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

Good morning, everyone. My name is Luv Sodha. I'm part of the Jefferies software equity research team. And we are lucky to have Timothy Young, who is the President of Dropbox. He's an entrepreneur at heart, has had former stints at VMware and a bunch of other tech companies here. Really appreciate you, Timothy, for being here with us.

Maybe to start out with -- you were at VMware before. Could you share a little bit about what you did out there and what brought you to Dropbox?

Yes, absolutely. So at VMware, I actually arrived there in kind of a transitional period, right? It was going in the kind of the second era of VMware. So it was the Paul Maritz era. I arrived via acquisition. I had a venture-backed company called Socialcast that was acquired. And then over my stint at VMware, I was on the exec team, ran a number of businesses and product lines and really kind of learned kind of a 3-stage playbook for growth there: one, around large-scale M&A; around kind of expanding into a global R&D center; and then how do you take a business that had a very dominant kind of 1 product line in server virtualization and how do you actually become a multiproduct company. And that playbook kind of carried with me and kind of brought me in many ways to Dropbox.

Got it. And now that you're at Dropbox, could you maybe talk about the impact you had on the organization? The product has come a long way. So could you talk about the product innovations and really the overall story?

Yes. I mean Dropbox is obviously just such an iconic company here in the valley. It's one of the few companies, I think, that's still founder-led and that is still a dominant product, right? I talk to customers everyday, who -- they say, "Hey, this is one of the only things that on a subscription basis I paid for, for more than a decade." And Drew and I actually go all the way back to 2008. We actually met each other while we were both fundraising. He was fundraising for Dropbox. I was fundraising for Socialcast, and we passed each other in the VCA office and met there. Then I obviously did my own journey through a couple of venture-backed companies, VMware, and then coming back to Dropbox and really coming in and thinking about what does the next 10 years look like for the company. And when I joined in the fall of 2019, I knew we were going to have a fair bit of strategic work to do. I knew that we were going to have some operational work to do. The thing that I didn't originally factor in was the cultural transformation and how that would be the foundation for really our next 10 years. And I -- when I joined the company, obviously, the people and the iconic culture that Dropbox had was so key to it, but the pandemic really -- kind of 5 months into the company really forced us to make some real operational decisions around our culture, including moving to a fully distributed company, but that has really laid the foundations to get closer to our customers who are on that same journey with us and then really focused on transitioning the strategy from just file, sync and share to actually expanding into the cloud. If you think about when Dropbox started, most of us, we started our days opening up that Finder, that Explorer window. And that was really the window to all of our work and all of our files. And I think today, more and more, we not only start in that Finder/Explorer experience with our files. We also start in the browser. And so Dropbox is making a big shift to support workflows not just on the desktop but also in the cloud over the next coming years.

Got it. No, that makes sense. Maybe -- the biggest question, obviously, on top of investors' minds is the macro environment and the impact that it's having. Could you talk a little bit about the impact it's having on your business? And maybe talk a little bit about the criticality of Dropbox as a software solution.

Yes. I mean I think when you look at Dropbox, Dropbox has historically been this like utility platform. And in many ways, it is a container for your most important digital assets, your most important digital information, whether that for an individual user is their most important assets in their personal life or for their team or for their entire business. And so that criticality of storing that information and being able to access it, being able to organize it was clearly valuable before the pandemic. It became even more important, I think, during the pandemic we saw. But we also see that there is sustained opportunity moving forward. I spend every day working with customers, talking with customers, thinking about how to co-innovate with them. And I think the macro trends that we're seeing out there, the trends of security, the trends of the hybrid workforce, the trends of digitalization are really going to be trends that fuel the business for the next 10 years. When I look at the macro environment, obviously, there's a lot of volatility out there. And so in addition to talking to customers, I spend every day kind of waking up, looking at a dashboard of various early signals of is the macro environment impacting not only our business, but our customers. And to date, the business is relatively stable. And when I look at things like sales pipelines, cross-sells, license expansion, we see everything continuing to be strong, and we think there's a lot of opportunity ahead.

Got it. Could you talk a little bit about the customer behavior you're seeing out there and in which verticals you see strength in? I know creatives has been one of the verticals that's been strong for you guys. And the fear is that in a slowing macro environment, marketing dollars could be hit. So could you talk a little bit about that?

