get it out there, get people to use it more actively, keep iterating to make sure retention, that usage is high, continue to drive adoption and sort of monetization will follow from that. And so we talked about having over 450,000 of our 500,000 teams using the product. We've learned a lot, as I mentioned, we're going to have ongoing innovation, introduction of new features and integrations coming up. We talked about our weekly active users from the desktop app, we're 50% higher in Q2 when compared to Q1. And so we also believe that this sort of more foreground experience provides a more effective way for us to service -- to surface functionality in our paid plans that go beyond storage. And this is something we've talked a lot about in the past of having our prompt and kind of in-product ability to communicate with our users, but this just gives us a broader canvas, where we bring together teamwork spaces, team members, connected applications, all-in-one place. So we see people kind of engaging with these collaborative elements of our platform more in this application. And for example, what they would do in kind of the older format of using us kind of in a file finder or the tray. And we're leveraging this to continue to drive awareness of our new features and new products. And customer feedback has been good. And again, we're very focused on listening to what it is that they like. And what we're hearing is people like the way kind of the app mentions and the task lists and time lines and lightweight project management can kind of live alongside with the content workspace and all the metadata around it. So that's sort of where we are today.
Rishi Jaluria
analystAnd just kind of going on that a little bit. When we think about Dropbox and Slack and Zoom, you said something the last time we talked about that was really interesting, that you're kind of together, a rebel alliance that you give customers that platform-like and seamless integration without going down the walled garden route of Microsoft. Would love to hear a little bit more how you're thinking about these integrations and partnerships. Is that something that you can even shake out as like a joint go-to-market over time?
Lev Finkelstein
executiveYes. So I mean, it can take a whole number of different kind of shapes and forms, but I do think like our mentality about how people get their work done and their products do -- is very similar across these sort of companies that you just mentioned. And so we, as well as I think these partners of ours, we all focus on customers and opportunities where companies and their IT departments or managers of teams are open to adopting kind of the best-of-breed tools. They don't want like 1 solution does all from 1 company. They want flexibility. They want their users to have choice. And so that's where we see a lot of opportunity, and we believe the world is kind of moving more that way over time. Today, kind of our focus is primarily on kind of technical, kind of back-end integration on kind of sending certain kind of signals around metadata to each other, just to make sure that, again, those integrations kind of deliver value for the user and doing some kind of joint promotions of our vision and how our products work together. Of course, their go-to-market options that are kind of possible in the future, and we always think about those, nothing to discuss right now. But we do think that we provide a very functional and kind of best-of-breed experience by being used together.
Rishi Jaluria
analystAll right. I want to turn maybe back to competition. I know we've obviously -- we've touched on it. Maybe just help us kind of frame how do you compete against a Google or Microsoft where they are kind of able to give it away for free or for effectively free to the installed base? How do we think about the dynamic versus Box for example. Maybe just kind of walk through that would be helpful.
Lev Finkelstein
executiveSure. Sure. The way we think about it is, ultimately, people use Dropbox because we're kind of the home for their content. We have billions of sort of different types of pieces of content from people historically using and continuing to add kind of their Dropboxes. And we view kind of our product design and functionality is best-in-class in terms of ability to organize and share and collaborate around that content in a platform-agnostic way. And I think this platform-agnostic capability is, I think, underappreciated, maybe by some people, but appreciated by our customers because again, the industry is that we really resonate with and focus on, whether it's media or marketing and sales, professional services, architecture, construction, some different parts of the healthcare system. They collaborate a lot outside of the 4 walls of their company, where, again, like the ability to not worry about whether somebody you're working with has a license to a particular type of application from which kind of the content you're working on is derived, or whether they're on Android, or iOS or whether they're on Windows or MacOS or all these sorts of things, like it just gives them the peace of mind that the experience on both ends will be consistent and presentable in a professional way. And our customers really value that. And they value the fact that we're not trying to displace the e-mail systems or some other applications that they also want to use. We integrate very seamlessly with Microsoft and Google as well as all the other kind of collaboration applications that we see in high demand in our customer base. So that's kind of our competitive differentiation now. We also, obviously, we're really focused on content based workflows. So adding HelloSign and sort of extending document collaboration capability that some of these other competitors you just mentioned don't offer obviously extends our value. The ability to use this effectively for personal use and business use is different, and that is why we did all these introductions of our more personal use oriented products in our plus plan earlier because, again, we just -- we enable a seamless experience and transition from work to home and vice versa and peace of mind about the collaboration capability across different platforms.
