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

All right. Let's go ahead and get started here. Thanks, everyone. Welcome back. For those who don't know me, my name is Rishi Jaluria. I cover software here at RBC. I'm absolutely delighted to have with me the Co-Founder and CEO of Dropbox, Drew Houston. Drew, thanks so much for being with us.

Yes, thanks for having me.

Maybe I want to start out like just for -- everyone knows Dropbox. But I'd love if you could talk a little bit about the evolution of Dropbox, right, from your college project as a replacement for a USB drive to consumer-grade sharing application to really this kind of business collaboration platform that has become over time.

Sure. So I'll try to make -- yes, it's been quite the arc. But yes, I started Dropbox when I was -- I started writing what became Dropbox really just to solve my own problems. But it's pretty clear that there are a lot of other folks with the same kind of needs and that life would be a lot better in a lot of ways if all of our stuff could live in the cloud. Fast forward several years, and we found that most of our -- most people using Dropbox and certainly most of our subscribers, the vast majority of them were using Dropbox for work. And for a lot of these customers, they would use language like, "I'm working out of Dropbox," right? And then going into the pandemic, that became even more like literally true because we talk to customers around the world who -- I believe there's still people like migrating off of their on-prem file services, things like that. But COVID made that and going into lockdown made that not optional. But it's interesting talking to customers during the pandemic where they're like we moved from working out of these different offices -- Australian creative design agency and they're like, "Well, we used to work in different offices and then lockdown hit and then we were working out of Dropbox." So Dropbox, for a lot of people at the home for all of their most important work information. Obviously, there's a lot of personal use, too, or mixed use. People use it for both home and work. And then we've expanded what we offer. So we've built a portfolio of products, a lot of them around workflows, around content. So certainly, we all need our content to be stored and shared and synced and things like that. But then we found that there's a lot of demand for customers who need e-signature or they need richer sharing functionality, analytics. And so we bought companies like HelloSign and DocSend, which have become part of the platform. So both continuing to scale out our initial platform, but then also build out the product portfolio.

Yes, got it. That's a great place. So if we think about the core users that you're targeting, right, you've got a lot of freelancers and individual business people. You've got teams within large organizations. You've got SMBs that standardized on Dropbox. What helps you gain that mindshare? And are there distinct features? Is it more about the user experience? How should we be thinking about what gets that mindshare and really the usage from that core base?

I mean a lot of it stems from our initial model and our philosophy, much of which has stayed constant. So first, we believe that if we've built a great product, made it really easy to use, then there will be a lot of adoption. But then our go-to-market approach or method of driving adoption was really inherited from -- or basically, it took a lot of consumer Internet playbook, things like focus on virality and ease of use and bringing it to business software. So I think we were one of the early SaaS companies to adopt this product-led growth approach and the self-serve viral models, which are super scalable, super efficient. And that's still true today. So as far as like why do people choose Dropbox, a lot of those things are the same. Like they like the ease of use. They need to be able to work across different platforms. And then we're seeing that our sweet spot is -- because of this scale, we've been able to reach hundreds of millions of users mostly through viral growth. Like 90% of our business is self-serve. But when we look at what an SMB needs, and especially when you look at what an SMB -- the evolving needs of customers especially after the pandemic, things have shifted. And so what they need -- certainly, when you look at the -- we compete with Microsoft and Google and the Office suites. And certainly, every small business needs things like e-mail or calendar or docs, sheets, slides, those kinds of things. But we find that a lot of our customers need more than what comes with OneDrive or Google Drive. They need -- they have -- they put more stress on the system. So if you work with a lot of our SMBs, a lot of freelancers, if you think about the creator economy, the creative professionals and even like casual creatives, they do big workflows around video now, whether that's like the yoga instructor during the pandemic who had to move from physical classes to like trying to run the classes online or have videos of that. So there's a lot of increased usage of videos and PDFs on Dropbox. And then when you think about the broader portfolio of products, SMBs need to be able to sign all their documents. They need to be able to -- if you're a start-up founder, you need to fundraise. So tools like DocSend, which we offer, or as an acquisition are really important for that. So I'd say it's people that need -- that often work with large files. And so whether that's video or creative assets or architecture, CAD, construction, media, these are all verticals where we tend to do well and where our -- the excellence in sync and the ability to handle large files, all these needs beyond just sort of what's in the box with the Office suite really resonates with customers.

