Dropbox, Inc. (DBX) Q4 2020 Earnings Report, Transcript and Summary

Good afternoon, ladies and gentlemen. Thank you for joining Dropbox’s Fourth Quarter 2020 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. 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 Mr. Rob Bradley, Head of Investor Relations for Dropbox. Mr. Bradley, please go ahead.

Thank you and good afternoon and welcome to Dropbox’s fourth quarter 2020 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; expected 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 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 our risk factors included in our Form 10-Q for the quarter ended September 30, 2020 and the risk factors that will be included in our Form 10-K for the year ended December 31, 2020. 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’s Co-Founder and Chief Executive Officer, Drew Houston. Drew?

Thanks, Rob. Good afternoon everyone and welcome to our Q4 2020 earnings call. I am here with Tim Regan, our Chief Financial Officer. I’ll start our call today by recapping our accomplishments from 2020 and providing an overview of our priorities for 2021. Then I’ll hand the call over to Tim, who will review financial results for the fourth quarter and full year, give guidance for Q1 and fiscal year 2021 and share some thoughts on our long-term model. 2020 was a transformational year for Dropbox as the world abruptly shifted to working from home due to the pandemic. We helped many of our customers through this transition. We adapted quickly to the new environment ourselves and we reoriented our product roadmap to address many of the new challenges and opportunities that distributed work presents. Even with the changing landscape, our business performed well. For the full year, we delivered more than $1.9 billion in revenue, we crossed $2 billion in ARR and we meaningfully increased our profitability. We ended 2020 with more than 15 million paying users and 525,000 business teams. And throughout the course of the year, we remain focused on launching new features and products to help people organize their lives, both at home and at work. To start, we introduced several features in the first half of 2020 to help our customers protect and secure their most important content. The first feature to highlight is Dropbox Passwords. With Passwords our users can store passwords in one secure place, sync across devices and access passwords from anywhere with zero-knowledge encryption. We also introduced Vault, an additional layer of security for our customers’ most valuable content where that content is accessible with a unique PIN code. The users can also grant emergency access to their Vault to trusted friends or family, so they can access the protected content when needed. And finally, we introduced computer backup, which automatically backs up users’ local desktop, documents and downloads folders to Dropbox for secure access on the go and retrieval in the event of hardware failure. We believe these new features will drive better engagement and retention across our user base. In addition to these new features, we launched a new SKU called Family Plan, which helps keep families connected and helps keep their content secure with a central place for shared files like photos, videos and documents. Dropbox Family lets up to six family members share as much as two terabytes of data in one plan with a single bill. After positive signals from our initial launch, we broadly rolled out Family Plan in October and the user adoption has been encouraging. We’ve also been building out our portfolio of products for distributed work. In 2020 customers relied even more on Dropbox to get their work done as we saw elevated engagement across our products early in the year and in an effort to better support them we adapted our product roadmap quickly making investments in content collaboration capabilities being the files that can share. For example, as the need for eSignature increased, we introduced a deeper integration with HelloSign making it easier to sign documents without ever leaving Dropbox. We also launched HelloSign in 21 additional languages to better address the global eSignature market and to help cross sell into our Dropbox user base. These steps resulted in strong growth in HelloSign’s ARR and user paid seats and more than a 70% increase in end user signature requests. We also evolved Dropbox Spaces into a standalone experience that lives alongside the classic Dropbox file experience. Spaces are designed to solve an important problem. The context and information we all need is scattered across the variety of different files and tools and messaging apps, leaving it up to each of us to piece everything together. Moving to distributed work has put a lot more stress on the system as teams have had to adopt new ways of working remotely and have to juggle a variety of tools like Zoom and Slack and many others. The goal of the new Spaces app is to simplify and organize this experience, bringing projects and teams together in a single virtual workspace where they can quickly kick off projects, find and add any kind of content and easily track progress. The new Spaces experience is currently in private beta, but we’re excited to roll it out more broadly to our users this year. And finally, in 2020, we expanded our add-on offerings with our new Creative Tools and Data Migration products. These were developed for some of our most passionate and demanding users to better handle key workflows and further differentiate Dropbox. The creative community relies heavily on Dropbox to get their work done and today’s tools don’t solve all the challenges they face when working with large media files. In early 2020, we made investments to help take the headache