Yes. Absolutely. I mean, I think one of the amazing things about Dropbox is it's such a big platform. And so when you look at 700 million users, you look at 800 billion pieces of content. We're getting signals every day on what's going on in the platform. Over the 13 years that Dropbox has existed, one of the things that we've noticed is that there have been different periods of time where content has been dominant on the platform. So very early on when we were focused on kind of developers, early adopters, we saw certain types of content. Then that shifted as it became more of a consumer-driven product early in its life to heavy media files, right? We're storing all of our MP3s or videos. That transitioned then to office documents as we launched Dropbox Business. But then we saw a very clear delineation and shift in the user base starting in 2020. And 2 types of content have been very rapid growth. One is the [ surgence ] of video, and then the second one is PDFs. And so that's where we focused. A lot of our new product experience effort for the next kind of 5 years will be around those 2 dimensions. And then when we look at various verticals in various sectors, still see a lot of opportunity and demand in areas like professional services, finance, construction and manufacturing. Media and entertainment are still very strong for us.

Got it. Could you talk a little bit about the competitive positioning? I mean there is this misperception, if you will, that there are so many competitors in the space and that it's commoditized to a certain extent. Could you talk about what makes Dropbox different?

Yes. I mean on one hand, I think it's the scale of Dropbox. And I think many people think of Dropbox is just an individual tool. But you have to remember what is special is those shared folders, those shared pieces of content actually build out a complete graph in a network. And there's a lot of stickiness and durability in that as we've seen for the last 13 years. If you think about Dropbox, we are kind of a collaboration in between tools, right? So we've always been that place, that kind of neutral place that no matter what application you're using with your team, you can store the files there. And so I think there's a lot of value in that. And I think on the productivity space, what we've seen as we work with customers is that there is a clear shift. Although we work very well and closely with Microsoft and Google, there's an explosion of productivity tools out there, much beyond just the traditional office suite. And so we'll continue to kind of lean our road map to support all of those tools moving forward.

Got it. You did DocSend a year ago. Tell us the momentum that you're seeing in that business and how it has been integrated into the Dropbox platform.

Yes. I mean DocSend, I think, has been an excellent acquisition for us. And it really -- if we go back in time, it was based on the insight that we had on the platform. The insight was basically looking at user behavior and looking at what are people doing with shared folders. And in many ways, what they're doing with shared folders is not just sharing internally, but they're using it to share externally, right? It might be with a supplier, a partner, a customer. And so we wanted to actually take a look at that behavior and say, "Hey, how could we actually build a deeper product experience?" And in looking out at the market, we obviously saw DocSend and its rapid growth and decided it would be really valuable to expand our product portfolio there. Now since acquiring DocSend, the business has accelerated actually quite rapidly, and we see a lot of synergy in the customer base. So a lot of new DocSend customers are coming directly from Dropbox. We've built a lot of capability in our upgraded sharing so that Dropbox customers now have a choice when they share to actually upgrade into DocSend. And I think if you look at the DocSend road map and the opportunity, what we're basically doing is kind of reinventing the virtual data room. And we think there's a lot of opportunity to bring that functionality much further beyond just finance teams. We think most teams and organizations will have some sense of a virtual data room, and that's kind of where that team is innovating.

Got it. On HelloSign, you've had the asset for some time now. Could you talk about the opportunity there? There has been this fear that eSignature solutions face tougher comps, given they saw the surge during the pandemic. Could you talk a little bit about the demand environment on that side?

Yes. I mean we definitely saw a surge during the pandemic, but we still think it's very early days for this opportunity. I think the main competitor for HelloSign is still pen and paper. But our solution, in particular, is really focused on that SMB space. And it's really focused on bringing a solution, not just basic sign functionality. So when you look at the portfolio of HelloSign, they have HelloSign works, which is an automation platform, they have HelloFax, which brings digital fax to it. And then we have our API business, which is enabling customers like Instacart to actually integrate eSignature for their partners, for their vendors, for their suppliers into their processes, into their application. So I think as we move forward, there's a lot of effort internally to bring the product lines of Dropbox and HelloSign together to have natural extensions for cross-sell as well as future integration. So you'll see a lot of that in the road map over the next couple of years.