Awesome. I want to think about maybe your expansion motion right now, continue to expand within customers. But if we think about what's driving that expansion other than just getting more users on to the platform, how do you think about that, be it upgrades, be it cross-sell? And now you have additional products in your portfolio with HelloSign, DocSend, how do we just think about those drivers? What's really making customers adopt, upgrade tiers or adopt new solutions?

Yes, so there are a lot of moving parts. I think we've been fortunate that since the beginning, we've been able to reach customers of all shapes and sizes. But at its most basic, people start using Dropbox often as individuals. They start using it at home. They bring it into work. They work on a project with a few colleagues, and then a little workgroup like that becomes a department, becomes a [ wall-to-wall ] deployment through this kind of viral expansion. So within that, there's the whole funnel of different levers that we optimize for that. And so we've had a lot of success just with continuing to tune that basic motion, just reduce friction from those key flows that drive growth. We've been able to actually drive improvements to retention over the last several quarters even at scale. And by doing things like simplifying basic experiences around sharing or making it easier to onboard into your Dropbox, things like that, so those have helped drive more retention. And as far as cross-sell or the multiproduct opportunity, we're pretty early innings in terms of introducing our new products like Sign or DocSend to the broader Dropbox space. And so we'll do that through pricing and packaging. But probably the most important lever is deep product integration. So if you have a PDF in Dropbox or you hit save on a Word document that says -- that's a contract prompting you like tastefully, in context, like do you want to send this out for signature, or you're doing basic sharing in Dropbox, but if you want analytics, you want to be able to see what recipients are engaging with, then that's what DocSend does. And so we can upsell you that way. So there's a lot of different levers that we work on in parallel.

Yes. And you talked a little bit about pricing and packaging. So recently, there's kind of this new price increase that's being worked through that helped us last quarter and, I imagine, continues to go through. It's happened in the past. How do you -- what drives the decision for these price increases? And how do you weigh out pushing out a price increase and not having customers push back [ in a way ]?

Carefully. So we think of it as a flywheel that really starts with adding more customer value. And then as we add more value, whether new performance features or new product experiences, we update -- or raise our prices or we update, we change the packaging and pricing to reflect the added value. So for example, as you were saying, we just launched -- we added -- we updated our Teams offering, so Dropbox for Teams, right, with a lot of -- actually in response to a lot of new requests from customers after the pandemic around security. So we launched a new Teams experience. It had new features around things like ransomware protection, backup. So if you think about it, a lot of SMBs don't have IT people. They -- and in a world where you don't even have an office, like keeping your laptops backed up and safe is something that has a different shape now than it would have a few years ago. Things like passwords, being able to manage passwords in a team. So we added all this value, and then we raised the price of the team SKU. But sequencing is important. You add value -- so we're leery of just like increasing prices just because we can. But where we want to -- when we think about pricing and packaging, we want to think about it holistically, and we want it to be sustainable and we want it to be any price increase to be paired with added value. And then there's -- like I said, we just talked about the team SKU. I'd say we've had similar approaches with our individual SKUs. I think just bundling overall is a big opportunity for us that we're in the first inning of that, so bringing Dropbox and Sign and Send and other experiences together.

Yes. And if we think about Sign and Send, so HelloSign is a couple of years now. DocuSign -- sorry, DocSend have been around for a while. You've got Command E now. What's the playbook in terms of once you buy an asset, right, are these -- do they get fully integrated from a technology perspective, from a go-to-market perspective? Do you continue to invest in a product and innovate and bring it to places it couldn't have been on its own? What's kind of the playbook once you've identified a target and you've actually bought it?

