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

All right. Good afternoon, everyone. Welcome back. Thanks for joining us. My name is Rishi Jaluria. I cover software here at RBC. I'm delighted to have with me Timothy Young, President of Dropbox. Timothy, thank you so much for joining us.

Well, thank you for having me. This is fantastic.

Awesome. And for any messages or questions for Timothy, please send them in the box, and I will ask them directly. And -- or if you want to e-mail me, [email protected].

Timothy, let's start. I want to talk a little bit more about your background. I mean you've sold 2 companies in the past. What have -- where have you been able to leverage your back? And what has you most excited about Dropbox in taking over that President role?

Yes. Well, it's a great question. I mean, I've always had a passion for technology and building businesses. Both my parents were entrepreneurs and business owners. So I think just kind of growing up, there was always that notion of working for yourself, but also building things that resiliency, that grit that was required and kind of being surrounded by that as a child, I think, kind of ignited that passion in me and set me on that kind of path, right? And as you alluded to, I've been fortunate enough to have found and successfully exited a couple of different companies. One was on the enterprise and then one was on the consumer software side. So the first was about.me, which was acquired by AOL. And then more recently, Socialcast, which was an enterprise collaboration platform, kind of main competitors were Yammer and Jive kind of in the pre-Slack era. And Socialcast was fortunate enough to be acquired by VMware just a couple of years after we had taken VC funding. And then I stayed on at VMware. And I gained really valuable operational experience, kind of overseeing a number of global teams within the company's end user and mobile computing business units working for Paul Maritz and his leadership team is kind of the second era of leaders. At VMware, it was really fascinating to watch and be a part of a playbook to expand beyond one core product, right, and really kind of a lot of the lessons that I learned there and participated in are lessons that I'm bringing to Dropbox now as Dropbox thinks about its kind of next decade of growth. And when it comes to Dropbox, I think what I was really excited about and continue to be is just the opportunity that's in front of us and really thinking about how do you come into a company that has been so iconic and where you have a customer base that is so passionate. In many cases, customers paying month-over-month for over a decade, which is I think is very rare with any product. But how do you help them on their journeys moving forward? How do you build products to help customers? And I definitely spend a lot of time, months before joining the company a couple of years ago with Drew really making sure that I was aligned with his long-term vision of kind of creating that one organized place for your digital content. And it's just been an exciting journey, especially joining and then talking to customers. And as you know, in the last 2 years, I couldn't be more excited with the team we have in place, and most importantly, where we're headed with customers.

Yes. And then -- and you're absolutely right, Dropbox is very much an iconic company everyone knows about. But there's obviously been this big evolution of Dropbox over time, right? Maybe can you talk a little bit more about that evolution, right, from Dropbox's original solution, which is really just an online replacement for USB thumb drives? Everyone knows the famous story about Drew forgetting his thumb drive into this kind of broader and deeper vision that Drew has been outlining?

Yes. I mean I think as we all know, right, as we're living right now instead of being in person, right, we're doing this virtually. And so I think in many ways, COVID has completely changed the way most of us work, where I think distributed or hybrid work is really going to be here to stay for the long term after the pandemic as people seek more flexibility, more balance in their lives. And I think Drew has said before that we've gone from working primarily out of physical offices and kind of going from conference room to conference room to really working primarily out of our digital screens, right? So I don't really get in a car anymore. I open up and sit in from my desktop and I fire up Zoom and Dropbox and e-mail and my browser, right? And it's a very different experience. And I think with the explosion of digital content and kind of the proliferation of cloud apps, everyone's workflows are becoming kind of increasingly scattered and overwhelming to where I'm managing hundreds of browser tabs in any given workday. And if you think kind of back kind of all the way to 2007, when Drew created this really elegant solution to keep your files and sink across devices. Now instead of those kind of that messy 100-plus files on your desktop, we have what I just mentioned, a couple of hundred tabs in your browser every day. So -- and I think it's a huge opportunity for us, and we see a real need to be more than just a place to just store that digital content but to really increase the verbs for our customers, right, to make it easier to organize, to browse, to share and really do more with your content. And if you enable that and enable people's creativity, I think we can help people do their most important work. And as with everyone more distributed, I think than ever before, we need to have this kind of one organized place for your content and then all the workflows around it. So wherever you are, if you're working from home, if you're in your office, if you're at an off-site, you always have that most important information and the ability to do things with it with you.

