Good afternoon, ladies and gentlemen. Thank you for joining Dropbox' Fourth Quarter 2022 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' website following this call. I will now turn it over to Karan Kapoor, head of Investor Relations for Dropbox. Mr. Kapoor, please go ahead.

Thank you. Good afternoon and welcome to Dropbox' Fourth Quarter 2022 Earnings Call. Before we get started, I'd like to remind you that our remarks today will include forward-looking statements such as our financial guidance and expectations, including our long-term objectives and forecast for our first quarter and fiscal year 2023 and our expectations regarding our revenue growth, profitability, operating margin and free cash flow as well as our expectations regarding our business, assets, products, strategies, technology, employees, users, demand and the macroeconomic environment. These statements are subject to risks and uncertainties that could cause actual results to differ materially. They are also based on assumptions as of today, and we undertake no obligation to update them as a result of new information or future events. Factors and risks that could cause our actual results to differ materially from these forward-looking statements are set forth in today's earnings release and in our quarterly report on Form 10-Q filed with the SEC. We'll also discuss non-GAAP financial measures, which are not prepared in accordance with generally accepted accounting principles. A reconciliation of GAAP and non-GAAP results is provided in our earnings release and on our 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, Karan, and good afternoon, everyone. Welcome to our Q4 2022 earnings call. Joining me today is Tim Regan, our Chief Financial Officer. And I'll start with a recap of 2022 and provide an overview of our strategy for 2023, then Tim will go over our financials for Q4 and fiscal year 2022, give guidance for Q1 and full year 2023 and provide an update on our long-term targets. So let's get started. While 2022 saw a more challenging macroeconomic backdrop, and we saw some elevated headwinds in Q4, of which Tim will discuss in more detail, I'm pleased with how our business performed for the year. We ended the year with over $2.5 billion in ARR. We once again increased profitability and free cash flow, and repurchased nearly $800 million of our stock. We also rolled out new plans for our Teams customers with expanded security and data protection capabilities, made progress improving revenue retention and closed acquisitions such as FormSwift and Boxcryptor, which I'll touch on shortly. Before we dive in, as you know, last month, we shared that Timothy Young is stepping down from his role as President. And I really appreciate everything that Tim has done for Dropbox over the past few years and wish him all the best. And I'd also enjoy digging in with our senior leaders to continue leveling up our execution and to pursue all the opportunities we have ahead of us. And over the last year, we've been focused on three strategic objectives to help us realize our long-term vision. Our first objective has been to evolve our core FSS product, driving retention gains and monetization efforts through better conversion of our free users and through pricing and packaging. Our second objective has been to expand workflows beyond core FSS around…

Thank you, Drew. Before turning to our quarterly results, I'd like to start with a reminder of our financial strategy. We are continuing to pursue sustained growth and profitability in a disciplined and thoughtful manner while remaining committed to our longer-term financial targets. We also remain focused on allocating capital to growth initiatives that we believe will drive future revenue, both organically and through acquisitions, while also returning a significant portion of our free cash flow to shareholders in the form of share repurchases. As Drew highlighted, we are seeing more signs of macro-related weakness impacting our business. And today, I'll walk through our guidance for 2023, which takes the current environment into consideration. I'll also provide an update on our financial targets for 2024. But first, let me discuss our fourth quarter and full year 2022 results. Total revenue for the fourth quarter increased 5.9% year-over-year to $599 million, beating our guidance range of $592 million to $595 million. Foreign exchange rates provide an approximate $19 million headwind to growth, in line with our previous guidance. On a constant currency basis, revenue grew 9.2% year-over-year. I'll note that our Q4 revenue was inclusive of a partial month of revenue from our acquisition of FormSwift, which we closed on December 15. Total ARR for the quarter grew 11.2% year-over-year for a total of $2.514 billion. On a constant currency basis, ARR grew by $83 million sequentially and 11.8% year-over-year. More than $50 million of this ARR was driven by the acquisition of FormSwift with an additional contribution from our pricing and packaging changes to our Team plans that we announced in June. As a reminder, we include the ARR related to acquired companies in our total ARR in the period of the acquisition. We exited the quarter with 17.77 million…

[Operator Instructions] Our first question comes from the line of Rishi Jaluria of RBC Capital Markets.

