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

Welcome back, everyone, to the Jefferies Software Conference. My name is Brent Thill. I'm very pleased to have with us Drew Houston, CEO. Drew co-founded the company in 2007, and he's led the company's growth to millions of people using the product around the world. Drew, a real pleasure to have you at our conference. Thank you for joining.

And maybe if you could just start off, at a very high level, on your true north and bring us up to speed as it relates to your top initiatives at the company right now and going forward.

Sure. Yes. Well, first, thanks for having me and it's great to be here. And as you mentioned, I started the company -- well, we've been a public company for a few years, but actually started the company back in 2007. And my motivation was I was really frustrated, right? I had a hard time keeping track of all my stuff and all the problems we used to have. Stuff on different computers, thumb drives, e-mail. And I was just frustrated as a user, I couldn't understand why no one had solved this problem. Obviously, things would be much better if everything lived in the cloud. And so we created this magic folder where you could access everything regardless of what device your operating system -- you're on, and it just took off. It was way more successful than I could have imagined. And then -- and I bring that up because then when it comes to the vision today, obviously, a lot has changed in the world. A lot of workloads have moved from files to cloud tools. But ironically, I think we're seeing a lot of the same problems, right? Our stuff is scattered everywhere. It's impossible to find things, keep track of your stuff. What's changed is that what used to be like a 100 icons on your desktop is now like 100 tabs in your browser, but it's the same genre of problem, right? Now, we've got Google Docs and Airtables and Miro boards and all kinds of new content, but at the same time, files haven't gone away. If anything, we've actually seen an explosion in video content or PDFs or creative assets on Dropbox. So most of us have had to straddle both -- as -- where we straddle both the file and cloud worlds. And so we see a big opportunity to solve the 2021 version of the problem we had in 2007. So our vision today is to evolve Dropbox from syncing files to first organizing all of your cloud content. Bringing all your files and cloud docs together into one view so that your PowerPoints and Figma Docs and Google Docs and everything can be in one place. So you have 1 search box instead of 10. So that first part is organization. And the second is workflow. So building this home screen for all your digital content, enabling us to connect you to the workflows around your content in one click. So that's whether that's viewing a document, sharing and editing, signing. Those are the things you can do today in Dropbox and HelloSign and DocSend, some of our other products, Brent. And we think about what other verbs all our customers need around their content. There are a lot of them. So that's how we think about growing the portfolio. We're creating new experiences around new verbs. We'll both do that first party, organically, and we'll also -- we'll continue to acquire companies and we'll also connect folks to our broader third-party ecosystem around -- of content tools. So overall, creating one home screen for all your cloud content, that's organized and connecting you to the workflows around it, is this universal problem.

The WFA, or work-from-anywhere trend seems like it's here to stay. Jefferies is in a permanent hybrid model for our CEO. Some are demanding the Wall Street to be back, but our CEO has said, "Be productive where you need to be productive." And it seems like that plays very well to your strategy. And many are curious kind of what you're seeing now as it relates to -- as we're settling into this new norm. How you've evolved to this? What's that doing for demand? And from a product side, it seems like there's a tremendous amount of innovation you can drive to help these millions of workers that are going to be in a distributed environment. So can you just talk to high level what you're seeing there?

Yes. Well, I think there's a lot we could all say about COVID and the brave new world we're in. But to me, the biggest change is that we'll look back on 2020, as the year where the world moved from working out of offices to working out of screens, right? And we believe this is a permanent shift. So even after lockdown ends, we're not going back, right? And so when you think about that, working primarily out of the screen versus primarily out of a physical space, this is one of the most profound changes to knowledge work since that term was invented back in 1959. And so it matters a lot. So why are we focused on organizing cloud content? Well, when you look at that screen, when you look at our workspace, if you were to minimize this Zoom window, underneath there's this huge mess like a browser tabs everywhere. There are always new pain points around kind of the exhausting and distracting and overwhelming and fragmented nature of this modern work. That creates a massive opportunity that -- and that didn't really exist before lockdown. So I see it as a major tailwind in the long run for Dropbox. I mean the fact that -- I see this as an opportunity of hiding in plain sight. Like when we started everyone had these problems around keeping track of their files, but no one was really talking about it. And a lot of people didn't think it could be a good business. But -- and so everyone is overlooking that opportunity. No one was pulling everything together and it ended up being huge. And I think the same kind of opportunity is true today when in terms of bringing all your cloud content together and addressing a lot of these pain points. Yes, I'm excited, we've got a much bigger head start this time, things that I would have loved to have back in 2007, right? We're one of the large cloud services in the world. We're trusted by a huge number of people, have a ton of content unlike the office suites were inherently cross platform. That's our DNA. So we're really well positioned to solve these problems and it's a natural evolution for us. As far as the business during 2020 or since lockdown, it's interesting. And certainly, for our HelloSign and DocSend businesses, it's a massive accelerant, right? Over the last year, many of our customers started adopting eSignature for the first time. As such, HelloSign continues to be one of the fastest-growing areas of the company with end user signature requests continue to stay up 75% versus a year ago in Q2. And the core business is also interesting. I mean on the one hand, Dropbox wasn't really like a new habit. I mean, it was something people needed before the pandemic, need during the pandemic, need after the pandemic. So that's been more stable. But even then, there are some pretty significant changes in behavior, right? And it sped up -- and the pandemic sped up the lot of trends that were already in play that represent big opportunities that we're leaning into. So we've seen a lot of -- we've explosion in rich media and video content. We're seeing the pull forward and the rise of the freelancer -- a freelance and creator economy, accelerated shift of businesses to cloud. We've even seen this in our own business. In addition to HelloSign, our core -- our Dropbox Professional SKU is up 30%, which is really popular with the creator economy type user. So we're seeing a lot of tailwinds as part of the shift. And I think more broadly, we're in the first inning, right? This new world, this new way of working, it needs new tools, right? And we are sort of all forced into this like buggy beta test of what hybrid should be, but I think there's a lot of room for improvement and I think the experience is going to get a lot better and lots of opportunity for us to help our customers make that a great transition.

