Good afternoon, ladies and gentlemen, and thank you for joining Dropbox's Second Quarter 2024 Earnings Conference Call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. [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 the call over to Peter Stabler. Please go ahead.

Thank you. Good afternoon, and welcome to Dropbox's second quarter 2024 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 third quarter and fiscal year 2024 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'll now turn the call over to Dropbox's Co-Founder and CEO, Drew Houston.

Thanks, Peter, and good afternoon, everyone. Welcome to our Q2 2024 earnings call. Joining me today is Tim Regan, our Chief Financial Officer. I'll first share our business and product highlights from the quarter, and then Tim will review our Q2 financial results and provide an updated outlook for the remainder of the year. I'll start with our business performance. Revenue for the quarter was slightly better than we anticipated with growth in self-serve individual plans offsetting continued challenges within our Teams business. Net new paying user growth improved quarter-over-quarter, but we expect some volatility to return in the second half of the year. Within our individual SKUs, we're encouraged for the performance of our essentials product, which posted strong growth in the quarter. Among our document workflow products, performance is largely as expected, as strong adoption of DocSend’s Advanced Data Room helped to offset expected seasonal pressure in our FormSwift business. While we continue our work to improve our core FSS performance and prepare for an expanded rollout of Dash, our AI-powered universal search product, we remain focused on driving shareholder returns through spending discipline and our commitment to returning the excess free cash flow to shareholders via our share purchase program. I'll now share some additional thoughts on our top priorities. As a reminder, this year in our core business, we're primarily focused on improving our Teams performance. In parallel, we continue our work to improve the features and functionality of Dash, our AI enabled universal search product. As we shared previously, the health of our Teams business is important, because our Teams plans feature higher net revenue retention rates, greater customer lifetime value, and more opportunities for license expansion and cross-selling of new products like Dash. As part of our investments here, in Q1, we made progress…

Thank you, Drew. I'll cover our financial highlights from Q2, provide guidance for Q3, and offer some updated thoughts on our full year 2024 outlook. Starting with our results for the second quarter. Total revenue for Q2 increased 1.9% year-over-year to $635 million, slightly ahead of the high end of our prior guidance range. As expected, foreign exchange rates had a minimal impact on revenue for the quarter, yielding a 1.8% year-over-year constant currency growth rate. Total ARR grew to a total of $2.573 billion, up 2.9% year-over-year. On a constant currency basis, growth was 2.2% year-over-year. We exited the quarter with 18.22 million paying users, adding approximately 63,000 net new paying users on a sequential basis. Average revenue per paying user was $139.93. Relative paying user strength across our self-serve individual plans was offset by continued challenges for a Teams product and expected seasonality and other pressures weighing on our FormSwift and Sign businesses. 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 purchasing tangibles, certain acquisition-related expenses, net loss on real estate assets, and workforce reduction expenses. Our non-GAAP net income also includes the income tax effect of the aforementioned adjustments. With that, let's continue with the second quarter P&L. Gross margin was 84.5% for the quarter. As mentioned previously, the primary driver of the year-over-year increase in gross margin was the increase in the useful life of our servers from four to five, effective January 1st of this year. This change resulted in approximately $9 million of benefit to gross profit in the second quarter. The impact of this change was weighted towards the first half of this year. For the full year, we expect…

Thank you. [Operator Instructions] One moment for our first question that comes from the line of Brent Thill with Jefferies. Please proceed.

Hi, Drew. Hi, Tim. Thank you again for taking my questions. This is Luv Sodha on for Brent Thill. Maybe the first one for you Drew. As we look at a bunch of the horizontal applications, there's been a big investor debate around seat-based pricing versus volume-based pricing in the age of AI. As you look at Dash, could you just share your thoughts on the monetization plans there? And how do you think you're injecting more volume-based pricing to make up for any seat-based degradation that you might see?

Sure. Thanks for the question. I mean, so to be clear, Dash is pre-revenue. It's in beta right now. But the way we're thinking about it is, or the way we're thinking about pricing and packaging, in a lot of ways, will be heavily informed by what's worked with Dropbox 1.0. And a lot of the playbook that we had around freemium and self-serve and sharing driven virality and then bridging to self-serve team accounts and moving up market into manage accounts, we envision taking advantage of a lot of the same levers with Dash. And we expect that the pricing model should be pretty straightforward. I mean, obviously, if there's -- if we need somewhat -- if there are different knobs and dials in terms of like AI usage or volume based pricing, but we're not dogmatic about any one model, but our preference is to keep things simple for our customers. And so far, we haven't -- when talking of prospects, we haven't seen a lot of pushback or concerns on a pretty straightforward subscription model.

Got it. And then just a quick follow-up on the Teams, the challenges that you're seeing on the Teams side. I guess, is there a way to dig deeper and parse out like how much of this is macro versus the pricing reaction? And is there an element of competitive share losses on that side? Just additional thoughts there would be appreciated. Thank you.