First, I want to maybe think about FormSwift. And what is the customer overlap within that customer base look like? So in other words, not only what is the cross-sell potential for you to sell FormSwift to the existing Dropbox customer base and integrate the asset, but maybe are there net new customers that you have the ability to sell Dropbox -- the core Dropbox into and expand your reach? And then I've got a quick follow-up.

Sure. So thanks for the question. And I'd say short answer is yes to all the above. I mean I think, first, a lot of overlap or complementary fit between FormSwift and Dropbox in terms of a similar target customer, similar self-serve go-to-market and addressing the content life cycle and then there's fit in the other direction. So every -- or often contracts that you send out for signature originate in the form of a template where if you think about getting an NDA done or some office lease or something, that might start with a Google search and you land on a site like FormSwift to find a template. So it's complementary in both directions. And FormSwift has its own audience of millions of visitors every year that are potential Dropbox customers. So we see a lot of synergies in all directions.

Wonderful. That's really helpful. And then, Tim, when you're talking about kind of the elevated churn that you've seen, maybe can you give us a little bit of color in terms of what you're seeing on the churn? Are these customers just going out of business or shutting down at the low end? Are they going to maybe larger platforms where they're consolidating their spend, be it with the Microsoft or Google? And maybe alongside that, what's happening on the consumer side of the business, which -- last, I think you disclosed about 20% of total paying customers?

Sure. So we did see our churn rate increase this past quarter largely due to the deterioration in the macro economy, and we continue to see churn from our Plus customers, particularly on mobile devices. And we also saw heightened price sensitivity amongst our Team customers where, in particular, we saw a greater degree of churn from customers subject to our Teams pricing and packaging changes than we saw in the third quarter. Now that all said, our overall churn rate is currently in the low teens, and that's an improvement from where it was just a couple of years ago. So improving retention continues to be a focus for us. And of course, our revenue guidance factors in all of these latest trends. And as far as what's happening on the consumer side of the business, I wouldn't say there's been any material deviation in those trends as far as the 80-20 split that you referred to.

Our next question comes from the line of Michael Funk of Bank of America.

So just a couple, if I could. So on the ARPU change, you mentioned a few different factors there, family for one, obviously. The change in pricing has also been a factor and then FormSwift. Can you deconstruct the change in ARPU for us based on those different factors?

Sure. So we ended Q4 with ARPU at $134.53, which was down about $0.25 year-over-year. So a few key factors there. So FX was a $4.20 headwind. And continuing headwinds from a mix shift to Family plan are also a factor there. Now this was offset by benefits from our Teams pricing initiative, which we launched in June. And then FormSwift represented a small headwind, roughly $0.25, because we recognize all of FormSwift users, but only a half a month of revenue. Now looking forward, we don't formally guide to ARPU. But again, there are some factors that will impact our trends next year. Again, the Teams pricing change, that will be a tailwind to ARPU. FormSwift, we expect FormSwift to be a tailwind to ARPU as well next year as its monthly plan is roughly $40 per seat. FX, we expect that to be a headwind, but that to moderate throughout 2023, assuming current leasehold. And then again, Family plan, as a reminder, that SKU is a headwind to ARPU as this plan includes six licenses for friends and family.

Got it. And then also on the call, you mentioned some incremental revenue headwinds baked into the '23 guidance. You gave us a few different things, churn and mobile user count, elevated churn relative to 3Q, what you're experiencing there. Can you just break this down for us as well -- you already talked about ARPU, but in terms of gross set expectations versus churn expectations that are part of the incremental headwind, are you also expecting to have fewer gross additions? Or is the majority of the change on the churn side?