Yes. Got it. Got it. Can you talk about some of the changes to product strategy that we've seen over the past year under your leadership? What's different today? And what learnings have there been from some of the past bets that maybe just haven't worked out as you expected them to?

Yes. I mean last year, here at Dropbox, we moved to kind of a President structure, where we decided in my new role that I would oversee more of the day-to-day business operations, including our product, engineering, design and go-to-market teams. And the reason we moved to this structure was to allow us to work as a more nimble, but cohesive team with closer collaboration among teams driving kind of better product experiences for our customers as well as really uniting 2 different sides of the business to kind of have a hybrid go-to-market, right? Both our self-serve engine and then our outbound teams. So this is also, I think, allowed us to have faster decision-making and execution across the company. And I think it's also really enabled Drew to focus more of his time on long-term strategy and long-term innovation, right? As it relates to kind of, I think, our product strategy, we've shifted kind of our center of gravity really towards users and where they've shifted their behavior. And it's kind of driving an increased focus on product design, user experience, which is creating kind of faster iterative cycles for us and more experimentation. And one of the things that I really focused on over a year ago was kind of restructuring and reimagining our engineering culture, right? We've rotated a new set of leaders and product managers in, and they're a little bit different than we've had in the past where Dropbox historically has had more of an infrastructure-dominant culture. And as we bring the product back kind of out from the shadows of being like a utility platform and focusing more on workflows, we've shifted a lot of our engineering culture to be able to build those type of experiences. So today, we're more focused on user behavior, collecting feedback and we're seeing not only shorter build times but I also think shorter investment horizons. So I really oriented the teams to really listening to customers, putting their needs first and then incorporating those learnings quickly across the surfaces. And I think as we think about where to apply capital and resources is really towards investments that both show near-term impact, but also more importantly ones that we believe will compound over the long term by really improving the foundation of the business. So we're monitoring what's working, and we're accelerating investments towards those areas. We're still in the very early days of that. But we're also being extremely disciplined about what's not working and shutting things down if we're not getting the right early signals, so we can kind of reposition our investment profile.

Yes. Got it. You've talked on the calls about a number of different projects that you're working on, what project or projects do you get the most excited about?

Yes. I mean, we're working on a number of exciting early initiatives. And I think one area that is -- we're continuously enhancing is the mobile experience. Now this is something that I was very passionate about a couple of years ago when I joined. And we basically shifted the team from being a lot of little engineering mobile teams that were kind of interspersed throughout the org and really centralized all those into one and really made that a focused effort, right? And Drew has talked a lot about our work on mobile recently. But if you think about it, for a growing number of our basic or our free users, this is where they're coming to Dropbox for the first time, and mobile is their primary interface for using our products. And we found that over half of our mobile basic users say their primary reason for downloading Dropbox is to share or receive shared content, which I think is very different than historically where they were coming to basically sync and store their content. So we're responding to that very quickly by redesigning that experience as more than just a mobile version of the traditional Dropbox file syncing service, and evolving the initial experience much more towards sharing. So we've got that mobile product team dedicated to this and you're continuing to see iterations month after month. So last quarter, for example, we drastically reduced the number of steps that mobile users and mobile recipients are required to actually share and view that content. And as a result, we've directly seen improvement in things like our app store ratings and improved retention among our Plus users who subscribe to us through mobile. So that will be a continued dominant focus for us. Another area though that I'm extremely excited about is something we kicked off about a year ago with our research teams, which is really creating more adjacent workflows for our work users such as creatives, small teams, freelancers. And what we're really trying to do here is thoughtfully expand the verbs of what you can do with your content. So going much more beyond sync and storage, but doing so in a very disciplined from an investment profile in a user-centered way. So we've built new product experiences like Capture, Replay and Shop. And all of them have different use cases, but they're all rooted in user behavior that we're actively seeing on the platform.

Got it. Got it. All right. So Timothy, there's this misnomer out there. I think maybe it gets back to Dropbox, everyone knows, but maybe that's a little bit of a blessing and a curse sometimes because there is that misnomer that Dropbox is just commodity file storage. Clearly, you don't feel that's the case. Why do you feel that's not the case? What is it that truly differentiates Dropbox from competition?

