Good afternoon, ladies and gentlemen. Thank you for joining Dropbox's Fourth Quarter 2021 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded and will be available for replay from the Investor Relations section of Dropbox's website following this call. I will now turn it over to Kern Kapoor, Head of Investor Relations for Dropbox. Mr. Kapoor. Please go ahead.

Thank you. Good afternoon, and welcome to Dropbox's Fourth Quarter 2021 Earnings Call. Today, Dropbox will discuss the quarterly financial results that were distributed earlier. Statements on this call include forward-looking statements, including future financial results, including our goals and expectations regarding future revenue growth, profitability and our ability to generate and sustain positive free cash flow; our expectations regarding anticipated benefits to our business and the impact to our financial results, including estimated impairment charges as a result of our shift to a Virtual First work model; our expectations regarding the future performance of our business; operational efficiencies we may achieve as a result of changes to our organizational structure; our expectations regarding remote work trends, related market opportunities and our ability to capitalize on those opportunities; our capital allocation plans, including expected timing and volume of share repurchases, future M&A opportunities and other investments; our ability to drive user growth and retention by enhancing our products, developing and offering new products or features and through strategic partnerships; our strategy as well as the ability of our key employees to execute our strategy and our overall future prospects and ability to generate shareholder value. These statements are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those projected or implied during this call, in particular, those described in the risk factors included in our Form 10-Q for the quarter ended September 30, 2021, and the risk factors that will be included in our Form 10-K for the year ended December 31, 2021. You should not rely on our forward-looking statements as predictions of future events. All forward-looking statements that we make on this call are based on assumptions and beliefs as of today, and we undertake no obligation to update them, except as required by law. Our discussion today will include non-GAAP financial measures. These non-GAAP measures should be considered in addition to and not as a substitute for or in isolation from our GAAP results. A reconciliation of GAAP to non-GAAP results may be found in our earnings release, which was furnished with our Form 8-K filed today with the SEC and may also be found in the supplemental investor materials posted on our Investor Relations website at investors.dropbox.com. I would now like to turn the call over to Dropbox' Co-Founder and Chief Executive Officer, Drew Houston. Drew?

Thanks, Kern, and good afternoon, everyone. Welcome to our Q4 2021 earnings call. Joining me today is Tim Regan, our Chief Financial Officer. I'll start with a recap of 2021 and provide an overview of our strategy for 2022. Then Tim will go over for our results for Q4 and fiscal year 2021, give guidance for Q1 and full year 2022 and provide an update on our long-term financial targets. So let's get started. To recap, 2021 was a strong year for Dropbox. We ended with over $2.2 billion in ARR, significantly increased our profitability, grew free cash flow by over 40% and reached approximately 600,000 paid teams. And throughout the year, we've stayed focused on our three strategic objectives and delivered even more value to our customers as we work towards our long-term vision to organize all your cloud content and the workflows around it. Our first objective for 2021 was to evolve the Dropbox core offering. We made investments to simplify and remove friction from the experience to drive customer satisfaction and gains in long-term retention while also improving high-value actions like sharing content and previews and mobile and team onboarding flows. I'm pleased to see these investments pay-off. We've seen retention improve with churn coming down each quarter in 2021. And our rebuild of the mobile experience, which we began in 2020 and continued in 2021 was one of the biggest drivers of churn improvements. Last year, we also made improvements to quality, performance and sharing to drive mobile user acquisition and retention at the basic level. And these are crucial investments because nearly half of our basic sign-ups come from mobile and over 40% of mobile sign-ups come from users receiving shared content. We also reduced the friction in the onboarding experience for mobile and self-serve…