Sure. I'll give you some context on our net new paying user additions. So again, we added 230,000 net new paying users in the fourth quarter, a majority of that did come from FormSwift. And then excluding FormSwift, the addition to paying users did fall below our expectations, as I touched on. Now there were a few factors to that. First was the churn of a large university, which did carry a low ARPU. This had an immaterial impact on ARR. And then second was the softness across our Plus and Teams plans as we continue to see increasing macro headwinds. Now as far as what we expect going forward from a net new paying user perspective, I would expect that our net new paying users going forward to be a bit lower than the run rate that it was in the first half of 2022. And while we don't firmly guide to net new paying users, just as we navigate the pricing and packaging changes in the current macro environment, I'd expect something in the neighborhood of roughly 100,000 net new paying users per quarter, with ARPU expansion being more pronounced next year.

Okay. That's really helpful in thinking about the piece parts of trying to model out the growth for the year. So 100,000 net new per quarter. And just one more quick one, if I could. Just on the impairment related to real estate, specifically San Francisco. Did you explore other options such as early exit from the lease, simply negotiating maybe a -- from a stronger position with the landlords? Or I'm assuming you probably explore all options here rather than simply taking that off of the expectation for subleasing.

Sure. We've been actively exploring all options here. We have actually executed a few subleases in years past in San Francisco. We were relatively quick to market with our subleasing plans, but the market has deteriorated with many companies reducing their real estate footprint. And there's certainly been an increase in supply of real estate for sublease, which has pushed out our anticipated time to lease. And so we originally anticipated we would sublease San Francisco in mid-2023. Now we expect we won't begin subleasing until mid-'25. We've also lowered the rates we expect to receive. So we've certainly been active, and we continue to be active in partnering with our landlord and in searching for subleases. But at this point in time, this is our revised assumption just given what we're facing at this moment.

Our next question comes from the line of Steve Enders of Citi.

I guess maybe just to start, I think would love to get a little bit more detail on how you're thinking about kind of future packaging and pricing levers to potentially pull and how you see FormSwift coming into the rest of the portfolio and how you're thinking about kind of future monetization and pricing with picking and buying suite there going forward?

Sure. Well, FormSwift is a good example. It's complementary to a lot of our other use cases, and we've been building towards supporting document workflows end-to-end throughout the whole life cycle. So for example, a contract that originates as a template. Now we can -- we have the top of the funnel covered. And then as you send out a draft for review or iteration, you might use DocSend and then send it out to signature and sign and then have the signed version archived on Dropbox. So we've been building towards this on our roadmap for a long time, and there's a lot of -- as far as pricing and packaging, as you'd imagine, building that more integrated experience, bundling these experiences together, having a broader portfolio of products, all these things contribute to monetization. And with them zooming out from document workflows, our philosophy in general has been to add more value to add new features to our core products. So last year examples include a lot of new security features. And then as we add beyond a sufficient threshold of value, increased prices. And so you saw us do this last year with our 20% price increase for Teams customers. So that philosophy will -- that will still hold. That said, as we're all monitoring the macro environment, every company is looking to -- looking at budgets and consolidating spend. You have to -- we have to be mindful of what customers are going through and what they want. And so price -- it might be less around just straight price increases and more around bundling or looking at our customer -- our share customers and talking to them about if they're using some separate eSignature tool to buy a bundle that includes Sign and FSS instead. So I'd say what customers are interested is shifting, and we have to be mindful of the balance of continuing to increase monetization and ARPU while also being -- monitoring churn and what our customers want.

Okay. Got you. That's helpful context. And I guess maybe for the outlook here, I guess, particularly as we think about the '24 outlook on free cash flow. Understand there's the $75 million headwind there. But I know you mentioned that there's some further levers that you could potentially pull. I guess how are you thinking about what the potential -- biggest areas are to potentially pull there? And how are you thinking about, I guess, the general kind of hiring environment and outlook as you think about trying to drive towards that free cash flow target?

