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

Welcome back, everyone. It's Brent Thill at Jefferies. Thanks for joining the Software Conference. We're continuing through the day. Really happy to have with us Dropbox. Both Lev and Rob are with us. Lev, Serves as VP, Corporate Finance and Strategy. He started in August of 2017. And prior to that, he was an MD at Goldman Sachs Technology Investment Banking and spent 18 years there, helping lead the firm. So gentlemen, thanks for joining. I'm joined by my partner, Luv, who decided to dress up for you today. Sorry, I'm not wearing a tie. But anyways, thanks again.

Maybe just to level set where we're at, I think we're all sitting in home, using a lot of these technologies more and more. I know a lot of the content management systems, we're definitely using more and more at Jefferies, combined with Microsoft Teams, combined with a lot of the Zoom. There's a handful that seems to see a really strong uptake in usage. And I think the concern among investors is, is there some type of surge in demand. This goes back down, and we see this fall down and -- or is this demand sustainable? And are we seeing a potential permanent change in the tailwinds to this industry that we're all in?

Sure. And thanks, Brent, for having us, and thank you, everyone, for attending this session. A pleasure to be here. So the way we think about it is, in many ways, we're fortunate that our product and platform was really designed for this kind of work environment before any of us really have to experience this in mass globally in that the whole point of Dropbox is very easy to use, versatile kind of content management system where it's -- your content is accessible on any device anywhere. And your team or even your family can kind of collaborate asynchronously in a very easy way. So what we've experienced this year as a result of the pandemic just underscores the utility of our kind of value proposition. Now we did see an uptick in top-of-funnel demand for our product as everybody had to scramble in March and April and May to sort of figure out how to deal with this and continue to be productive. So we did talk about seeing an increase in trial starts to our individual and team plans and increase in usage and trial starts of HelloSign end user and API product, and that's great. However, I think we are at a much larger scale than many other kind of younger companies that are in this market. And so while we are encouraged by the top-of-funnel kind of uptick, we also believe that we already serve a very large user base, and we'll continue to serve them well through this time. And I think -- we think kind of this environment has shown many companies that they can work fairly productively asynchronously and virtually. And that should provide a good tailwind to our product strategy that we're really engaging in, which is creating a digital work space for a team and enabling them to do more of their workflows. So not just cloud file sync and share but really having a place where you can come back to kind of away from the noise of all your messaging and e-mail and other systems, and you can very easily know what tasks are assigned to you? What content your team is working on? Who touched the file last? And what did they do to it? Or what thing that they ask you to address in that? What pieces of content are relevant to you for your next meeting? And if you need to do something with it, whether it's editing videos or sending a product out or a contract out for signature, you can do all of that with Dropbox. So I think we don't -- we've already talked about that. It's not like we've continued to be -- to see like continuous top-of-funnel increase. I think we had a lot of customers that didn't have a solution that had to find one. They went and found one. Many of them found Dropbox. Some of that has subsided. I think it's subsided in core product a little bit more than eSignature product where the trial starts and activity and purchase rates continue to stay elevated. That's just digital transformation getting accelerated around the world and what is a platform that competes primarily with pen and paper anyway.

Perfect. Yes. Just a quick follow up on that. So is that -- obviously, you talked a little bit going back down to like more sustainable levels, but that sustainable level is still higher than what you had, say, pre-COVID, right? Is that a fair frame of reference, if you will?

Yes. I mean, I think we've incorporated into our guidance for the rest of the year all the different signals that we had access to during kind of our last earnings call in August. So I think there are kind of puts and takes as there are to everything in a platform of this size, right? So on the one hand, we're very excited about the fact that this environment is bringing new customers to us who are going through their own form of digital transformation and adopting solutions like ours. On the other hand, of course, there are some parts of our customer base that are either impacted through this environment or they're just being more cautious about kind of buying ahead for growth. As you can imagine, a lot of companies before this pandemic, they'd expect to grow 20% this year. So they'd buy 20% more than they need because they would consume all of that product by the end of the year. Right now, everybody is in a little bit more cost-conscious mode. So I think some of the top-of-funnel upside gets offset a little bit by some segments of the market that are in a more difficult position. Again, we factor all that in. I think part of the beauty of our business in that it's at scale, and it has no customer concentration or no industry concentration that we don't get overly impacted up or down by any one of these segments. And it's a fairly predictable financial model. So our focus really is on continuing to add features and kind of new products to our product portfolio to address this sort of like smart work space vision.