out of creative, post-production and social media workflows. The Creative Tools add-on simplifies viewing, facilitates remote collaboration with frame-based commenting and allows flexible workflow management, all while making transfers of large files simple and secure. And with the new Data Migration add-on, business customers can seamlessly migrate files and permissions from local storage or other cloud storage solutions on to Dropbox. They can also automatically map access rights and file structures to Dropbox saving our customers’ time by reducing friction. This is especially helpful to customers as they were forced to transition quickly to remote work and needed to securely migrate their traditional file storage solutions to the cloud. In addition to reorienting our product roadmap, we transformed our Company and work culture with our shift to Virtual First, bringing together the best of both the remote and in-person experience. We’re preserving the freedom and flexibility that remote work offers and reimagining our offices as places dedicated to meaningful in-person collaboration. Most importantly, we believe going Virtual First offers us an opportunity to truly live our mission and build even better products for our customers and their transition to distributed work. We also took a number of steps towards the end of 2020 to operate faster and more efficiently. First, we simplified our accountability structure, bringing product development, technology and our go-to-market functions together under our President, Timothy Young. Timothy’s elevation to President will help us focus on our customers through closer collaboration and coordination between our engineering, design, product and customer-facing teams. And finally, last month, we also announced an 11% reduction in force to streamline our teams against new structure, strengthen our operational discipline and better align to our Virtual First strategy. So while this past year meant changes to our product roadmap, leadership and team structure, we believe we are set up for stability and execution in 2021. We have three company priorities for the year and I’d like to walk you through each one with a little more detail. First is evolving our core product. Since our founding millions of customers have trusted Dropbox to store and share their most important content. This has always been our central product value and has led to our viral growth and global adoption. This year we’re evolving the core Dropbox experience to become the organizational layer across all of our users’ content. We will aim to improve functionality to reduce friction and make collaboration and file sharing even more seamless. We expect these improvements will help drive activation, retention and migration into paid SKUs. New updates included the automated organization of user content and simplified sharing and access features, which we believe will lead to greater retention and growth for the core business. Second, we will continue to invest in and expand our new product pipeline beyond the core experience. In 2021, we will build on our early success with HelloSign to serve an increasingly distributed work force. Our planned investments will help position HelloSign as the go-to solution for eSignature, for individuals and teams through targeted awareness campaigns and prompts. We also plan to continue scaling our efforts like Spaces with strategic partnerships that add unique value to our users’ workflows. Late last year, we previewed Spaces integrations with Zoom and WebEx to offer users a single place for meeting notes, action items and project management, so they can stay connected long after they leave a meeting. Investing in partnerships and deep integrations like these provides a more seamless product experience for our customers and makes Dropbox an even more indispensable part of their workflows. We’ll also plan to complement our new product pipeline with strategic acquisitions as we broaden our capabilities in the content collaboration and other adjacencies. M&A will continue to be an important lever for us as we add to our team and product portfolio while being disciplined in our approach. And finally, we’ll stay focused on operational excellence in 2021 and make progress towards our long-term financial targets and be deliberate in the use of our resources. We’re really proud of the progress we made in 2020 driving nine points of operating margin improvement, combined with $99 million increase in free cash flow. And looking ahead, we will continue to build efficiency and agility throughout the organization in a number of ways. We’ll drive improvements and efficiencies in our infrastructure and storage as we continue to add users and content. We’ll also optimize investments in R&D and sales and marketing, focusing on opportunities with the best ROI. We expect these combined actions to continue improving our profitability and free cash flow. In summary, I’m proud of the team’s work last year to adapt quickly to the changing macro environment and take care of our customers. We demonstrated our ongoing commitment to our long-term financial goals, while still investing in growth. I believe we have the right plan in place to set us up for success and now we’re focused on executing against our strategy for 2021. We believe our opportunity is growing as the lines between home and work continue to blur and there is increased demand for more seamless collaboration experience. Hundreds of millions of people already trust us to store and share their most important files and we will rely on that strength as we expand our capabilities to become the one organized place for their content and all the collaboration around it. I’ll now turn it over to Tim to walk through our financial results.