That's a good point about kind of the first inning of this new world. And I think many of us have question, we saw this surge of demand and this concern did -- a lack of a better analogy, did we take the suburban to Costco, load up, come back now or are we digesting? Or are we just in this -- we're running suburbans back and forth now to load up because it is -- this is a massive permanent shift and the demand environment is still sustaining. Can you just talk to how you're -- what you're hearing from your customers about the sustainability of that demand?

Yes. Well, I mean, this is a permanent shift, right? And I think we're in the early innings of this experience and then even some of the COVID beneficiaries like Zoom. Zoom was designed in a world for a world where you're on maybe like 1 or 2 Zoom meetings a day. You're not on like 10 hours straight of Zoom meetings or you're not doing like bar mitzvahs or congressional hearings on Zoom the way you have last year and beyond in a way that none of us would have really expected. And so I think there's -- in terms of demand, I think, people are going to need and want -- they're going to have kind of unlimited demand for making that experience better. And I think like what are the problems with experience. I think it's a very fragmented and overwhelming and distracting environment. And when you're at home and basically the boundaries between home and work have completely dissolved, that's an unsustainable situation. And so I think there's a lot -- I mean, we're focused on how do we organize your working life starting with your content. We think there's a lot of room for improvement there in ways that I've talked about. And then what we're seeing with customers, they all have the same kind of questions about how is this all going to work. And we think about this ourselves, like when lockdown hit, like what's our operating model going to be? And in addition to trying to build products for this new environment, we've also tried to open source some of our thinking around how we're navigating that or how companies might want to think about navigating that. So we created a model we call Virtual First, which is basically where individual work will happen at home or remotely. And then we've completely reimagined our offices as purely collaborative spaces for convening people that we call Dropbox Studios. And we think our model is a little different from the default sort of compromise that a lot of companies have worked into, which is usually something like, why don't we make people commute 2 or 3 days a week? I think that's the most basic approach. I think it's easier to understand. But the reason we didn't do that is because in our opinion, we think that it has major flaws. I mean I think you lose a lot of flexibility. If everyone -- some of you live next to the office, maybe some of you listening have already discovered this. But I think as people start coming back, they're going to figure out they're like, wait a minute, now I'm commuting to the office. When I'm at the office, I'm still on Zoom because like not everybody is here. And now it's super noisy in my open plan office. It's like, it's a new circle of hell. So we wanted to avoid that. So that's why we chose this more flexible model where you still bring people together in person once or twice a quarter, but it's much more kind of thoughtfully curated and concentrated experience around building relationships and team work and culture versus just forcing people to come back and sit in the desk every week. So -- but everybody has these same question, how is it all going to work? How do we unleash the opportunity? And then I think there's unforeseen opportunities here, too, right? By adding flexibility to work, you unlock new pools of talent. So with this Virtual First model, we've been able to attract people from all over the country or all over the world that might not have been able to move or not near one of our offices. I think that's an opportunity that's open to every company. I think it's good for employers, as I was just saying, but it's also good for workers. I mean it opens up opportunity more broadly. There are great jobs from anywhere. And I think it gives us a window to address some of the bigger societal issues that we've been seeing where a lot of good jobs are only concentrated around certain cities, in creating all kinds of inequality and kind of an unsustainable trajectory.

So taking this foundation that you've built since 2007, can you talk about now the biggest areas of investment where you're leaning in really hard over the next year?