Thank you, Drew. On today's call, I'll walk through our fourth quarter and full year 2021 results, our 2022 guidance along with some context underlying this guidance, and then I will close with an update on our long-term targets. Starting with our fourth quarter and full year 2021 results, total revenue for the fourth quarter increased 12.2% year-over-year to $565 million, beating our guidance range of $556 million to $559 million. Our revenue outperformance was driven by strength in our higher ASP offerings, such as our professional SKU, our teams’ plans and DocSend. Foreign exchange rates provided approximately a 150 basis point tailwind to growth. Total ARR for the quarter grew 11.8% year-over-year for a total of $2.261 billion. On a constant currency basis, ARR grew by $43 million sequentially and 10.2% year-over-year. As Drew highlighted, our continued growth in ARR reflects our efforts to attract new users to our premium SKUs and to drive better retention by improving the user experience with a specific emphasis on mobile, work and teams users. We exited the quarter with 16.79 million paying users and added approximately 300,000 net new paying users in the fourth quarter driven by strength in our teams plans and the continued adoption of our family plan. Average revenue per paying user was $134.78 in Q4. Before we continue with further discussion of our P&L, I would like to note that unless otherwise indicated, all income statement figures mentioned are non-GAAP and exclude stock-based compensation, amortization of purchased intangibles, certain acquisition-related expenses, impairments of our real estate assets, expenses related to our reduction in force and net gains on our lease termination. Our non-GAAP net income also excludes net gains and losses on equity investments, the income tax benefit from the release of a valuation allowance on deferred tax…

Thank you. [Operator Instructions] Our first question comes from Mark Murphy with JPMorgan. You may proceed with your question.

Yes, thank you very much and congrats on all the progress that you're making. Drew, I had a question regarding Dropbox capture and Replay products. What is it that's underpinning this move that you seem to have into video creation and targeting creatives. Just wondering if there's more to come on this video road map. And as well, can you just touch on the margin profile for maybe storing some of those larger video-type files?

Sure. I can start. So we're following customer demand, and we've been seeing an explosion in engagement with video on the platform over the last couple of years. And this is – this dovetails with the rise of the creator economy, both with having more creative professionals on Dropbox and then a broader audience of more kind of casual creatives or creators. And Dropbox resonates with these audiences because their workflows revolve around large files, rich media, and so we've gotten a lot of demand from these customers to better support video and their new workflows. So Capture and Replay are an example of that is where you can communicate over video and help produce video in a distributed way. Dropbox Shop is another one where you – where we're helping our customers monetize their digital content. So we see that these customers are – that Dropbox really resonates with these customers. They need more than what they get with the bundled solutions in their office suites. So we think it's going to be an exciting expansion opportunity for us.

And then, Mark, this is Tim. Maybe I'll just add to that. As far as Capture, Replay and Shop, these are lean internal teams where these were not material contributors to our results in 2021 and not expected to materially contribute in the near term. These are certainly longer-term bets where we will be monitoring adoption and adjusting our resourcing accordingly. And as related to margins, you can see they're not having a material impact on our margins as indicated by the raise in our long-term targets to 80% to 82% for gross margins.

Yes. And so Tim, thank you for clarifying that. It kind of bridges right into my other question, which is on the increase in the long-term margin framework. Obviously, it's nice to see. I think I'm just wondering what is the delta that's creating the uplift there? For instance, maybe it's the real estate footprint coming down or maybe it's storage costs, maybe it's user acquisition costs or something else. Can you just help us bridge to that increase there?

Sure. So as you know, we are raising our long-term operating margin target to 30% to 32%, up from 28% to 30%. We do have some headwinds this year such as FX and post-pandemic costs such as additional T&E and other costs. But despite this, we do see the opportunity to drive leverage within the business, really starting with our infrastructure team as they continue to find ways to be more efficient with our storage costs. Then additionally, we see other ways to drive efficiencies such as the shift to lower-cost locations. And as a result, we do see the opportunity to raise these longer-term targets. But that said, we still have room to invest in growth opportunities, and we remain focused on driving sustainable top line growth.

Excellent. Thank you very much.

Thank you. Our next question comes from Brent Thill with Jefferies. You may proceed with your question.