Thank you, Drew. I want to begin with a reminder of our investment thesis and our financial North Star as this provides the context for what we focus on and where we are headed. Here are the core principles of our investment thesis; doubling free cash flow to $1 billion annually by 2024, investing for continued revenue growth, driving annual improvements in operating margins targeting 28% to 30%, allocating capital to organic initiatives and acquisitions that align with our strategic and financial objectives and returning capital to shareholders by allocating a significant portion of our annual free cash flow to share repurchases with the goal of reducing our share count. We believe that execution against these objectives will generate long-term value for our shareholders. With this context, I'd like to talk through our fourth quarter and full year 2020 results, which demonstrate our continued progress against our long-term targets. Total revenue for the fourth quarter increased 13% year-over-year to $504 million. Foreign exchange rates did not have an impact on year-over-year revenue growth for this period. Total ARR for the fourth quarter was $2.022 billion, up 11% year-over-year. We continued to drive growth in ARR through the release of value-enhancing features, the introduction of new SKUs and add-on products and continued growth across HelloSign subscription plans. We ended the year with 15.48 million paying users and added approximately 230,000 new paying users in the fourth quarter. Average revenue per paying user for the quarter was $130.17. Before I turn to the P&L, I wanted to highlight some customer wins we had in the fourth quarter where the team had success driving the adoption of new add-on products that we introduced in 2020. First, we are pleased to announce that we signed one of the largest energy providers in the United States with a Dropbox customer. They turned to Dropbox to transform how they provide a secure, cloud-based content storage solution for their on-site and field workers. Committed to finding a solution that would ensure their IT security was best in class, the company selected Dropbox along with our data governance add-on to modernize how teams such as project managers and field technicians work and collaborate on large and highly-sensitive files. Given the length of projects and compliance requirements that the company must adhere to, our data governance add-on was a critical part of the solution. Another win to highlight is 1000heads Group, a global media company based in Europe. 1000heads approached Dropbox as part of their strategy to secure and consolidate their data and empower their workforce in their creative and operational processes. Dropbox along with Paper and the Creative Tools add-on will be a critical part of 1000heads creative workflows. By standardizing on one single collaborative space 1000heads will have the ability to securely manage their content while making a move away from costly on-premise infrastructure. Creative Tools was the most exciting piece of the puzzle for 1000heads as 90% of all their creative content is created in-house. In addition, the ability to access 10 years of historical company data allows these creatives to dip into previous campaigns for inspiration and content. Before we continue with further discussion of our P&L, I would like to note that unless otherwise indicated, all income statement measures mentioned are non-GAAP and excludes stock-based compensation, amortization of purchased intangibles, certain expenses related to the acquisition of HelloSign and an impairment of our real estate assets. Our non-GAAP net income also excludes net gains and losses on equity investments and includes the income tax effect of the aforementioned adjustments. 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 in the supplemental investor materials posted on our Investor Relations website. Additional information regarding the exchange rate assumptions used in our guidance may also be found in our supplemental investor materials. One reminder, as part of moving to a Virtual First work model, we are taking steps to de-cost our real estate portfolio by subleasing our existing facilities. We previously shared on our third quarter earnings call that as we do not expect to recover the full value of our lease obligations we anticipated recording an impairment charge in the range of $400 million to $450 million related to our real estate assets with the vast majority of this impairment charge to be recorded in the fourth quarter of 2020 and a portion to be incurred in 2021. In the fourth quarter, we incurred an impairment charge related to our real estate assets of $398 million. We continue to expect to incur additional charges relating to certain European leases over the next 12 months, which could range between zero and $50 million depending on the then current market and economic conditions. Now let’s continue with the P&L. Gross margin was 80% for the quarter, representing an increase of 2 percentage points on a year-over-year basis. The improvement in our gross margin is primarily a result of unit cost efficiency gains with our infrastructure hardware. Turning to our operating expenses. I’d like to note that all expense categories benefited from lower facilities related costs, driven by our employees working from home, as well as a reduction in depreciation as a result of the write-down in our real estate assets stemming from the impairment. Fourth quarter R&D expense was $129 million or 26% of revenue, which decreased compared to 30% of revenue in the fourth quarter of 2019. Sales and marketing expense was $100 million in Q4 or 20% of revenue which decreased compared to 22% of revenue in the fourth quarter of 2019. G&A expense was $47 million or 9% of revenue, which decreased compared to 11% of revenue in the fourth quarter of 2019. In addition to lower overhead, G&A benefited from non-recurring releases of certain non-income tax reserves. As a result, we earned $128 million in operating profit in the fourth quarter, which represented operating margin of 25%. This compares to 16% operating margin in the fourth quarter of 2019. Net income for the fourth quarter was $118 million, which is a 75% improvement over the fourth quarter of 2019. Diluted EPS was $0.29 per share based on 416 million diluted weighted