Dropbox, Inc. (DBX) Earnings Call Transcript & Summary

Yes. Right. And that's part of the reason it's really been -- right. Okay.

Yes. Well, as you pointed out, people -- it turns out people love it when tech companies just totally flip everything upside down on you overnight, right? So -- and so it's a journey you want to take people on at their own pace. And obviously, you want to move them along as quickly as possible. We have to be respectful of their habits and help people understand why they might want to go on a journey like this. So concretely, you can -- however you used Dropbox yesterday, you can still use it that way today. That's not changing. But a lot of the newer functionality appears only in the new app. And then over time, we want people to understand -- well, first, we educate you. Like, hey, there is a new Dropbox. It does the following for you. And check this out, check this out, check this out. And it's a balancing act of, obviously, we want to roll this out to everyone as quickly as possible so that everybody can get the maximum benefit. But we also want to iterate on the experience, so it's good because with every passing week, every passing month, every new cohort, we're entering on the experience, learning from feedback from the field, baking those less -- making improvements to the product, and every new cohort gets a better and better experience, and they engage more, retain better, all things. And so we're really solving for our long-term retained users, which is a balancing act across all the different dimensions of, obviously, fast rollout, [ puts ] and quality.

Yes. Can you give us an example of something you learned since it came out?

Well, we were happy to see -- I mean we're happy to see some of these new features resonate with customers. And then the -- but more broadly, that there's more collaborative engagement in the new app. And that's important because collaborative engagement as opposed to solo engagement or we can call it like multiplayer versus single player. Multiplayer is really good because it drives the kind of the network effects that both -- or every action I take causes you to take another reaction so has that viral engagements, but hopefully, in a productive way. And then it builds network effects that drive retention and lifetime value. So I mean there's a whole bunch of benefits to it. But really, we're trying to bring people on a shift from thinking of Dropbox as a place where you just put your stuff when it's done to the place you're living out of and using all day every day, which takes a little bit of a shift in people's minds.

Yes. All right. Cool. Let me ask you 2 of my standard questions I've been asking everyone up here. So first of all -- and I know you just reported, but how's the business? What would you say?

Good. I mean we've been really happy on a number of dimensions. We wanted to take an opportunity to really strengthen -- just to clarify some of our longer-term thinking and strengthen our investment thesis. So for the first time, we put out a long-term free cash flow target, raise some of our long-term profitability targets. Ajay, feel free to chime in here, too.

Yes. Will go over them in a moment.

And the response has been really good. I mean, obviously, you like to see -- we had a nice jump after earnings. And -- but like helping people understand sort of a number of things, the inherent efficiency of our business because I think sometimes a lot of our -- our model is relatively new to people. People might not understand all the ins and outs of how -- or they might not understand -- they might be familiar with enterprise software generally but kind of the more consumer-oriented, bottoms-up, viral, self-serve motion, I think, were just -- that's a relatively new phenomenon.

Yes, we're starting to get it.

[ Maybe not just understand yet ] but you're starting to get it. But really kind of understanding all -- the depth of understanding, I think, is something that takes anyone some time.

Yes. All right. Ajay, we'll come back to the coronavirus in a second. So Ajay, on the -- so you took the long-term operating profit margin from 20% to 22% to 28% to 30%, right? Pretty big move. People were surprised. Walk us through sort of the lead up to how that happened.

Sure. Well, I think any change like that is a gradual lead up, and it's something that was very deliberate and kind of an output of thoughtful planning that Drew and I, along with the executive team and the broader company, has been working through over the last few months. And I would just echo what Drew said about our playbook, and this target is really reflective of the inherent operating efficiency of our business today. And we've been able to accelerate some of the margin expansion that we had planned for longer term as well as free cash flow generation as we got more focused on what we wanted to prioritize in 2020 and beyond. And we feel great, I would say, about all the investments we're making in product and in growth this year. And Drew very thoughtfully walked through a lot of this in his remarks on the earnings call vis-à-vis driving adoption and engagement around the new Dropbox and making some structural improvements to the team funnel and how we onboard and monetize and help expand teams. And then he also talked a little bit about the upcoming launch of some new personal products that we'll be announcing later this year. And so we feel great about the healthy balance of growth of scale and profitability that we're bringing to market this year.

Yes. Let's talk about the personal products a little bit. What can you tell us about that?

Yes. So I mean the one thing that is important to keep in mind is that -- or is increasing that we have a portfolio of products and customers and kind of businesses, lines of business. And so we are certainly putting a ton of effort into the new Dropbox. We're really excited about the future for it. And -- but there are some things that people might not fully appreciate, which are even though file sync and share -- or it's easy to think of file sync and share has kind of reached maturity. How much headroom is there really? At least from our perspective, there's a lot of embedded value in our base for people who haven't adopted the business version of Dropbox or don't even -- thing with this base is they don't know there is a business version. So when we look at the cohort curves, I say we could stop signing up new users tomorrow and still have a long way to go to become fully penetrated in our accounts. The majority of our -- we have a business version of Dropbox, but the majority of people who are using Dropbox at work, for work, business service are still on either the free version or even just the individual version. And when we look at the whole user journey from being in that state to being a business team, when we really kind of put that under a microscope -- we don't even need a microscope, you just look at it. We're like, wow, there's all this friction that we need to remove, and things as basic as like if you're on a free version of Dropbox, and your company has a team, a business team, we don't really surface that effectively to you compared to how we might. And when we looked at the onboarding flows, virality flows, sharing flows, all these things, and we just find all these opportunities to migrate people to the business product, which is not only, yes, it's an upsell opportunity, better for Dropbox in a bunch of ways, but really, it's a better experience. And that's where we're -- most of our product development effort is going, into making that really good. And there's still a lot of gaps in terms of -- or there are a lot of ways we can kind of clear the tracks for people that get into that experience, which has a much higher lifetime value. Then again, those network effects help drive retention and a lot of good things about that. But then on the other side of the house, we have this thriving personal business, and even if 80% of subscribers use Dropbox for work, that's still a big business in and of itself. And then most of our work users also have a blended personal and work use case. So a lot of the productivity problems we're addressing and collaboration problems we're addressing in the office have analogs at home. So if you're planning a wedding or running a little league team or all these things in your personal life actually look a lot like workplace productivity challenges. And so how do we take advantage of the stuff we're building over here and make our personal offerings better and more differentiated and give the teams room to run to improve both of those experiences. And so some of the problems we see our customers are struggling with that are adjacent to the Dropbox -- to what we saw today are -- go beyond files. And so people still -- and we just think about all these little pain points like having all your passports...