Sure. So I'd say it's -- there are parts of it that depend on the specific case, but I'd say all of the above. We want to have it deeply integrated with our platforms, so deep product integrations. We want to align with go-to-market motions. We want to do the obvious M&A integration things. With Sign and Send, they're both examples of content workflows. So these are like other verbs that people need to do or actions that people want to take on their content and opportunities for us to provide value on top of the basic storage and sharing and differentiate ourselves from the Office suites. So that's certainly like what are the workflows around content? What do people want to do? That's an organizing principle behind what's in the portfolio. You mentioned Command E. So for context, that's a universal search company. And that was really prompted by -- kind of going back to the same kind of thinking when I started the company, I'm like -- and actually, in a lot of ways, the same problem, like the problem when I started was like my stuff is everywhere, can't find it. In 2007, when I started the company, that meant like, oh, my files are on these different devices and these different operating systems that don't talk to each other. As an end user, this creates all these paper cuts for me of having to personally manage that. But then today, fast forward, and in principle, kind of a lot of the same problems. Like my stuff is everywhere. I can't find it, no way to organize it. Maybe it's not so much files and devices as much as just now I've got what used to be 100 files on my desktop is now 100 tabs on my browser because we've had this -- obviously, we still use files for a lot of workflows, but then there's this whole array of new cloud tools. So in addition to having an Excel spreadsheet, you might have Google slides and then a Figma doc or an Airtable. There's no container that can hold all of those things really if you think about it. And then search is one of those basic experiences that despite all this like technological progress we've seen in the last 20 years, 20 years ago, actually search worked a lot better for your stuff. If you think about it, 20 years ago, you search your hard drive. The thing is there or it's not. But now today, I've got like 10 search boxes that each search like 10% of my stuff, right? And that's become this really fragmented experience that's gone in the wrong direction as kind of an unintended consequence. So I mean that's a long preamble to say that Command E is a universal search company that's really doing this, like indexing all your -- it connects to all your SaaS tools and your files and your e-mail. And so you can have one search box that searches everything. So we bought that company about a year ago, putting a lot of investment in that area. And we've -- what I'm really excited about the road map there when I think about it, or if we were to build Dropbox for 2022, 2023, what I'd build, and universal search would be a big part of that.

Yes. So maybe going alongside that, right, as you mentioned, you were one of the initial PLG companies out there. Now it's becoming kind of the topic du jour in Silicon Valley, and you still spend a lot of money in R&D. So how do you think about that debate of buying versus building, right? And these are features and functionality you want. Why choose to go out and acquire them versus build them yourself?

Sure. Well, I think that we see them as different -- as complementary approaches. I think each has different strengths and weaknesses. M&A has been a great tool for us building the business. And I'd say whether that's kind of smaller talent acquisitions like Command E or products -- or fully built products or fully built businesses like HelloSign and DocSend or more transformative M&A, which we haven't yet done to date but becomes more affordable in an environment like this, so we see -- and then there's a lot of benefit to building things organically and different pros and cons there. So we look at like what's the most -- I think this starts from just capital allocation. Like what's the most efficient way to put the next dollar to work? Or how do we accelerate our product road map? Or how do we fill in -- how do we build our portfolio quickly? M&A has been a helpful lever in that and will continue to be.

Yes. Got it. Got it. And then last question on M&A and some of the targets you've acquired. If we think about HelloSign -- and I think you've recently rebranded and pulled out the HelloSign branding away. But when we think about the digital signature space, how do you think about competition there versus DocuSign? Obviously, Adobe has its foot in that space. Box recently bought someone in that space. Just where do you compete on the digital signature side?

Sure. Well, first is -- one of our first advantage is just our scale, right? So we have this audience of SMBs and freelancers and some of these folks where our sweet spot is a little different from a DocuSign or a Box or some of these other competitors because we can profitably -- and the reason is we can profitably acquire or have acquired those customers, those people who are already happy Dropbox users. It's relatively easier for us to introduce e-signature to an SMB that's still on like pen and paper workflows but has Dropbox. So that's -- our audience is a big advantage in terms of scaling it up. And then secondly, of course, the e-signature landscape is evolving and the product experiences are evolving. We think about not just the literal signing of a document, but that whole workflow, before and after, right, from drafting the contract to rounds of review to the signature, but then also like the archival and the many steps in document workflows. So we think about both the literally signature space, but I think it will also evolve into -- [ to envision ] more of these end-to-end workflows and these more integrated experiences. So part of what we think about to differentiate is there's a lot of friction in that whole -- in all those steps, right? In a lot of cases, users have to -- they might -- they'd be editing a document in Word. But then they have to like leave and then go send the e-mail to get review and upload it to DocuSign. And so there's a lot of friction in that which we can remove. And so we think about how do we keep that whole workflow seamlessly in Dropbox. And so you hit save on the Word document in Dropbox. You can use things like DocSend to get analytics and help with the review. You can sign it with Dropbox Sign and then have Dropbox be the system of record for where that's stored. And like SMBs don't want to have like 10 different tools to manage that, and their needs are pretty straightforward. And I think a lot of the user experience has a lot of -- that whole workflow has a lot of room for improvement in user experience. And so I think there's a lot of opportunity to differentiate there.

Absolutely. I do have a bunch more questions, but I wanted to open it up to the audience in case there were any questions for Drew. And we do have a mic runner here as well.

How do you know the user experience is good?

Sorry, could you repeat that in the mic?

How do you know the user experience is good? Do you do a lot of survey work? Or how do you [indiscernible] customers?