Got it. Perfect. Maybe one on -- so obviously, once you have that initial surge in top-of-the-funnel metrics, the focus quickly shifted on conversion. Could you maybe walk us through like what the conversion process is to convert maybe like you have a massive pre-user base, right? So what's the conversion process like? And how can you maybe carry through more of those customers who you saw start with Dropbox through that journey?

Sure. So there are several ways in which customers can convert to a paying user. Sort of like the oldest way for us is just people who are users of a basic product and they hit a paywall that encourages them to convert to paying user. Now the paywall can be limitations on storage, where they need more storage. It can be any number of paid premium features like Smart Sync or password protection or watermarking or professional sharing or some more sophisticated administrative controls. And so that's kind of one motion is just basic to paid. The other motion for conversion is trial starts, and that's kind of what I was talking about earlier in terms of top-of-funnel. We just saw a good pickup in trial starts earlier in the year. And our conversion rate in those trials was roughly consistent with the conversion rates we tend to see on trials. So it wasn't like a double positive, so to speak. I think we have reasonable conversion rates that we've seen on our product before and just to pick up in trial starts. Now one thing that we are encouraged about that we watch very carefully because for us, if you kind of look at our conversion and retention curves, once someone has kind of used the product for a little bit and has utilized some of its features, they're much, much less likely to churn off the product than maybe in the very early phases when somebody is just not fully aware of all the capabilities. So a lot of our in-product and kind of external marketing efforts are driven by driving better awareness of all the different features that people can use in the product. And what we've seen this year is a good time to utilization of the different features that, to us, indicate a customer really engaging with the product and getting utility, which then means they're more likely to retain. So even though, for example, we talked about one element we've seen through the pandemic is a little bit more of a mix shift among new customers towards monthly subscribers, but we're also seeing better engagement early on in product from all of those new users, so whether they're monthly or annual to us, that indicates likelihood of better retention over time. And that's what we're really kind of focused on right now is whoever comes to us from a basic product or direct or a trial, getting them to use as many of our capabilities as possible. One of the things, by the way, that has been really encouraging to us recently is some of the new features that we've introduced like the password management and sync everything and computer backup and then the family plan. We've seen more people -- because we can see like what causes them to start a trial, what causes them to convert to a paid user or what part of the product they engage in first, we see more and more people engaging first with one of these new features, and it's growing nicely in terms of like how many people are engaging first with those new features. To us, that signals again positive reception amongst our new users to these expanded set of features. And what it does for us is continue to evolve the positioning and perception of the product is much more than file sync and share.

Perfect. And just an FYI for people listening in, if you have questions, please send those through the portal. We will definitely take them as well. So moving on, I think you guys had a great win last quarter at the University of Michigan, and you've had similar wins across the education vertical. Could you maybe talk about -- Olivia was a great recruit early on this year. Maybe talk about what she's brought to you guys as the new CRO (sic) [ COO ] and sort of how that win came to be and the momentum you're seeing in the education vertical?

Yes. Absolutely. Maybe I'll step back about just Olivia a little bit, and then I'll dive into education specifically because it's one of the many areas she's focused on. She's our Chief Operating Officer, and so she'd sort of owns all of the outbound activities in the company, which spans sales, customer support, self-serve assist, business development, partnerships, things of that sort. So she's brought great experience from Google to us -- sorry, I didn't mention, but sales and marketing obviously also reports into her. So a lot of her focus has been on improving productivity and efficiency of all of these different businesses now that we continue to kind of be larger and larger in terms of scale. It's a very important set of initiatives for us because, obviously, it's very consistent with us setting a higher set of long-term margin targets and cash flow targets. And so it's very important for us to drive the right level of efficiency out of marketing and out of sales. And yes, education has been a great vertical for us. It's one that obviously kind of her prior company did well in, and we believe there's a lot of opportunity in seeding usage of our product amongst students and having them kind of graduate into the workforce just like individual users brought us to their workplace from our individual products to team products, same thing with people on education SKU, graduating, going to the workplace and buying or converting into our normal priced SKUs. And so that's what we're focused on. We historically have been very strong with research and faculty in education institutions, and we've really had a lot of success expanding that presence into the student base as well. So we have a specialized SKU, Dropbox for education. It's at a lower price than the normal kind of commercial SKUs, but these -- this product has best-in-class integrations with learning management systems like Blackboard and Canvas, popular communication tools like Slack and Zoom. It gives IT in those education institutions the right administrative tools to manage a very large student body and sharing permissions. And what Olivia and her team are spending a lot of time on is like how do we capture that 25% of the graduating student base? And what kind of promotions and initiatives can we implement to drive them to convert to paid products? So that's -- we're kind of excited about that. University of Michigan was one of many universities that came to us through the course of these past few months, and we believe it presents a lot of opportunity in the future.