Drew, there's been a lot of talk about the great pull forward during the pandemic. And I'm curious your thoughts about – is there a digestion phase on the way? Or do you feel from what you're seeing in the signals that your clients are continuing to move forward at the same pace you saw over the last couple of years. Curious just to get your thoughts on the overall shape of demand and what you're seeing?

Sure. I think, I mean, maybe different shapes across the different businesses. I mean I'd say on the core business, it's been pretty stable. I mean we found a lot of our customers needed Dropbox before the pandemic, needed during the pandemic, needed after the pandemic. And then you have our businesses like HelloSign and DocSend where there were – as these are like new habits like shifting from pen and paper-based workflows to adopting e-signature, for example. So there's a surge in demand during the pandemic, but that's moderated somewhat. And then another thing that we see is that as people are working out of screens more than offices going forward. There's a lot of room for improvement in that experience. And we find when we talk to customers that their content is all over the place. It's scattered in a lot of different places. They're using tons of different apps, 100 tabs open in their browser. And so we see a big opportunity for Dropbox to help organize your cloud content the same way that we help you organize your files. So there's an expansion opportunity where this is more acute for this challenge of fragmentation and my content being scattered and using all these different tools being more acute after the pandemic. So there's certainly a pull forward in terms of that complexity and this fragmentation becoming a bigger problem. So those are some of the dynamics that we see. And overall, we think the shift to distributed work will only create more demand for our tools.

And just on the capital allocation, great to see the buyback, but some will ask why not plow that into more innovation and M&A? What's driving conviction to keep driving that? Are you leaving enough room for M&A going forward? Can you just walk through that decision?

Sure. I can start. Tim, feel free to add on. I mean, our business is really efficient. We're able to invest in a lot of growth areas, and we're always thinking about having a balance of growth and profitability. Unfortunately, we can afford to both fully fund our core business and some of the transformation we're working on there. We have our growth stage businesses with HelloSign and DocSend that are fully funded, and then we have a longer tail of newer products that we think are big long-term opportunities. So we feel good about our ability to invest organically while also continuing to expand margins, and we're pretty unconstrained in terms of capital. I'm also excited to the extent the market corrects that M&A can become more efficient. And so we're on the lookout for those kinds of opportunities opening up more, but at the same time, we'll still be disciplined. So over the last few years, we've really gotten a lot more disciplined and intentional about our capital allocation.

And maybe just to quickly add to that. We do, as Drew alluded to, have a very strong balance sheet and an efficient business model that does generate a lot of cash. And that gives us great flexibility to pursue share repurchases, M&A and organic investments. And as related to share repurchases, we do intend to allocate a significant portion of our annual free cash flow to share repurchases on an ongoing basis with the intention of reducing our share count. To Drew's point, as related to M&A, certainly, we'll look for businesses that complement our vision and product road map similar to HelloSign and DocSend. And as related to organic investments, we'll continue to invest in R&D to cultivate a diverse product portfolio and to drive revenue growth. And ultimately, Drew, Timothy and I will continue to assess the best use of our capital according to where we believe we can generate the best returns.

Thank you.

Thank you. Our next question comes from Steve Enders with KeyBanc. You may proceed with your question.

Okay. Great. Thanks for taking the question. I appreciate all the extra context on the guide. I guess I want to get a little better sense for how you're thinking about kind of the levers that you could potentially pull as you think about the revenue opportunity for the year. It seems like there's some things coming both on the pricing and packaging side, but what are – are there other income areas we either invest or optimize some of the experiences to drive better conversion rates?

Yes, I can start. So the growth – there's a lot of growth levers. I mean, the ones we're focused on include continued optimizations to our core FSS business. So we see lot of opportunities to continue the deposit momentum we've had on reducing churn, just improving engagement and simplifying the experience, improving top of funnel. And then we have our growth stage businesses with HelloSign and DocSend, which are still some of our fastest-growing businesses and a lot of headroom there, still pretty early innings for them. There's an opportunity for a broader transformation in our core business, so evolving beyond, syncing files to organizing all your cloud content, which I talked about a little bit earlier and then the longer tail of the earlier stage products like Capture and Replay and future M&A. So these are all levers were investing into different degrees, and we feel good about where the portfolio is right now.