Sure. So as we've shared on in the past this year, there are 3 strategic pillars we're focused on to drive growth. And so the first is evolving the core, second is investing in new products and third is operational excellence. So first, on evolving the core Dropbox experience, we really want to double down on our strengths. So making the experience simple, intuitive, making the collaboration more seamless, helping organize users' content, tools -- content and tools and workflows. And we've been steadily rolling out foundational improvements, particularly for free users, like an improved mobile experience where we added a new passwords app, camera uploads on mobile. And as far as the future, as I said in the beginning, our core road map is focused on that evolution from syncing files to organizing all of your cloud content beyond trials. And again, I think it's a huge opportunity. We'll have a lot more to share there over the next several quarters. Second strategic pillar is investing in future products and handling more workflows or more of those verbs around your content. Having broader offerings for our millions of users or hundreds of millions of users and more than 550,000 Dropbox business teams. So we're seeing a lot of momentum in DocSend and HelloSign as well as our ecosystem partnerships. We see these as natural adjacencies, these workflows. And the 550-plus-billion pieces of content on Dropbox gives us a lot of leverage to drive engagement, distribution, cross-sell and ultimately, a really big lever for growth. And then finally, the third pillar of our strategy is driving operational excellence. And we want to improve the efficiency and reliability and security of our overall technical infrastructure, while being thoughtful and disciplined in all of our investment decisions. And there's additional growth levers beyond that. We'll continue to evaluate opportunities to grow the portfolio inorganically, through M&A, while still being disciplined when it comes to valuation. So we've been really laying out this 3-pillar strategy and executing against it, and then we're really proud of the progress we've been making.

One of the biggest questions we get from investors is just the product differentiation and how you would separate yourself from what some of the hyperscalers are trying to do with tying -- Microsoft trying to tie-in to their own system or what Google is doing. Can you walk through what the clear separation from your side is and the strength that's keeping you insulated?

Totally. Well, I mean, the first is we've always operated in a competitive landscape. There's never really been a time where it wasn't like a wild competitive environment. So our success has always been against that backdrop. So as far as differentiation and competition, we think about it both in terms of larger competitors like the platform companies, office suites. And then smaller competitors, including like the new breed of SaaS productivity apps. But when you think about the larger competitors, our advantage is really that we're platform agnostic, right? The walled gardens often want to keep you, by definition, in their ecosystems, but that doesn't mean they won't have integrations, but you're not going to see awesome support for Google Docs, I don't think, in the Microsoft ecosystem, for example. But the reality for most of our customers and probably most of us on the call is that where we use everything, right? We have the Microsoft products, the Google products, the Apple products, Dropbox and all the best of breed. And so there's a real need to tie it all back together. And the fact that we have this cross-platform DNA and the fact that we've always been -- our strength has always been integrating across all these different tools and ecosystems, as I said at the top, that we need that more than ever. And then second, compared to the new breed of -- our new wave of working tools, a lot of the recent IPOs, we have significantly greater scale and content, right? We have several hundred million registered users, over 550 billion pieces of content on our platform. And this gives us insights at a massive level, right? We know a lot about what our customers want to do. There are a lot of workflows around that content. Duplicating that is really difficult. So -- and we're really focused on content, right? We think there's -- those are -- that's the area where we're really well suited. And I say content as opposed to other parts of the collaboration stack like communication or coordination or tasks like -- there -- a lot of those challenges have good solutions, but we see a lot of unsolved problems in content. So I think our focus on content is a big advantage.

When you think about -- you mentioned this freelance economy booming. We have seen Upwork coming on, another San Francisco-based company that has seen a tremendous surge in their business due to the freelance movement. What are you seeing there from that perspective? Anything new?

Yes. I mean there's -- we've seen explosive growth there, right? The freelance economy, creator economy. You think about all of the previously offline businesses that had to move online in the last year. And then in many ways are staying online, right? So we've seen that reflect in our business. We've seen spikes in volume and engagement around our customers using rich media, creating video content on Dropbox. And fortunately, these customers, in the broader creative community, have always been really passionate and loyal Dropbox users. And they've been relying on us -- and in many cases, long before the pandemic to store and share their most important work. And we find these are really high-quality customers, right? They're really engaged. We find that customer's high engagement, unsurprisingly, are more likely to convert at higher rates. And we've seen it reflected in momentum in the business. So as I said in Q2, we reported that we continue to see strength in our Professional SKU, that's up 30%. It's targeted at those kinds of audiences. And as far as competition, like these customers that work with creative assets and videos, large files, they need a lot more out of Dropbox than they get from OneDrive or Google Drive, right? Our support for these -- for media to better focus on collaboration features for rich media, having an equally good experience across all platforms, having good mobile experience, these are all major selling points for these customers. So lots of opportunity to serve these audiences in new ways and support more of their workflows. I think they need to collaborate even more around rich media. They need to monetize content. There's all kinds of things that they need to do, and they're asking for. So it's a really exciting space, and we'll have more updates on this front in probably the coming weeks. So stay tuned.