Yes. I mean I think this is a great question. I mean I think file storage is where the company started, but that is the base and the platform that we're going to build on for the future, right? And so kind of building on to my last point, I think we've been making a number of investments toward expanding those workflows. So it's great that people want to come to us for storage but they stay for sharing and they stay for the network effect that the product is able to drive. And we want to be able to build new network effects through new flywheels and new value, right? So it's important for us and our team to think about driving value in the network of Dropbox users, both basic and paid and truly understanding the potential of all users and driving connections to other content and users and workflow. So we're kind of, right now, very hyper focused on sharing broadly as that type of behavior drives both virality and network effect flywheels. And those flywheels really increase the product value, right, when I'm able to share something with someone, but they also increase the switching costs for individuals and teams. And so I think a lot of people look at Dropbox just as rough storage and just subscriptions, but there's actually a very vibrant network that is very important to people. It's not just about the storage, but it's about who can access that data and what types of other content are shared with them. So we're making it easier to share through redesigns of core features of the product quarter after quarter. For example, on the mobile app, which I just touched on as well as improved and simplified sharing for our work users. And then we recently introduced new capabilities that enable you to use automation, right, to better organize and search for your content, which is a common struggle amongst customers, especially our teams as they continue to add more and more data. So improving that experience of sharing and finding things in individuals Dropbox accounts is going to help us improve the sharing capabilities more seamlessly with audiences, both internally and externally. And that external sharing factor is yet another kind of core differentiator and competency that our customers extremely value. So the other thing that we're looking at and we're paying close attention to is the types of content that are growing on the platform and observing those macro trends, right? So this is things like the rise of the creator economy, the growth of freelancers, which makes us very confident that we're investing in the right themes for the long term. So a lot of you have probably heard about our momentum that we've seen in the Pro SKU over the last few quarters. And now we're starting to see expansion across our team's plans. So when we look into that, we look at what are users storing, what are they sharing on the platform. We've really seen an explosion in rich media, in particularly, videos and PDFs, which are the fastest growing types of content that are created in the most shared content types for Dropbox. So this is very different than a lot of the competition. So we're really focused on building innovation around these kind of very high velocity, differentiated content types. So Drew, I think, recently mentioned that we've got about 3.4 billion videos that were added by users to our platform in just the first half of this year. And so that's where you see us lining up new investments around replay for video collaboration, for creatives and capture as a way to use video to communicate asynchronously with distributed teams or clients, right? And then we also introduced recently Shop, which is a way for small businesses and freelancers and solopreneurs to monetize their digital content. And that came about from direct from design research where we looked at where users were storing content on third-party platforms, things like Etsy or Patreon. And we're trying to make those workflows for users much more seamless and much more easy and add more value. Now when you think about the other content type, which is really documents, we've got nearly 50 billion PDFs were added or modified on Dropbox over the last year just alone. And I think this type of behavior and action connects really well into document workflows that we're focused on, like sharing secure presentations and agreements or transacting via e-signature and that's really where DocSend and HelloSign come into play. So there's a number of ways in which we're kind of differentiating beyond just traditional cloud storage offerings. And then we're investing in marketing campaigns to really drive more of that product awareness, brand recognition, user education. And we're going to continue to do all of this with just what I think is the core Dropbox DNA, which is just very simple, easy-to-use interfaces that just work. And I think as we'll see more productivity tools emerge, and we see changes in user behavior on the platform, we'll continue to make kind of smart investments based on those valuable insights.

Yes. Got it. Got it. All right. So a lot you said there that I want to drill more down into. I want to start with just thinking about the user base, though, right? So 98% of our users today are free. How should we think about the strategy to monetize more of the user base?