You had me at the sports teams. It's a disaster.

Yes. Things like having a copy of your passport in your Dropbox or collaborating on your tax returns with your accountant. Or there's just a list of these things that we find our customers trying to hack together in Dropbox, but we can have a much more streamlined experience.

Yes. Awesome. All right. Why don't we take a pause and see if we have any questions from our audience? I can see one in the back there.

Yes. Hoping to press on the point about the change in the operating margin. So you put a lot of time in the preparation at the Analyst Day, and then 5 months later, you're essentially calling for $300 million of improvement 4 years out. I just wanted to understand a little more about what changed. And second, what are the buckets of improved -- the biggest buckets within that, call it, $300 million that somehow you're struggling right now?

Sure. And I can add a little color to build on what Ajay was saying. So yes, I wouldn't say it was like we kind of we're -- kind of we're just looking around the closet and found those $300 million. We -- I would say, we -- when we looked at our longer-term trajectory, and frankly, some feedback from the folks in this room, we realize there could be more to sell -- like put together an investment thesis that reflects the inherent efficiency of the business. And then we want to be, like, why were the targets lower before? And I think as you plan for the long term, you don't always know exactly what the curves are going to look like. You don't want to lock yourself into that. So I think of the lower targets previously reflected, just keeping our options open or being able to not knowing exactly how we want to invest or when, so giving us some room, but we knew we were going to -- but I think what we weren't doing a good job of is helping people understand the efficiency and the discipline. And so we're like, well, we're going to optimize for free cash flow target, but we just want to be able to have multiple paths to get there, but not have a case where like, oh, if growth is coming down and then leave it ambiguous as to -- or you can be not growing and then also not balancing that out with more profitability. And so part of it is us coming up with a new kind of framework to help people understand how we internally make those decisions because we're certainly going for growth, and that is -- and we have a huge opportunity in front of us. That hasn't changed. But we want to drive growth efficiently. We want to drive productivity on every incremental dollar spend. And we want to be -- even if we are someone profitable, we want to make sure we're still able to make the fundamental investments in the business and not starve ourselves, which we're certainly not in -- we certainly have plenty of room to invest in the business like the investments across all the OpEx lines are going to continue to increase over the coming years in all cases. So -- and still have room to do M&A like -- so we -- it's a new framework where we integrate or where we're able to solve for all the things we're going to solve for, but then also let all of you in on how we make these decisions internally.

Yes. I think that's a good summary, and it's really us realizing that inherent operating efficiency and leverage in the business that we built today. And it's a framework we feel confident, allows us to invest as aggressively as we need to in new product bets and in growth. And it's something that was also catalyzed by the addition of new leaders to the management team over the past 6 months or so. And we brought -- and Drew did a great job recruiting some incredible leaders to run the engineering product and design organization to Dropbox and folks who have a lot of experience managing to higher and higher efficiency and productivity levels with the R&D headcount and spend that they had managed in the past and then recently complementing that management team with the addition of our Chief Operating Officer who joined us from Google Cloud, Olivia, who's doing a great job of focusing and complementing those R&D and product development efforts with the right levels of efficiency across sales and marketing. And so there were a couple of different catalysts that were at play here, but we feel great about what we're investing in this year and the long term.

Yes. All right. Last one. So coronavirus, is it showing up at all in your business? I would guess no. Is it showing up in events you would attend or events you would hold? I would guess maybe you're thinking about it. And then are you -- the last CEOs up here are saying, I got to start thinking about contingency plans with my workforce. So just any thoughts on that would be great.

Yes. I think our experience is pretty -- it's probably not too different from the other software companies thinking through this. Obviously, it's -- the downside scenarios are pretty stark and scary. And every day, you read something else that gives you some pause. I mean doesn't -- as far as -- we have a pretty big global footprint but not really in China or some of the other areas that are affected. Obviously something that we keep an eye on for the well-being of our employees, and obviously something that we hope can pass as quickly and smoothly as possible.

Yes. Ajay, anything to add?

I wouldn't have much to add. I mean we're all keeping our eyes on the broader global supply chain and some of the second order impact that things like this can have. But we manage a pretty diversified supply chain when it comes to our own infrastructure. And so we feel great about this year and beyond, but we'll continue to keep an eye on things.

All right. Yes. Thank you so much. It's a real treat to have you here. I really appreciate it.

Thanks, Pat.

Awesome. Thanks, Pat.