average shares outstanding, up from $0.16 per share for the fourth quarter of 2019. Moving on to cash balance and cash flow. We ended the quarter with cash and short-term investments of $1.116 billion. Cash flow from operations was $171 million in the fourth quarter. Capital expenditures of $12 million during the quarter resulted in free cash flow of $158 million or 31% of revenue. In the fourth quarter, we added $40 million to our finance leases for data center equipment. In addition, during our third quarter call, we shared our intention to increase the pace at which we repurchase shares under our existing $600 million share repurchase authorization with the potential to exhaust this authorization by the end of the first quarter of 2021. In line with this intention we repurchased 11 million shares in the fourth quarter spending $220 million. Now let's turn to our full-year 2020 results. Total revenue for 2020 was $1.914 billion, representing 15% year-over-year growth. On a constant currency basis relative to the average rates across 2019, year-over-year growth would have been 16%. Gross margin was 79% for the year, which was up 3 percentage points from 2019. Operating margin was 21% for 2020 which was up 9 percentage points from 2019. This significant year-over-year improvement demonstrates our commitment and ability to execute against our investment thesis. Cash flow from operations for 2020 was $571 million. Capital expenditures for the full year totaled $80 million which yielded free cash flow of $491 million or 26% of revenue. Excluding headquarter spend net of tenant improvement allowances for $26 million and the payout of HelloSign deal consideration holdback of $28 million, free cash flow would have been $545 million or 28% of revenue. In 2020 we also added $146 million to our finance lease lines for data center equipment. Net of repayments, our finance lease balance increased by $56 million. I’d now like to introduce our 2021 first quarter and full-year guidance. For the first quarter of 2021, we expect revenue to be in the range of $504 million to $506 million. Currency exchange rates assumed in this guidance account for an approximate 1.3 points of growth at the midpoint of guidance this quarter and are based on a combination of recent and historical average rates. We expect non-GAAP operating margin to be in the range of 27.5% to 28%. This margin guidance excludes approximately $15 million related to the severance and benefits paid to employees impacted by a reduction in force in Q1. Finally, we expect diluted weighted average shares outstanding to be in the range of 409 million to 414 million shares based on our trailing 30-day average share price. For the full year 2021, we expect revenue to be in the range of $2.095 billion to $2.115 billion. Currency exchange rates assumed in this guidance account for an approximate 2 points of growth at the midpoint of guidance this year and are based on a combination of recent and historical average rates. We expect gross margin to be approximately 1 point higher than fiscal 2020. We expect non-GAAP operating margin to be in the range of 27% to 28%. This also excludes the aforementioned severance benefits paid in Q1. We expect free cash flow to be in the range of $645 million to $655 million. This includes $31 million in cash outflows, comprised of $16 million for the 2021 installments of deal consideration holdback related to our acquisition of HelloSign and one-time severance payments of approximately $15 million related to our reduction in force. Finally, we expect 2021 diluted weighted average shares outstanding to be in the range of 402 million to 407 million shares. This reduction in our share count reflects our commitment to and the impact of our share repurchase program. In addition to this formal guidance, I wanted to share some further thoughts on our expectations for 2021. While we don't formally guide to paying users, I want to provide some context on our expectations for this metric in 2021. As a reminder, our objective is to drive growth in ARR in profitable and efficient ways without over indexing on specifically growing either paying users or ARPU. As we consider this and as part of the strategy behind our workforce reduction, we are prioritizing our land and expand and self-serve go-to-market motions which are most efficient across our individual, small business and mid-market customers. Accordingly, we intend to minimize the pursuit of opportunities that carry lower average seat prices, higher acquisition costs and greater degrees of customization, which could lead to lower paying user additions in certain quarters. Conversely, we are also seeing early positive signals from the adoption of our Family plan which could lead to higher paying user additions. As a result, we may see more variability in our paying user additions in the future. Overall, we will continue to focus on our strengths that allow us to engage in our most efficient go-to-market strategies while investing in our existing and new products. Separately as related to capital expenditures, we expect our additions to our finance leases to be approximately 6% of revenue and we expect cash CapEx to be in the range of $25 million to $35 million in 2021. Lastly, I want to reiterate our plan to return capital to shareholders in the form of share repurchases. We still plan to exhaust our previously authorized $600 million share repurchase program in the first quarter of 2021. In addition, our Board has authorized an additional $1 billion share repurchase program consistent with our strategy to allocate a significant portion of our annual free cash flow to share repurchases, with the goal of reducing our share count. In conclusion, our progress in 2020 and our plan for 2021 keep us on a trajectory to achieve our long-term targets and our investment thesis. While we are approaching our gross margin and operating margin targets this year, we intend to continue to invest for sustainable revenue growth. As a result, we may reinvest some of the savings that we are generating from our efficiency initiatives into growth opportunities. We therefore remain committed to our target model and our 2024 free cash flow goal of $1 billion. We look forward to sharing our progress along the way. With that, I’ll now turn it back to Drew for closing remarks.