Yes. I mean I think we're focused on monetization in a number of ways. And this is really a top priority for myself as well as our growth and product organizations. I think first, when you look at the top of our user funnel, right, the basic user experience, is where a majority of our paid users come from. We're looking -- I would say we look at where a growing number of those basic users are coming from. And what's changed in the last couple of years. And the big change is that a majority of them are coming first from mobile, right? They're finding us through shared content or finding us through an app store, but their first experience with Dropbox is on that mobile screen. And so we're moving very quickly to make mobile a true first-party experience and drive unique value there. But we're also focused on better optimization and segmentation of our plants. So that, for examples, in our like Pro SKU, where we're really trying to segment the customer base, we're trying to better identify those users upfront early on when they're on our fee paid plans and then surface the capabilities in the product to them that we think will really resonate. In that way, we can help convert them from trials and retain them as we provide a smooth experience through that customer journey. Now we've also introduced a number of new SKUs such as the family plan. And we've made improvements there to drive awareness and traffic towards that offering. And then, of course, as I think Drew recently talked about in Q3, we continue to have a focus on what we call team expansion. This is our expansion of our teams product. And what we're doing there is really converting more of our network users as they're added to teams and we're making that much easier to do as well as surfacing users that are in the free population that might actually be part of your organization that should join your team. So this includes converting those free basic users as well as upselling, right, from attaching paid individual users to paying teams. And in doing so, we're leveraging a lot of our data science teams and models to be able to do that. I think as we continue to evaluate additional ways to monetize the user base, we're considering a lot of options, whether it's converting free to pay through different pricing and packaging plans or through building increased pricing power by driving more value to users with more functionality around their most important workflows. And I think it's an important reminder that improvements in churn can go a long way, right? So we have a large ARR base and a big part of stabilization in the core Dropbox offering comes from driving churn lower, which we're seeing through many of our product updates as well as a more efficient go-to-market motions, which we've implemented across both mobile and our team segments.

Yes. Got it. Got it. I want to drill down into maybe the future of work and some of these -- what you and I were talking about right before this fireside chat started. But it's pretty obvious we're heading more into a hybrid work future or maybe increasingly that's going virtual-first versus the initial vision of hybrid. But how do you see Dropbox is being able to benefit from those hybrid work tailwinds? And maybe adding on to that, how do you view those as different from the broad work from home tailwinds we saw last year?

Yes. I mean I think, the beauty about Dropbox in many ways is that it always started from a hybrid work kind of use case, right, where as you mentioned earlier about the USB drive, it was really helping people connect, work and home, right, and having that mobility of your data. So I think what that demonstrates is that Dropbox, long before the pandemic and before the lockdown, was very critical to how people work. So I think today, what you're seeing is a company navigating their return-to-work plans and whether they settle on being in an office for a few days a week or going fully virtual, like how we've structured our workforce, I think the need for collaboration tools will definitely not go away and the need to always have your most important digital information with you is not going to disappear either. And if you think about what we're solving for, it's really organizing all of your digital content and then adding very focused, differentiated and kind of natural workflows to bring really more order and effectiveness to your day. I think for most of us, we've really experienced the burn out, right, of immediately shifting our office lives to a fully virtual environment. And I think with many of us, we're trying to figure out the best ways to kind of restructure our days and also navigate just kind of the overwhelming number of apps and browser tabs that you have to coordinate and kind of manage, right? And if you think about a decade ago, when you sat down in your computer, you opened up the C drive or your Macintosh HD and all your work was there. And then for many of our users, all your work, all your creativity was in that Dropbox folder. And I think today, you're using that Dropbox folder, but you're also using your browser, right? And you're trying to manage all these tabs. And I think Dropbox has this amazing opportunity in front of us to connect those 2 worlds together, just like we did over a decade ago with geography, I think we can connect them again. And if you look at a lot of the new products we've introduced, whether it's Replay, helping distributed teams edit videos which is a whole new way for those organizations to work together or its Capture, which eliminates the need for unnecessary meetings with asynchronous video messaging or even if you look at the recent acquisition we did with Command E which makes it very easy to search all across -- all your cloud apps, your browser and your desktop files. I think these are all examples of the ways in which we're in the very early stages of beginning to drive more value and help distributed teams really work more seamlessly together, both with their colleagues internally but also externally with their clients no matter what location or time zone they're in. And I think as you then think about us layering in additional workflows around documents, things like HelloSign and DocSend, we have a couple of big opportunities in front of us to really help individuals and small businesses in their digital transformation journeys, which I really strongly believe has only begun. I think knowledge work over the next 5 years is going to radically shift and evolve even more than it has done in the last 20. And I think we can be right in front of that opportunity, and we're just starting to begin to build in more user value there.