I mean it sounds like the – some of the new pricing and packaging is coming later this year, but I guess, is there kind of a – I guess what are kind of the areas that you're looking to kind of augment if there's kind of any early preview for at least how you're thinking about what some of the changes would be there.

Sure. This is Tim. I'll take that one. We're always thoughtful about our pricing and packaging approach to ensure it best reflects the value that we're delivering for our customers. And as we improve our products, provide new capabilities and deliver even more value for our customers later this year, we'll iterate on the right pricing and packaging approach. And we're also building out new capabilities such as security and automation features to address customer demand in an increasingly complex environment. And our 2022 guidance is inclusive of updates to our pricing and packaging approach. We'll have more detail to share in future quarters.

Okay, great. Thanks for taking the questions.

Thank you. Our next question comes from Kash Rangan with Goldman Sachs. You may proceed with your question.

Hi, thank you very much. Drew, I wanted to get your thoughts on the value proposition in the product and technology is almost very different and more enhanced certainly from the days of the IPO. How is the marketing and go-to-market changing as a result to accommodate the new workflows that you're building into the product? And also what does this mean for the pricing power of the company and what we all know to be a very inflationary environment? Thank you so much.

Sure. Hey Kash. Well, I'd say we're – some of the changes since the IPO that you've alluded to, we've just had a lot of strength among creators, whether that's creative professionals or solopreneurs, SMBs, freelancers, gig economy. These are segments where we've had strength and where there's a lot of natural adjacencies. So as creators work on content, they need to do a variety of different things with it, whether that's on more on the video side and things like video production or monetizing digital content or on the document side, having richer sharing capabilities or e-signature. So we've certainly seen new kinds of demand or elevated demand on those fronts. As far as our marketing go-to-market, I think, at a high level, our philosophy is pretty similar where we focus on building a great end user experience. We focus on customers where they self-serve and organically adopt new tools. And these viral motions we're sharing, if I share – if I use HelloSign or Dropbox and I share with you or send something to you for signature, in many cases, you become a new user or you certainly become exposed to our products. So it's an incredibly efficient motion, as you can see from just the fundamentals. And so the self-survival motion is really efficient. We've embraced that. I'd say one thing that is changing is as we become a truly multi-product multi-business company that we're investing a lot in helping make sure that when we buy a HelloSign or DocSend, we can quickly drive adoption through our existing base. And that's a huge source – or our customer base is a huge source of option value and potential customers for all of our products. So we're investing a lot in our multiproduct foundation having more consistent branding, exposing our customers thoughtfully to all the different products. And then on the pricing packaging front, we've had some early success with bundling and having new SKUs. So for example, we have our professional e-signature bundle with HelloSign. We have a similar thing with DocSend, and we're always tuning pricing and packaging. And then the last, I think, as we've touched on, obviously, we're monitoring inflation. And as – and we always try to create a virtuous cycle of adding significant new value to our products and then iterating on our pricing or leveraging pricing as we feel like we've added enough value to justify it. So we expect that cycle will continue this year.

Wonderful. Thank you so much.

Thank you. Our next question comes from Rishi Jaluria with RBC. You may proceed with your question.

Wonderful. Thanks so much for taking my question guys. Two here. First, I wanted to go back to the long-term operating model. Look, I appreciate you're raising the margin target. I guess I want to push back a little bit on your R&D target, right? You're talking about still spending 23% to 25% of revenue, which great that you're a product-led growth company and self-service. But I have to wonder, is that the right level when you're talking about 7.5% growth around there for 2022? You're talking about negative sequential growth for Q1. Maybe just remind us how you're thinking about your R&D expense in the context of your growth and where all that spending is going at this point, just given that that's a very high level for a software company at your growth rates? And then I've got a follow-up.