All of the above. Yes, I think there's a lot of wires you want to plug in. I mean one of them is just like do users think it's good, right? So certainly, things like surveys, analytics around engagement, CSAT, things like that, pretty subjective, right? When we look at it, it's like -- or when you sit a customer down in front of this experience, like you watch them navigate that, like where do they get stuck? Like is there -- is that a smooth experience? So I'd say that we do a lot of both qualitative and quantitative things you'd expect. But you want to triangulate on it -- on that question from multiple angles.

Drew, Rishi, appreciate the conversation. I guess as you look through your customer base now, what are some of the more, I guess, areas where we can address customer problems? What are some of the top customer problems that you have on your mind right now and thinking how we can serve them or address them?

Yes. I mean, to me, the most fundamental ones are really where -- in that transition from the file system to the browser, right, where -- we talked about search. I've got 10 search boxes instead of one. I got a new search box every year as I adopt a new SaaS -- as I adopt a new tool, but then fundamental challenges around organizing my content. So as I was saying, there's no container that can both hold like an Airtable and a 10-gig 4K video, so we don't even try. The browser has like no persistence or organizational construct. What does that mean? Well, at least files have their drawbacks. But at least when you restart your computer, like your desktop, your 200 -- your mess of 200 icons will all still be there. It's actually not the case with your browser, right? You'll either -- when you close your browser or it crashes or you just like declared tab bankruptcy, if something's -- like imagine if your -- it's like your desktop has cleared itself out. And then how often have we had that experience where like I know I was looking at this document like literally an hour ago. I'm typing in an exact keyword match into the Chrome search bar, not finding it. So there are these basic challenges around organization and retrieval that we think -- that we see -- we see all of our customers struggle with and, frankly, like we ourselves struggle with this. So it's like not that -- it's one of these huge problems hidden in plain sight, like not unlike -- like why are we carrying thumb drives around, like why am I writing myself e-mails and attaching files to them. These are like very basic user experience issues. And then the other part of it that I'm really excited about is, obviously, there's been this renaissance in machine learning, right? And we have -- and now what I'm really excited about from a technical perspective is like -- and what we're working on, it's like what would a self-organizing Dropbox look like, right? How do we unlock a lot of the value that is sort of stuck within these files? Because if you have a video file -- or until recently, if you had like an image with a dog and you search dog, it wouldn't turn anything up, right? And because of machine vision, we can see that. Same thing is true for video. If I have -- if I search for something someone said in that video, in most tools today, that won't turn up any results. And so there's a lot of advancements in machine vision and then also on the document side, natural language processing, which, frankly, have permeated a lot of our consumer experiences, right? If you think about it, like if I want to make a playlist for dinner in Spotify, maybe I have to start by manually rummaging around for the first few songs. But then the interface changes pretty quickly to like making recommendations. It's like, well, do you want this song or this song because these fit with these? And you're like, yes, no, yes, yes, no. But then the next round of recommendations is smarter and smarter because you're really training a model under the hood. But you can end up with a 50-song playlist in like a minute. Think about how much easier that is than like getting the materials together for a Board meeting, right? There's just no intelligence in that experience, right? And then there are -- these are like very elementary applications of machine learning. But with the large language models and things like that, there's a lot more innovation to be done. But just zooming out, how do we -- why do we live in a world where it's easier to search all of human knowledge with a Google search than my company's knowledge, right, or increasingly, my own stuff, right? That's insane. Yet Microsoft is not solving this. Google is not solving this. And then how would you solve that? Well, you need to build like a huge -- you have to like -- it helps if you like start with a hard drive that -- for hundreds of millions of people and to evolve that from just syncing files to organizing all your cloud content. But we see that as a huge fundamental opportunity that's been overlooked.

All right. Any other questions out there? All right...

And that's where a lot of our R&D spend is going, just to circle back on that.

Future-proofing the company is never a bad thing. We all like that. So when we think about maybe -- thinking about security now, right? Is built-in security something that is a near-term focus for you? And the reason I ask that is we see a lot of competitors that are putting a lot more muscle behind security and governance and compliance. Or is that not something that's as important for the customer base you're going after?