Yes. Got it. That's really helpful. And throughout you just mentioned HelloSign. You mentioned DocSend before. I think HelloSign seems to be, from my experience, at least well understood by the market today. But DocSend is a little bit more recent and maybe not fully appreciated. Can you maybe talk a little bit about the rationale for the acquisition and how it has been trending relative to your own expectations?

Yes. I mean, I think just as a quick reminder, right, to everybody, DocSend is a secure document sharing and analytics product that we acquired at the beginning of this year. The company historically has had a lot of success with groups like VCs and private companies, especially around fundraising with its kind of reimagined virtual data rooms, right? So it has easy-to-use NDA workflows that also gives you security and analytics. It checked many of the boxes that we look for with M&A, right? It fits squarely into our product strategy. It has an efficient go-to-market motion with it mainly being self-serve, and it's focused on SMBs, right? So the team also had a great cultural fit. The founder actually years ago was an intern at Dropbox before he started DocSend. And I think -- and all in all, we've been very pleased with DocSend's performance. It exceeded our internal targets for the last 2 quarters with better-than-expected usage and retention, and I'm really focused on growing its momentum even further into 2022. With that, we're improving a lot on the user experience and adding a lot of new functionality for financial workflows. But again, if you think about it, it's really the evolution of the folder, right? It's thinking about what data rooms should be and can be in this new era of work where kind of the simple version was just taking a folder in Dropbox and sharing it with a number of other parties and making that the data room, but really reimagine that in a lightweight way for all teams. And I think it's something that we're very excited about for the future. I think it's a big opportunity to integrate that and -- integrate the workflows for our existing users who are using Dropbox in that way and providing them a much better, more purpose-built solution.

Yes. Got you. Got you. All right. I want to hit on a question, I think, is definitely front and center increasingly. And that's around privacy and trust, right? And customer trust really seems to be an important value for Dropbox. And clearly, that's fading from some of the other tech giants. Can you talk about what you're doing to gain that trust and maybe cater towards customers who are more privacy conscious?

I mean I think privacy has always been top of mind for Drew, right, ever since he found the Dropbox. And I think unlike others, we have a very pure business model, right? Like we're not about consumption. We're not about ads. And we believe that, that focus on trust with users has been a big differentiator for us. We believe it's also a big factor in why so many of our users have stuck with us and feel so emotional and emotionally attached to the company, right? We have hundreds of millions of people that already trust us to store and share their most important content, whether personal or professional, and we rely, I think, on that strength in our brand and reputation as a jumping off point as we want to expand our capabilities and what we offer, right? So customers of all sizes expect top-notch security from Dropbox, whether it's individual basic users, or it's our larger paying enterprises. I think in the last quarter, we rolled out some highly requested security controls around sharing of content, particularly for teams where now admins have the ability to enforce and edit things like password protection and link expiration. And this gives them more control over how their content is being shared within their teams and outside their organizations. And we're going to continue to build additional security features for our users, both on the individual side and the team side. And these are top factors, I think, for renewals next year for many of our teams customers, and it's a way in which we think we can expand a lot of value through security offerings to both teams and individuals.

All right. Wonderful. Last question because I know we're coming up on time, but supply chain concerns, right, seems to be a widespread issue. Given especially that you own your own infrastructure, and that is a competitive advantage, how are you dealing with the supply chain issues? And at what point does it potentially become a problem?

Yes. I mean I think we have a world-class infrastructure team here at Dropbox. And so we're obviously keeping a very close eye on shortages within the supply chain. I think the infrastructure team has done an excellent job in securing the supply that we've needed for this year and moving forward. And we've always had great relationships with our vendors and partners. It's something that I personally have been involved in, in working with the team, but also speaking one-on-one with our vendors and partners and making sure that we are really a strategic account for them and that we want to maintain our partnership. And I think our teams are working really hard to work with partners to be proactive and most importantly, ensure minimal disruption to our operations, which we've done so far, I think, very effectively.

Awesome. That's super helpful. And we're up on time. So unfortunately, I have to cut it there. But Timothy, thank you so much for the time. Really appreciate all the answers and insights, and thank you, everyone, for tuning in.

Thank you for having me.

Take care.