Thank you, Tim. And thank you all for joining us today. 2020 was an unpredictable year and I'm proud of how our team responded. We delivered 15% growth while making improvements in profitability and made necessary changes to ensure our business is operating with focus and efficiency as we pursue our long-term targets. We’re excited about the road ahead and believe we’re uniquely suited to help our users thrive in the new world of distributed work. And with that, I’d like to open up the call for Q&A. Operator?

Thank you. [Operator Instructions] Our first question comes from Mark Murphy with JPMorgan. Your line is now open.

Yes. Thank you. Drew, what are you assuming for 2021 in terms of any lingering headwinds or tailwinds from the pandemic? I think you had previously given us some insight into trends with trials and conversion rates. How do you see that playing out? And importantly, how do you think it will net out this year? More of a headwind or more of a tailwind?

Yes, so thanks, Mark, for the question. So as we shared last year, we had a surge in demand during the onset of the pandemic, elevated trial starts, things like that, which was mostly isolated to the first half. I mean engagement broadly, has been up. And then we think in the – we think more broadly in – for this year and beyond that the pandemic will be a tailwind, given that folks are shifting to distributed work and Dropbox becomes a lot more important when you're working out of the screen instead of [indiscernible]. So we see a lot of – as we've shared before, we see a lot of opportunity to address new pain points in the virtual work experience. Everybody has a need to keep all their content organized. It's very fragmented and distracting and overwhelming experience now. So we think it's a huge opportunity for us.