Got it. Now Drew and Tim alluded to some pricing and packaging changes. Could you talk about those pricing changes and packaging changes and what impact those would have?

Yes. So we launched Dropbox Business in 2017, and that was really the concept where you could take Dropbox and have team folders and put an organization onto the platform. And so for the last 5 years, we haven't made any pricing adjustments until yesterday, which we announced. And we built kind of 5 years of value. But in sitting down with customers, especially in the pandemic, and really talking to them about what challenges they were facing, one of the things that became very apparent was security. So we spent a lot of time taking security functionality and extending it to team admins. So things like data classification, things like data isolation, ransomware detection and recovery. These are all very top of mind for all of our customers from an SMB standpoint all the way up to the enterprise. And so we're really excited to bring that level of functionality out. And so I encourage everyone to take a look at some of the blog posts and the data we put out. But especially in our standard and our advanced teams, we're launching a whole host of capabilities. A lot of it is around security for customers, and this has kind of been their #1 ask for the last couple of years. So we're excited. And then I would just kind of reiterate what Tim recently said on our earnings call that for our full year '22 revenue guidance, our pricing changes have been factored in.

Got it. Could you talk a little bit about the hiring -- your hiring activity and how you evaluate the efficiency of the R&D investments because you make quite a bit of R&D investments into the platform? And could you give us insight into where those investments are going in towards?

Yes. I mean I think one of the key things to remember about Dropbox that makes the company very unique is we still operate most of our own infrastructure, right? So we do leverage the public cloud. We do have a hybrid environment. But some of our key R&D investments over the years like Magic Pocket, our storage engine, we still fundamentally run, operate and innovate there. And we think that gives us a lot of ability to drive more innovation in the future for customers. So that's where a lot of our investment will be. But I think as we look at moving forward, something that we made the decision early on in the pandemic was to go to a distributed workforce and really access and expand our talent base beyond the Bay Area, beyond New York, beyond Seattle, and that has actually been very effective for us. So you'll see us over the next few years continue to expand, especially in Eastern Europe, and try to access new pools of talent. And also, we'll continue to stay very operationally disciplined on our R&D spending.

Got it. Could we maybe talk a little bit about the product strategy? What's the overall vision and game with the creative product experiences, be it Capture, Replay and Shop? And maybe talk a little bit about where you see Dropbox, say, 5 years from today.

Yes. I mean one of the things that we're really focused on is kind of expanding what you can do with the platform. So if you think about the first kind of decade, once kind of Dropbox hit scale, it was really just about, "How can I store and sync my content across all of my devices and experiences?" And I think what we're hearing from customers, especially in the last couple of years as we entered the pandemic, is they want to do more with their content. And so we look at what kinds of content that they're storing. It's really around those videos and those PDFs. And then we look at what teams are really highly engaged with Dropbox and kind of where they're going with those pieces of content, and that leads us to a lot of these creative workflows. So 2 trends that we see in the environment that we think are only going to expand is kind of the creator economy and then also kind of solopreneurs, freelancers, micro businesses, which will be a dominant form of the demographic in the U.S. by 2025. So we're kind of leaning into both of those trends with the product portfolio, and that suite is Capture, which allows distributed teams to communicate via video asynchronously. That includes Shop, which allows a lot of our users to basically monetize their content that they're storing. And that was based on the insight that we saw. Like we saw users on Etsy, on Patreon, on Kickstarter, they would actually be delivering digital content that they sold through these platforms, but the delivery mechanism, the link that you would get, was actually on Dropbox. And so as we saw this explosion of activity, we decided, hey, we can remove a lot of the friction, capture a lot of this value and provide it also to users and just have a full end to end, and that's what Dropbox Shop really enables you to do. If you think about it in the past, Dropbox, you could right-click on a piece of content and quickly share it. You can now quickly set up a 1-page site and be able to sell it, right, and market it on any social channel that you want. And then in terms of Replay, it also extends the video functionality that we have. It's really a collaborative tool that allows you to not only view the videos on Dropbox with our upgraded preview and video engine, but also collaborate and edit them on the platform, and we think that's going to be a growing need as we've seen the explosion of video.

Got it. I want to open it up to the audience to see if we had any questions.