Sure. So we continue to have multiple ways to achieve our target. We have several organic initiatives, including improving our file sync and share business, expanding our multiproduct capabilities and organizing cloud content that can drive revenue growth. We also have inorganic opportunities we can pursue, which can contribute. We're also actively looking at ways we can drive more efficiency in the business. And of course, it's possible that exogenous factors such as R&D capitalization and FX can turn in our favor. So while the path has certainly become more challenging, it's too early to make any changes to our long-term targets at this time. And then as related to hiring, we are aware that many other companies are facing hiring challenges and taking restructuring measures in the industry right now. We did see an elevated impact of the macro economy on our business in the fourth quarter. So we're not immune to those pressures. We're closely reviewing the efficiency of our spend to ensure that we are seeing a sufficient level of return. And we will remain thoughtful and disciplined in making appropriate decisions for the long-term health of our business.

Our next question comes from the line of Joey Marincek of JMP Securities.

Drew, you mentioned increasing competition in the eSignature market. So I'm curious, how do you think Sign stacks up relative to competition? And what assumptions are baked into the guide on overall demand for Sign in 2023?

Sure. So I mean I think in the competitive environment, we're seeing certainly lots of different activities where different products are adding eSignature or different new kind of pricing and packaging approaches from different folks. So in general, we see Sign as having a very complementary motion to Dropbox. So we're self-serve, somewhat more SMB focused. We think that segment is relatively less addressed than -- in the enterprise with higher-end customers. Certainly, one of our big advantages is our existing audience of tens of millions of Dropbox FSS subscribers. So we're doing a lot to better integrate Sign and DocSend and our products -- I'd add FormSwift to that list, attaching it to our base. And I'd say we're pretty early in terms of our pricing and packaging and bundling optimizations there. And then when you sort of zoom out from just the eSignature to just the whole end-to-end workflow, as I said, we have a lot of different parts that we're stitching together and I think that our ability to provide a seamless and integrated end-to-end experience starting from, again, that Google Search to find a template with FormSwift all the way down to signature and archival. We are -- that's an advantage being able to have all those pieces of the puzzle, whereas with a lot of the competing point solutions, you have to like log in, log out. There's a lot of friction that is in that overall experience. So as you can see, we've been building -- our big source of differentiation is building the end-to-end experience, and we're relatively early innings in terms of driving adoption among our base and beyond.

That's very helpful. And can you give us some more details around Timothy's departure? How are you thinking about replacing him? Do you feel like you have the bench already? Or would you potentially look outside the company? Any thoughts there would be helpful.

Sure. Yes. So just for color, Timothy -- or last month, we announced that Timothy was stepping down. He's still at the company. He'll be here through March, and he contributed a lot. So I really appreciate everything he's done for us. As far as the go-forward leadership structure, nothing like preannounced here. We'll keep everybody posted. But it's been great for me to get closer to our operating leaders given all the opportunities we have in front of us and to focus on continuing to improve our execution.

Our next question comes from the line of Brent Thill of Jefferies.

This is Luv Sodha on for Brent Thill. Maybe one for you, Drew. I guess as you view as the long-term growth potential of this business, how should we think of the long-term growth potential? And what are the main levers that you have to drive growth, both organically and inorganically?

Sure. So many growth levers, I mean, starting with just organic levers, so continuing to optimal core business, which is at scale. And optimization is there. There's still a lot of returns to those. Second, we've been building out our broader portfolio of growth stage businesses like Sign and DocSend. And we also have a pipeline of newer products like Capture and Replay and Backup. And then there's M&A we've done in the past around things like Command E and universal search. And then looking ahead, as I shared on the call and in previous calls, I'm really excited about the opportunity to move beyond files and organize all of our customers' cloud content because if you look over the last decade or so, a lot of workloads have shifted from files to cloud tools, but there's a missing organizational layer there, and there's a lot of customer pain points. Search is one that is kind of obvious. Like what used to be one search box and kind of the file in PC era is now dozens of search boxes in the cloud era. And we see Dropbox is very well positioned to help address customer pain points and acquisitions like Command E bringing in a company that was already working on some of these problems and investing more behind it has been a big initiative for us. So there's a lot on the organic front, and I think this is -- this will ultimately be a bigger market than FSS. I think everybody, they're -- no one is solving these challenges around organizing cloud content. There's a whole lot of room for improvement in that experience, and we're investing very heavily there. And it also dovetails with a lot of the recent advances in AI and machine learning. So we're very excited about the prospect of having a self-organizing Dropbox or to be able to bring natural language in the experience for search or workflow or other areas. And these are areas we've been investing for a long time, and we're doubling down here even further. So there's a lot on the organic front, and we're continuing -- also, there are a number of growth levers on the M&A front. And even just the last quarter, we were really happy with some of the acquisitions we made with FormSwift and Boxcryptor. And so we'll continue to be on the lookout there, too.