Yep. So I'd say it's largely what we saw last quarter is a continuation of prior trends. We saw that some of the price increases we've made over the last few years ended up pulling -- on balance they were beneficial, but they pulled forward. They represented something of a pull forward. And then for new customers, higher prices and plus more price sensitivity generally has led to a weakening top of funnel which we've been addressing in a number of ways. I mean, one by reverting some of the pricing changes we made last October when we introduced some of the bundles. And then second is just the nuts and bolts, just the fundamentals of removing friction from the onboarding experience. And we found that when we look at -- when we just watch -- when we sit down as a customer, watch a customer walk through the onboarding experience, there's still a lot of steps that we could simplify. And so, we've seen a lot of good early returns and green shoots around, okay, as we simplify the team onboarding experience, as we make it easier to invite other folks to your team and get set up as we rationalize some of the sharing features. Some of the stuff that I talked about in my earlier remarks, but just really tuning those basic user and viral loops that there's still a lot of headroom there. And when we look at different funnel metrics on the Teams business and compare them to other SaaS products with similar characteristics, we still see some headroom there. But that said, we're not out of the woods. I would say these improvements haven't yet offset some of the bigger picture, just like macro pressure or other factors, but it's headed in the right direction.

Got it. And none of it is competitive, right?

Well, I'm sure some of it's competitive, although I wouldn't say there's like a different -- I mean, we've had kind of -- we've competed against the Microsoft and Google's of the world since the company was founded. So, I wouldn't say there's any new competitive dynamics, but for sure the platform companies or the product that's bundled in the office suite is going to be our primary competitor in most cases. So that's definitely a factor, but that's kind of been a -- that would have also been a factor 10 years ago.

Got it. Thank you so much.

Thank you. Our next question comes from the line of Steven Enders with Citi. Please go ahead.

Okay, great. Thanks for taking the questions here. I guess maybe just to start just on Dash on the AI product set. I guess what's kind of been the feedback you've gotten so far for how customers might be thinking about adopting that and utilizing it. And I guess, secondarily, how are you thinking about the monetization for that at this point in trying to drive share of wallet within customers?

Yep. So, early feedback has been good. I mean, I think the first thing we look for is that, the value prop clearly resonates, right? And it's hard to find someone that doesn't have these issues of having 100 tabs open and 10 different search boxes and kind of the mayhem of the new world of distributed work. So -- and then once you show customers that this is actually a solvable, addressable problem, they're pleasantly surprised. So I think the value prop resonates and then Dash specifically, we've made a lot of progress in getting the product to where we want it to be from a quality standpoint. So, for example, in Q2, we made big advances in continuing to make double-digit percentage point improvements in search success rates, search ranking quality, things like that, which is important because the first thing we do is get the product experience right. Then we look at engagement and retention, and then once those are in good shape, then we turn on distribution and monetization. So I'm really happy with the progress we're making on the product quality side, and it's great to see the early product resonate with customers who are kind of using it for their -- like, search box for their private information and people understand that. Oh yeah, there's a bunch -- ChatGPT is great, but there's a lot of questions that ChatGPT can't answer. If you ask like when does my lease expire or where's that slide from last year's product deck or product launch, existing tools can't really solve that, but Dash can. And then I'd say there's also -- in another area that's something that's been interesting is that, the IT admins have a lot of unmet needs around keeping track of what everybody's sharing across multiple platforms. And so, we see a lot of opportunity to solve some new, or to address some new unmet needs on the security side. So we're very excited about the roadmap for Dash, and we'll have a lot more to share on the specifics of both the product functionality and some of the -- and things like pricing and packaging in the coming months this year.

Okay. That's helpful context. And I guess we’ll look forward to what those look like. I guess on some of the document workflow products, it sounds like -- seeing a bit of an impact with Sign and FormSwift is well off for tax season, but can you give a little more clarity on what happened or what the customer activity was post security challenges with Sign and the impact that that's kind of having on the outlook here?

So pretty contained. I mean, to begin with, the Sign business is a low single digit percentage of our overall revenue. And then it was -- we've seen a pretty minimal impact on the business or on the Sign business overall. And then importantly, it just affected all -- everything we know indicates that the incident was isolated to the Dropbox Sign infrastructure, meaning, it didn't impact the other Dropbox products. So, overall, the incident hasn't had a material impact on our overall revenue or operations, and we don't believe it's likely to.

Okay. I appreciate the commentary there and thanks for taking the question.

Thank you. Our next question comes from the line of Kash Rangan with Goldman Sachs. Please proceed.

Hi, thank you very much. Good to talk to you, Drew and team. Drew, I was curious to get your thoughts on a couple of things. So, the right to win for Dropbox with Dash, I know, it's not out yet. But what gives Dropbox the right to win in this space? And do you think this new subcategory you're trying to honor by actually bringing a new category of users that may not be initially spurred by document sharing and the things that Dropbox has been always good with, Ultimately, do you think there is maybe an unmet need in the market for perhaps Dropbox, right? Not that you would not have considered. I'm sure you've popped through all this stuff where you have a lower price point, fraction of the functionality, but then these folks get used to the system, you maybe throw in AI for free, and then you upsell them to the premier versions of Dropbox. I'm just wondering how you're thinking about potential decision paths down the line. Thank you so much, once again.