I don't think we have any customers -- all of our customers care deeply about security, right? And you need to be secure regardless of the macroeconomic environment. So in a world where -- I think it's an area we've put -- where we're putting more emphasis not just, one, because of customer demand and like request for these kinds of things. But then in an environment where customers are looking to consolidate or downscale their spend, things like that, the one -- for the most part, you still -- you [ have to have ] security, right? You still need to have your files safe. And then with our sweet spot of our customer, who is an SMB, plus or minus, like they don't have resources to deal with this new -- the new threat environment, right? So ransomware attacks, for example, have exploded. Like between 1/2 and 3/4 of victims of ransomware are SMBs. Half of SMBs have no security people or like capability whatsoever. So it's pretty helpful when you can have ransomware protection or you manage your passwords better or to -- or just better manage your shared -- so a lot of the fundamentals of security, like what the threat landscape has looked like, even for an SMB, it has evolved pretty dramatically since COVID. So we see that as a mission-critical need and a good place to invest and something that's resonated with customers.

Yes. Got it. On the last earnings call, you called out a little bit of weakness on individuals who are on the Plus SKU and particularly, you called out mobile. What are kind of some of the dynamics that you've seen? And I guess what steps are you taking to control that or minimize the amount of churn or weakness we see there?

Sure. I mean a lot of our -- so on balance, as I said, retention has improved across the board. So there's -- and we're not -- we'll never be done like improving the experience. I think there's still a lot of optimization on that front which will continue. But I think we are -- I mean, on the one hand, we've been -- I think we're pretty fortunate in that our business is stable and predictable and has been pretty resilient. So when you look at the Dropbox core business, it didn't really run up during COVID, but it wasn't like negatively impacted either. And so broadly, we expect that to continue to be the case, especially as we continue to double down on things like security and these needs that are not optional for our customers. But we're not immune to the -- like the Plus mobile thing, which is an example. Like yes, we're like monitoring all this stuff super carefully. I don't think we're going to sit here a year from now and be like, oh, yes, we had no impact from the downturn whatsoever. Certainly, we've been impacted by things like FX, which affect every company. But then we're monitoring all the different signals carefully for ways we might -- that we may be impacted going forward. And so we just want to be transparent about those things, and we'll keep everybody updated on what we see.

Yes. Got it. All right. In the last 2 minutes we have, I'm going to ask a pretty loaded question, which is we've talked about the evolution of Dropbox over the past 10 years. If we put on our hat towards the future and think about the next 10 years of Dropbox, right, you're talking about some of the near-term priorities and your investments, but what would Dropbox 10 years from now -- if we're sitting on this stage 10 years from now, what would that Dropbox look like in your mind?

Yes, I mean, I think it goes back to those customers saying, hey, I work out of Dropbox. Now on the one hand, I think that is true for a lot of our customers. But to the extent that Dropbox is just like a folder on your desktop, I wouldn't say like people are like working out of their Dropbox. But when you sort of zoom out, COVID kind of took us through a one-way door where we used to work -- for most knowledge workers, like they just used to work in an office and now for more and more, a huge chunk of the planet, now we work on the screens, right? And you think of the care that goes into designing physical environments and you look at your digital environment where you're working, once you end a Zoom call and you just look at the mayhem underneath, right, it's a very like cognitively polluted environment. What is the biggest expense of all the companies that you guys invest in or cover? It's people, right? And it's like, well, what are you buying? And it's people's like time, their -- just really like their brain power, right? And the whole premise of knowledge work is like you sit at a screen. You take a human, you sit at a screen and hope something good happens. And so it's a -- but like in a world -- and so you'd think like, oh, well, our digital environment must be like optimized for like -- to get every like -- to maximize miles per gallon of our cognitive brain power. Yet when you actually look at what's on the screen, it's just total mayhem, right? It's like if you were trying to design a more like distracting and interruptive and overwhelming environment, like what we have is pretty good, right? So I think when you put -- when you take those dynamics and combine it with like -- it's a big opportunity for like a much smarter -- or so basically, training up the silicon brain, we should be able to get to a world where like you open your laptop and only the important stuff shows up, right, where you are able to search in one -- with one search box, get what you need. You shouldn't have to have like an exact keyword match or things like that. Your environment should be organizing itself. So we really think about like, all right, well, if we were to build the most like cognitively optimized digital environment and really -- and I think there is an opportunity for Dropbox to put more of a dent in that problem. And we're starting with organizing your content, but we see a lot of opportunity in the longer run to organize your working life. And really hope people get like the help -- companies help individuals just like have a calmer, more focused experience and just be able to get a lot more -- and to reduce a lot of the friction that I think impedes a lot of collaboration and just degrades our experience of working.

Awesome. I think it's a great place to jump off. Drew, thanks so much for being here. Thank you, everyone.

Thank you.