Okay. Thank you, Drew. And Tim, as a follow-up, when we dissect Q4, you arrive at this level of revenue growth through roughly 8% growth in paying users and 4% growth in ARPU. And I know you're trying to deemphasize too much scrutiny on that, but I'm just wondering at a high level, how do you envision that balance when we look across the multiyear framework? Do we think it's going to balance out eventually sort of mid- single-digit growth for each? Or do you think there could be some periods where that ARPU growth is sort of crossing above the paid user growth at some point?

Sure. Thanks for the question, Mark. And as you know, we do focus on ARR as our primary metric. We don't optimize for a given lever between paying users and ARPU, as overly focusing on one or the other may not best reflect our strategy. And while we don't formally guide to paying users, I did provide some additional commentary in my prepared remarks, where this year, we may see some variability in our net new paying user additions. Stemming from a few things, our strategy to minimize the pursuit of larger deals that may carry lower ASPs, higher acquisition costs and greater degrees of customization, where conversely, we are seeing some early positive signals on the adoption of our Family plan, which we just launched last November. So again, we may see more variability in our net new paying users this year, where overall, we continue to focus on our most efficient and profitable go-to-market strategies while investing in our existing and new products. And these types of competing dynamics between ARPU and paying users is indicative of why we do focus on ARR as our key metric.

Thank you very much.

Thank you. Our next question comes from Brent Thill with Jefferies. Your line is now open.

Hi. This is Luv Sodha on for Brent Thill. I wanted to ask one on the go-to-market motion. Wanted to – was there any benefit from the branding campaign? I remember you guys initiated it at the end of Q3. So did that have any positive impact, if any? And more specifically on the go-to-market motion, would these changes mean that you're less focused on team’s users in the future?

Sure. I can take this. I mean, as – for context, we did have a brand campaign in Q4 highlighting Dropbox as a solution for teams at work and for businesses. And the campaign ran well, basically to our expectations and we continue to invest in marketing to drive awareness and to drive all elements of the funnel and have had success there. As far as focus on businesses and teams, I mean, as we've shared, 80% of our subscribers using Dropbox at work, we're very focused on teams. I'd say we're proportionately a big strength of ours is that we have this really efficient, scalable self-serve engine. We have another strength, which is that Dropbox has brought into organizations of all shapes and sizes. But as far as where our dollars of investment go, we're going to prefer – or we're going to allocate more – we see higher returns in optimizing our self-serve engine and just maintaining cost discipline across all our different channels. Because we see that – I mean, the self-serve channel, just as one example of higher ASPs, lower acquisition costs, really scalable and viral. So it's really a refinement more than a major shift in strategy, incremental dollars going into the area of highest return.

Got it. And maybe one quick follow-up, if I may, on the NNPU side, will – what do you see in terms of like SMB spend? Can we expect some type of normalization in 2021? So will that be kind of a tailwind to net new paid users? Thank you.

It's a great question. And I think I would have to just point back to the commentary that I gave to Mark on what we expect from an NNPU perspective. And then just look to our revenue guidance for how this should all play out as far as SMB.

And we saw a lot of stability with SMBs in general, while the macro environment – well, there's a lot happening in the macro environment, we find that a lot of Dropbox customers, SMBs are knowledge workers and have been able to continue working from home. So we're relatively less impacted than other sectors, for sure.

Thank you.

Thank you. Our next question comes from DJ Hynes with Canaccord. Your line is now open.

Hey, thanks guys. Drew, I want to ask about free user conversion and the levers that you have there, right? I mean, look, we obviously saw a slowdown in the number of net new users added this year, at least relative to the last couple of years. And what I would have thought would be a pretty decent demand environment for Dropbox, right, given the move to distributed work. So I guess the question is there's still this huge free user base out there, is it that the triggers have become less effective? Are we just getting deeper into the base and that there's a segment that's just never going to pay for the service? Like what are the levers that you can pull to reaccelerate that free user conversion?