HelloSign, you mentioned the 75% growth definitely sounds like a home run. Many would ask kind of DocuSign seems like the standard, Adobe is in the signature market. What gave you conviction on this given there's some big vendors there? And obviously, you're used to doing well against the bigger vendors. What is the -- what are you seeing in this business that gives you the conviction in that sustainable growth opportunity?

Well, I think it's still early innings for this opportunity, right, even in eSignature. I mean what we find with a lot of customers, especially customers in our sweet spot that we've been talking about, so freelancers, SMBs. They're still on pen and paper and especially internationally, right? So there's a ton of room for growth here. And I think the momentum in their business was speaking for itself and we saw it as a natural fit between -- we have all these documents, all these PDFs, content, signing is -- and work -- document workflows are a huge opportunity, very natural complement. So we've just been focused on accelerating the growth that was already happening and pulling these products closer together, right? And that includes integrations with the core business, accelerating the international -- or growing into the international opportunities. So we added HelloSign in 21 other languages. Doing a lot to improve the compliance of HelloSign and launching support for qualified electronic signatures in the EU and long list of things like that. So unlocking the global market and making big investments there. And then similar to Dropbox, HelloSign's target, their model for like self-serve, viral model, focus on SMBs, freelancers, and being able to profitably acquire these customers is a huge advantage because often it's really expensive for a more conventional enterprise-oriented company or competitor to acquire these customers because they have the sales team and higher cost of acquiring customers. So we see it as a natural fit with our business. And similar to DocSend, right? The second -- that was our second major acquisition. It's going super well. The team is way ahead of our internal expectations. For those of you who aren't familiar with it, DocSend is a secure document sharing and analytics product. Really popular in the financial services, venture capital world. And its used for sharing sensitive materials like pitch decks, Board communications, sales proposals, gives a lot richer analytics for how viewers are engaging with the content and really find grand sharing features. So -- and then importantly, I think these -- our goal here is to make the whole more than the sum of the parts and pull all these things together because rich sharing, eSignature are each steps in a broader life cycle where the place we want to get to is you hit, save on a word contract, you send it out for feedback through Hello -- or sorry, you send off for feedback through DocSend and get a lot of sharing, rich analytics on it. Then send it out for signature with HelloSign and save it back in Dropbox. So eliminating all of the steps and extra clicks, making a totally seamless workflow, those integrations are a big advantage compared to folks that just address -- or that are just point solutions or address one part of that.

The $1 billion free cash flow target by '24. Many have asked the confidence that you have in achieving that, and I know it's out of ways, but as you're true north kind of thinking about the financial target, maybe walk through what's giving you conviction.

Well, first, we've made a lot of progress, right? What gives us confidence is, first, we continue to regularly exceed expectations, right, on profitability and free cash flow. On the first few quarters, we've increased our free cash flow guidance by $70 million since the beginning of the year. So from $650 million to $720 million at the midpoint, that's almost 50% growth from last year. In some ways, we're ahead of schedule even for what we anticipated. And obviously, we're very focused on growth, though, right, and sustainable growth. So as far as the future, there's certainly no shortage of opportunity, given all the tailwinds that we've been talking about, this new way of working, needing new tools. And we have a lot of levers for growth across the portfolio. And many of these are new or levers we didn't have a couple of years ago. And margins have been expanding dramatically, as we focus on operational excellence. Internally, things like our new president structure, organizationally, has been working super well. And overall, I've been proud of how we've been consistently executing and showing that we can move the needle. So really excited about the momentum that we're seeing and staying on track for our long-term targets.

And organizationally, you've had some leadership changes. Can you maybe just kind of go through some of those changes, and it seems like you've been hitting stride despite some of the changes. What's working well there?

Yes. Well, so we moved to our president structure last year where we brought all of our product teams, our technical teams and go-to-market teams under our President, Timothy Young, who was previously our Head of Product. And that's been great. The teams are collaborating better, closer together. And Timothy has done a great job. I'm really proud of the impact he's been making. And this has helped really speed up our product development and helped us operate more as one company, and it's helped -- allow me to operate at a higher altitude and this just had a lot of benefits. And I think the results and the momentum speak for themselves. So I feel great about the leadership team that we have. I mean, it took us a while to get there because we had some turnover before that or we were iterating on that model. But you can see the positive effect that's now having across the business. And our new model of working, Virtual First, it's been great for recruiting and unlocking new pools of talent. We're able to get talent at all levels, including execs, again, who might not have been able to join if they were constrained geographically. So really excited about where the team is.

Drew, a pleasure having you. Thanks so much for supporting the conference and being here with investors. I appreciate the time and we'll look forward to staying in touch.

Awesome. Well, thanks, Brent, and thanks, everyone. We'll see you again, soon.