I wanted to get back on one specific question that was asked but that I found maybe not providing me enough clarity, which was about the competitive positioning where you basically said that the scale is underestimated and that your shared folders create stickiness, which is great, but that -- actually it has very little to do with competitive positioning. So can you be a little bit more specific about like what makes you different versus competitors like Box or SharePoint/OneDrive? Why would people not migrate there? What makes you unique?

Yes. I mean, I think that's a great question. I think what makes us unique is really the focus that we've taken. So we've really transitioned in the last couple of years from just being about storage to really focusing on particularly these creative workflows. And we see the explosion of video throughout kind of all departments inside of companies. And we think we do that better than anyone. We think that -- when we look at our sync engine, when we look at the reliability, when we look at the speed, when we look at how we can handle large files, large-size files, we actually perform better than any other platform. And so that's where a lot of our focus is because that's where our customers are asking us to go with the platform, is really down this kind of digital asset management route, specifically around rich media use cases, around video. And so I think when you look at competitor platforms that are still very tied to the office suite, right, to things like spreadsheets and docs and those, I think those platforms are really well suited for that, and they're integrated, and we'll continue to embrace those platforms and support connection to them. But where we're headed is really around this rich media storage focus. And that's very differentiated than some of the other players.

Maybe I'll ask one more. On the -- you're making good progress on the $1 billion free cash flow goal by 2024. I guess can you expand on the levers that you have to sustain top line growth?

Yes. So when we look at the core business, our file, sync and share business, really focused on retention, focused on rotating our product experiences to be mobile first. We're expanding kind of our top of funnel new channels, and a lot of work has gone on there to stabilize and maintain the growth in that business, which is quite large now. The second lever that we have is really around our workflows. So that is looking at our document workflows with HelloSign and DocSend, and those businesses continue to grow faster than the core business and contribute. And then obviously, we have our new product portfolio that's coming out, which is all the creative workflows, which is really focused on video again. And then I would say, finally, we have M&A as a lever. And I think with both HelloSign and DocSend, we've been able to find a playbook that really works for us, where we take an insight from users on the platform. And then we, with a disciplined approach, go find products and businesses that we can plug onto the platform. And so I think given the macro environment and the changes in valuation, along with our free cash flow, we'll be able to use that as a real opportunity to drive growth in the outer years.

Got it. I'll ask one more. I think what amazes me is that you have this massive registered user base, right, of 700 million users. But yet the paid proportion of that is maybe 2%, 2.5%, 3%, say. So has that been somewhat of a focus that how can you monetize, say, the vast majority of the registered users that don't pay today?

Yes. That is one of the internal strong plays. And I think we've been much more aggressive about that in the last kind of 12 to 18 months, and we'll continue to make that a focus. If you look recently, we just launched a brand-new SKU called Backup, which is a lower price SKU that is specifically targeted at increasing the monetization our freemium base, and we'll continue to do that. The freemium base is extremely important because even those free users, even if they're not paying us, they are storing content and then sharing that content. And they're introducing new users to the platform, many of which quickly become paid users in their first 30 to 60 days. So it is important, I think, also to have that base for our new product experiences. But we are getting much more aggressive and much more targeted at monetizing that with our new products.

Got it. And one last one on -- not asking for the secret sauce, but like what is something that we, on the outside, maybe can't see that you, on the inside are really excited about or -- something that you can share?

Yes. I mean I joined the company as kind of a technologist, as a product operator really looking at kind of 5 to 7 years out, right? That's what got me really excited to join the company. And I think something that a lot of people have missed is an acquisition that we did last fall. And that was really around Command E. So it's a universal search tool. And I think it's going to be really key to the long-term strategy of the company. It is a new surface for us, and we'll be talking about it more in the coming quarters. But that is really a new daily use product. It has high engagement from our early users, sometimes 9 to 12 times a day. It's a product that they start their day with. It's a product that they end their day with. And it's going to be, I think, a new kind of magical experience. Like if you think about Dropbox, we brought the magic folder. Think about now having a universal search that is really personal to you and all of your work activity and ties together all of the applications and the cloud content that you have. And that's a big opportunity that we're really excited about for the future.

Got it. Perfect. We'll leave it at that. Thank you again, Timothy, for joining us.