Sure. I mean, we still see a lot of headroom with free users, and we have continuously been improving our ability to convert free users. And as you pointed out, we have a number of levers to drive conversion. So I mean, we start with customer value, just building a great product experience, adding more. So when you look at some of the things we launched last year, we've launched a portfolio of new features around, for example, helping individuals keep their content secure. So Computer Backup, Passwords, Vault, things like that, and we've seen those features and things like them drive paid trials, drive more conversions and so on. And then as teams expand, that's another lever and the list goes on. So there are a number of different levers that we – and we optimize basically, all of them. And it also often takes time for free users to convert. So there are time constants involved, like sometimes you – it can take some time for you to fill up your Dropbox. So that if you're – the storage is one hurdle, or you might start using it at home and then start using at work and then you join a team. So there is some – we're basically – there are a number of levers, and they're – and it can take some time for folks to convert, and we're optimizing for a balance of driving more engagement and growth of the user base with monetizing them as effectively and quickly as possible. And there's a bit of a trade-off there.

Yes. Yes. Okay. And then a question on Spaces. So what are you seeing users do in Spaces that they weren't doing with the platform before it became available in private beta? And I guess as outsiders to the organization, like what should we be paying attention to that says the Spaces strategy is working?

Sure, well, the Spaces is pretty early in its evolution. Last year, we decided to evolve it into a stand-alone experience. And we'd started experimenting in this area with the new desktop app, so adding more collaborative features and shared folders and things like that. And what we realize is that there's enough room for a dedicated experience and one that where cloud content is a little bit more in the foreground instead of just files and it's a workspace for a project, more than a folder full of content or files. So it's – what we're looking for with Spaces is to give teams one place for all their Google docs and Dropbox files and Air Tables and everything else. And to be able to organize their work around projects. And so those kinds of – some of that engagement is – these are new problems that we're solving for our customers. So – but that's the kind of engagement we want to see. So all that said Spaces is pretty early, where we will have more to share on it in the coming quarters. We're also excited about with Spaces; some of the new surface area we'll be working on is deepening partnerships with Zoom and Webex so that with Spaces, you'll be able to bring your content into the video meeting experience in new ways. So stay tuned for more on that.

Okay, great. Thanks for the color.

Thank you. Our next question comes from Rishi Jaluria with DA Davidson. Your line is now open.

Hi, guys. Thanks so much for taking my questions. I wanted to start by going to a comment made during prepared remarks Drew, which was about M&A as a potential opportunity. And I know you've made some smaller acquisitions in the past, mostly technological. But can you give us a sense if you were to consider inorganic, where would those adjacencies that make the most sense be? Would it be something akin to like what you did with HelloSign? Would it be more product based? Maybe give us some color on how you're thinking about M&A? And then I've got a follow-up.

Sure, well, M&A has been an important lever to help us grow the business across the whole spectrum, from adding talent to the team, adding accelerating our product roadmap and adding new businesses like HelloSign. So I think HelloSign is a great example of where that's worked well. So we're always on the lookout for these opportunities. And our user base and distribution is a big advantage. As far as where we're looking, there are a lot of different user workflows around content and helping people do more with the content in their Dropbox. And I think HelloSign is a great example of that. So in addition to being able to store and share and access your content, being able to handle the eSignature workflows and more broadly document workflows, is a natural adjacency for us. So we'll continue to look for opportunities and grow the portfolio through M&A.

Okay, great. That's helpful. And then just continuing down the path on HelloSign, could you give us a sense – you did talk about how HelloSign ARR growth has been strong this year. Maybe can you talk a little bit more specifically about what you've seen in terms of demand environment for HelloSign? How you're thinking about that business going forward? And how meaningful a contributor you can expect it to be? And maybe alongside that, you saw one of your competitors buy a small vendor in the digital signature space. Just maybe how you're thinking about any changes in the competitive environment for HelloSign? Thanks.