Sure, sure, yes. Thanks, Kash. So first on Dash, I mean, the origin of Dash was really kind of solving the kind of modern equivalent of or today's equivalent of the problem I started with when I founded the company, which is really in the beginning, I felt like my stuff was everywhere, I couldn't find it. Back then, it looked like my files were on these different devices and operating systems. And the solution was like, let's sync everything to the cloud. But today, kind of back to that familiar problem, like my stuff is everywhere, can't find it. But in addition to files, obviously we do a lot of work in our browsers now. And so what used to be 100 files on my desktop is now also 100 tabs in my browser. And it's really that kind of first principles. And it's like frustration as an end user personally, where I'm like, it is so hard to find just the basic information I need at work. And this is a problem that's getting worse not better as sort of one of the unintended consequences of this -- of the proliferation of all the different tools within platforms that we're using and a recognition that no one's solving this problem at scale, like Microsoft hasn't solved this problem, Google hasn't, no one has. And it didn't seem like there was anyone really putting the necessary firepower on solving this problem. And this was also before generative AI really took off. But I'd summarize by saying this is a universal knowledge worker need. I mean, when we talk to our customers, it's like hard to -- again, hard to find someone who like doesn't have this problem. Our right to win is it's a natural evolution for our customers.…

Thanks so much for the detailed compliments. Thank you so much.

Thanks, Kash.

Thank you. Our next question comes from the line of Patrick Walravens with Citizens JMP. Please go ahead.

Great. Thanks for taking my question. This is [Austin Colon] (ph) for Pat. So, Drew, when you think about some of the things you guys have been working through, whether it's the go-to market for the individual plans or the pricing on bundles. I mean, what inning do you feel like you're in on plugging some of these holes and getting to a place where you really have the right fit across these plans? Thank you.

Yep. I don't know if I have like a specific inning number for you. I think there's still -- and we're showing -- I think this year is like our first concerted effort in some of these parts of the funnel and we're seeing some of those efforts bear fruit and I think there's still a lot of headroom there but it's hard to speculate beyond what we've kind of already reflected in our guidance. But we certainly see lots of opportunities to continue reducing friction in the onboarding experience, the team expansion experience, and sharing. We've had some good milestones that we hit last quarter. So as I said earlier, sharing is up year-on-year, which is reversing what was kind of stable or slightly declining. So that's the kind of thing I like to see. And then also, we're gearing -- I think one of the best things we can do to grow the business is really get our -- a lot of these platform improvements are really important. So some of the things around our billing engine, having more flexibility in subscriptions, and continuing to tune up our technical infrastructure to be able to support cloud content and go beyond just files. These are long-term investments that are going to bear fruit, are going to be really valuable as we start to scale up Dash. So I think there's a lot of different, or I'm excited about the portfolio of investments we have and some of them are kind of incremental optimizations and some of the funnel things I mentioned and some we believe are really big new growth levers like Dash.

Great. Thank you.

Thank you. [Operator Instructions] Our next question is from Mark Murphy with JPMorgan.

Thank you very much. Tim, you had mentioned that hiring was slower than anticipated. And I think you said due to recognizing additional efficiencies. I'm wondering if you can elaborate on the nature of the efficiencies. For instance, are you using some lower cost regions? Are you seeing some productivity gain from internal use of GenAI, maybe from GitHub Copilot or something along those lines? Is there something different that you're enabling?

Sure. Good question, Mark. I think it's a little bit of all of those things. So our barge in outperformance was largely driven by lower headcount related costs as we have identified efficiencies across our operations that does include slowing the pace of hiring in some areas, as well as prioritizing hiring in lower-cost locations, exactly to your point. And maybe lastly, I'll note that we're managing our vendor and software spend closely. So those are some of the efficiencies we're driving and we'll continue to look for additional opportunities.

Okay, understood. And then, Drew, I appreciated all the insights you provided while you were answering Kash's question. Can you remind us if there is any update of when you think Dash is going to reach GA and where your thoughts are on the pricing strategy for Dash so that we might be able to kind of run that through our models and start to think about a potential contribution ramp?

Yep. So, we'll have a lot more to share after our launches later this year. But I think in principle, we'll be drawing heavily from the playbook, over the things that have worked with pricing and packaging with Dropbox. So we'll certainly make Dash available standalone and as a standalone subscription there will obviously be -- we'll be introducing it to our file sync and share customers in different ways. But it's a little early to give you specific numbers or to plug the cells into the spreadsheet.

Thank you.

Thank you. And it appears that there's no further questions in queue, I will turn the call back to Peter Stabler for closing remarks.

Thanks, everyone, for joining us today. We look forward to speaking with you next quarter. Hope you all have a great afternoon.

And thank you all for participating in today's conference. You may now disconnect.