Got it. And a quick follow-up for Tim, if I may. Just, Tim, just wanted to dig deeper into the revenue guide for next year. Could you just walk through your assumptions? Are you think -- are you embedding a worsening macro? Or are you expecting macro -- just any color in terms of churn and -- both the macro environment. And then you mentioned R&D efficiency. How should we think of that as a lever, especially as you look at your medium-term margin outlook of 30% to 32%?

Sure. Good question, Luv. So we are baking in, I'd say, an appropriate level of conservatism given the evolving macro landscape. We have assumed that key trends such as the increased levels of price sensitivity that we saw in the fourth quarter will continue throughout 2023. And so we are factoring in the latest signals and not assuming a turnaround in the economy in our guidance for 2023. Now consistent with our historical approach, we do factor in growth initiatives when we have sufficient signal on their performance. And as we see additional data over the course of the year, we will revise our guidance as needed. And then as far as R&D efficiency as a lever, just given our medium-term margin guide of 22% -- or sorry, 30% to 32%, we certainly will be looking at our R&D efficiency and closely reviewing the output that we're getting relative to that investment, and we'll continue to manage this business with discipline as we make our decisions going forward.

Our last question comes from the line of Mark Murphy of JPMorgan.

This is [Puneet Kaur] on for Mark Murphy. First, I just wanted to ask if you could walk us through any changes that you're seeing in the competitive landscape for Dropbox. Given Dropbox' scale and reputation, curious if there's an opportunity to kind of gain share given some of the macro pressures may be weighing on smaller vendors with less runway.

Sure. I'd say our competitive dynamics have been pretty stable. And I think you can see this in a -- while there were macro headwinds in Q4, I think broadly retention has been pretty stable. Margins have been pretty stable and so on. We haven't seen major changes in the environment. I'd say the dynamics are maybe a little bit by business by business or Sign and DocSend have some different factors than the core business -- or when fundraising comes down, that affects DocSend disproportionately things like that. But I'd say overall, it's been pretty stable. And then as we look ahead, especially as you think about organizing all cloud content, especially as you think about things like AI and machine learning and having a new generation of smart tools and products, we feel we're well positioned given our scale and our brand around trust and privacy and our platform neutrality. And we've already been investing a lot in machine learning and AI for a long time. So compared to start-ups, a lot of our accumulated advantages leave us well positioned. So pretty stable, but we're obviously continuing to monitor the environment.

Great. That's very helpful. And then as a quick follow-up, I just wanted to ask around some of the changes and enhancements you've made with your document workflow-oriented products, are there any early indications on the attach rates or initial proof points for some of these specific features that you've added that seem to be resonating more deeply with customers?

I don't have any additional stats to share right now, but we have been making increased progress in cross-selling Sign and DocSend in to our base and things like the rebrand from HelloSign to Dropbox Sign have been helpful. And then we're -- we've made -- we continue to make progress in building tighter integration points between file sync and share, our core Dropbox product and the broader portfolio. So we see a lot more upside there, both in terms of better integration and then continued duration on pricing and packaging and bundling.

Thank you. This concludes today's conference call. Please disconnect your lines at this time, and have a wonderful day.