Sure, well, we're really excited about HelloSign. It's the fastest-growing product in the company. We saw strong growth in revenue in paid seats and signature requests last year. And I think the pandemic really accelerated the adoption of eSignature as a category. And so we're – we've made big investments in accelerating HelloSign's growth that we're excited about, including more seamless integration with Dropbox, or with the core Dropbox experience, internationalizing HelloSign adding support for 21 languages. So we see it's pretty early innings, both for HelloSign, specifically in the category in particular, and there's a number of natural adjacencies around eSignature and just drop document workflow and better handling the document life cycle in general. As far as the competitive environment, one aspect of HelloSign that's really valuable to us is they have a similar customer base and similar go-to-market motion. They're driven by self-serve. It's a self-serve viral go-to-market motion and – which is really efficient and scalable. And we see Dropbox – compared to smaller competitors, we see Dropbox as scale and HelloSign's scale as a big advantage as now the time when a lot of folks are going to be making decisions about which solution they go with.

Got it. Wonderful. Thank you so much.

Thank you. Our next question comes from Jack Nichols with KeyBanc Capital Markets. Your line is now open.

Hi, guys. Can you talk about the expectation built in around the mix of personal versus business accounts? And the ability to drive up sales? And then I have a follow-up.

Sure. I'll give you an update on the teams and individual mix with where the mix between teams and individuals has remained relatively consistent. On a revenue basis, our individual revenue mix grew in 2020 as a result of the Plus pricing initiative. Of course, that said, we continue to see progress in our teams plan. As we do now have over 540,000 teams and growing teams is certainly part of our long-term strategy, and all of this has been factored into our 2021 guidance.

Okay, thank you guys. Super helpful. And what's the best way to think about ARR growth expectations going forward for the net new customers or upselling plans and higher ARPU?

I think the best way to think about it is to look again to our revenue guidance, where – maybe just specifically on ARR, we, of course, crossed an important threshold in Q4, passing over $2 billion in ARR and finishing the year at $2.022 billion. And of course, this is the primary metric we look at, but we don't specifically guide to this, where – again, I'd look to our revenue guidance for our expectations.

Thanks guys.

Thank you. Our next question comes from Zane Chrane with Bernstein Research. Your line is now open.

Hi. I was hoping to dig in a little bit more on the net revenue retention rate. You guys gave, I believe, a value of 90% around the time of IPO and update of 95% at the Analyst Day in 2019, I believe. Can you give us an update on what that is for the overall business as well as for the customers that are on business plan?

Sure. So we don't update this metric quarterly. Again, our revenue guidance factors in the latest trends. I can tell you that at a high level, net revenue retention now is in the low 90s, in line with historical levels, where pricing increase do drive some ebbs and flows. And as you know, we've worked through the plus pricing increase at this point. And a reminder, a few factors that do contribute to AN and RR include the migration of existing paying users to premium plans, the mix shift to teams and team expansion, where we are focused on driving this metric in a positive direction.

That's helpful. So it sounds like it's declined a couple of percentage points since your last update of 95%. Is that due to an uptick in churn from one particular segment? Or is it kind of a deceleration expansion from the business side?

It has much more to do with pricing, where we've worked through that pricing increase, and now we're back to our historical levels, absent pricing changes.

I see. So just the anniversary effect of that pricing change then?

That's right.

Got it. Okay. And one last thing. I believe last time I look in the K, you had 90% of revenue was through self-service channels. Has that changed materially over the last year?

No, that has stayed consistent.

Okay, great. Thanks very much.

Thanks. This concludes the question-and-answer session. I would now like to turn the call back to Drew Houston for closing remarks.

Again, thanks everyone for joining us. I really appreciate your support, and stay safe, and we'll see you next quarter.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.