Sure. So we are investing for growth. And lately, we've been adding R&D head count where it does take some time for these investments to translate to net new ARR and to flow through to revenue. And we've been investing in what we see is our highest return initiatives where I would broadly break them into a few high-level buckets. And first, retention, where particularly as related to our mobile and teams customers, we continue to see room for improvement, security and automation features, we're keeping content safe and easily accessible are key challenges that our customers are facing, enabling our multiproduct strategy as far as introducing our customers to our products, SKUs and add-ons in a seamless, intuitive way, investing in workflows, for example, adjacencies such as HelloSign and DocSend. And finally, ensuring a seamless experience for our customers as we adapt our desktop client to operating system updates and changes as regionally related to new versions of Mac OS, where these are all foundational investments that can have a long-term impact, and we see these contributing to our longer-term revenue growth rates.

Got it. That's helpful. And then one figure, in terms of – like on maybe take a high-level view, you were probably one of the first companies out there during the pandemic to go down this Virtual First strategy, and we're seeing more and more companies adopt that, which is great to see. From your experience, would love to hear, how are you thinking about the potential impact of that on employee retention, especially as we start to hear some really big tech companies talk about return to office as soon as the end of this month and definitely beyond that? How do you see that shaking out? And how you plan to drive employee retention and maybe alongside that, preserve Dropbox culture, while at the same time, keeping to this Virtual First approach? Thanks.

Sure. Well, on balance, Virtual First has been really positive for us. I mean, last year, we saw a 126% increase in offer accepts that's nearly double the number – and then also nearly double the number of candidates for op enroll and even an uptick in what we call Boomerang candidates like folks that might leave the company and then come back within a year. So we're finding that from a hiring perspective, it's really resonating and unlocking new pools of talent. And I think more broadly, what you're seeing is that employees once they have the flexibility or when companies like ours offer this flexibility, they then – employees demand it. So we think it positions us really well, and we think I'm really happy with the decisions that we started making back in, I think, October 2020 when we first rolled this out publicly. That said, I mean, I think every company is still figuring out how do you maintain culture in a distributed environment. We are trying to get – importantly, we're not remote only. We're Virtual First, meaning that the in-person experience is really critical. That's always been true, and we don't see a substitute for that. So we're also excited to – hopefully, there – we're able to return to office as it looks like we'll be able to do in the next few months after some false starts in the last several months. But we're really excited about being able to reintroduce the in-person experience. And our team has done a great job of thinking through how do we get the best of both of those worlds, get the best of the in-person experience, have really great retreats or just convening opportunities, but then give people flexibility to work from home day to day.

All right. Got it. Awesome. Thank you so much.

Thank you. [Operator Instructions] Our next question comes from Pat Walravens with JMP Securities. You may proceed with your question.

Great. Thank you so much. It's Joey Marincek on for Pat. Just one from our end. On HelloSign, can you give us an update on the competitive set there? How often are you going head-to-head? And then how penetrated do you think that market opportunity is? Thank you so much.

Sure. I can start. I mean things are going well with HelloSign, continues to be one of our fastest-growing businesses. And we've seen increasing adoption of our pro – our professional and e-signature bundle, which allows customers to buy both Dropbox and HelloSign at a slight discount. And we're investing heavily here. So there's – our customers have – appreciate how we added SharePoint support, so you can send and sign documents natively within SharePoint. We launched a new mobile app last quarter. So we're always improving the experience. And more broadly, we see a pretty stable competitive environment. I mean I think our advantage is that HelloSign is focused on the same kind of product-led growth motion that Dropbox has been. I think there are similar dynamics where we're less reliance on – or it's just a really efficient and scalable model. So it continues to be a big opportunity. I mean it's moderated somewhat after the big surge in the pandemic, but still we think it's early innings.

Thank you so much.

Thank you. And I'm not showing any further questions at this time. I would now like to turn the call back over to Drew Houston for any further remarks.

All right, everyone. Well, thanks again for joining us today. We appreciate your continued support and look forward to speaking with you again next quarter.

Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.