Rishi Jaluria
analystAll right. Let's go to margins now, put out this kind of -- maybe aggressive is not the right word, but some I think really bullish commentary around expecting to hit 30% operating margins, and we're obviously doing that right before COVID. But how do we just think about the path to margin expansion? What needs to happen to hit that? What -- without formal guidance? Like what sort of growth profile like -- are you still a double-digit grower at that point? So the puts and takes there?
Lev Finkelstein
executiveSure. I think what drove our updated financial model and obviously, demonstration of our execution towards that model in the last couple of quarters and hopefully, in the upcoming quarters when we announce those is just realization that at our scale, at our level of maturity and with a deeper look at kind of different types of investments across the business, we can be more efficient while still continuing to invest in growth. I mean, at the end of the day, when you look at our total operating expense base, it's at a scale where -- with a little bit more kind of ROI-driven and tighter kind of management of that, we believe we can just continue to drive margin expansion. The inherent kind of product platform that we have is very profitable as it is and could be even more. So we're a more mature public company now. We've optimized around some perks and kind of noncore investments that we make. I think also with the COVID environment and kind of distributed work, I think it's kind of opened up our and probably some other company's eyes around sort of more remote work and remote hiring and kind of having their workforce a little bit more distributed around the world, which has worked well so far for us, and there's opportunity there to improve kind of efficiency levels of a company through that. So I think it's really kind of a mindset. And all of our management team and Board's sort of saying like we are going to commit to the sort of more stringent kind of capital allocation internally in our business. And kind of keeping our teams to be accountable to certain thresholds of returns, and that's how we do our planning going forward. So look, we obviously -- I mean, we don't -- we haven't guided to a long-term growth rate, and it's going to get impacted by a lot of different things. And we're obviously continuing to focus on new product introductions to sustain all of that momentum. We are investing in a business to be kind of a sustainable growth company, the kind of compounds while delivering margin expansion. So that's kind of our approach.
Rishi Jaluria
analystAll right. Last one because we are actually out of time, but I -- sorry to slip this in. But what do you think the market is maybe underappreciating about the Dropbox story today?
Lev Finkelstein
executiveSure. We think one is just like the actual financial model and kind of scale of our business, the balance of growth and profitability, we believe is really underappreciated. Obviously, there are rich companies out there that grow faster than we do, but they're not at the scale that we are. And at our scale, like, again, and with somewhat more mature parts of our market TAM that we address. Our balance of growth and profitability to us is very attractive in terms of the returns we can generate and the cash we can generate and how we can reinvest that cash. So we're very focused on reaching those targets. We also have 100% kind of recurring revenue business and no customer concentration. And this sort of really unique dynamic of being able to address the needs of individuals as well as teams in companies ranging from a few people to 100,000-plus people. And we also believe that's pretty unique to have that wider range of a customer base and to have that sort of resilience where we're not dependent on any 1 particular industry segment, customer segment or a customer, specifically to deliver results. And because of that self-serve kind of approach model, we have a lot of data, right, and we can use that data to improve our product to surface more of our products and certain types of promotions to customers in a more intelligent way as well as really connect the sort of content and people and workflow together in a way that continues to hopefully make your workday kind of easier and the way you work kind of smarter. So -- and we've delivered. We don't have huge beats because of this kind of model. But we -- every quarter since our IPO, which speaks to kind of the strength and predictability of this model.
Rishi Jaluria
analystSo that's really helpful. All right. I think that's a great place to jump off. Lev, thank you so much. Always a pleasure to have you. Thank you.
Lev Finkelstein
executiveAbsolutely. Thank you, Rishi. Appreciate your coverage and attention. Thank you everyone for joining us.
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