Good afternoon, ladies and gentlemen. Thank you for joining Dropbox’s First Quarter 2021 Earnings Conference Call. All participants will be in 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 Page Portas, Investor Relations at Dropbox. Mr. Portas, please go ahead.

Today, Dropbox will discuss 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 impact to our financial results, including estimated impairment charges and subleasing income as a result of our shift to a virtual-first work model, expected performance of our business, 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 future user growth, upgrades and retention by enhancing our products, developing and offering new products or features through our acquisitions, our strategy and the effectiveness of strategy in achieving our business goals 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, including in our Form 10-K for the year ended December 31, 2020, and the risk factors that will be included in our Form 10-Q for the quarter ended March 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, 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 www.investors.dropbox.com. Additional information regarding the exchange rate assumptions used in our guidance may also be found in our supplemental investor materials. I would now like to turn the call over to Dropbox's co-founder and chief executive officer, Drew Houston.

Good afternoon, everyone, and welcome to our Q1 2021 earnings call. On the call with me is Tim Regan, our Chief Financial Officer. Today, I'll share our business and product highlights from the quarter. Tim will then review our Q1 financial results, provide guidance for the second quarter, and update our outlook for the remainder of the year. And before we get to our results, I'd like to thank our employees, customers, and partners for their support and their contributions to a very successful quarter. Around this time last year, we, along with many of our customers, were managing through an unprecedented global pandemic and a sudden shift to distributor work. It was certainly a challenging time, and I'm proud of the way our team showed up and supported our customers. While many companies are still adjusting to this shift and grappling with such decisions about hybrid, flexible or remote work, one thing is clear, the traditional way of working has changed forever. We've made decisions about our own workforce, adopting what we're calling a virtual-first way of working, combining the best of both fully remote and in-person collaboration. So as we shared previously, we reoriented our entire product roadmap to address the challenges our customers face in this new environment. At the same time, we also reorganized and streamlined our teams against our new strategies. And now we're focused on execution. This new era of distributed work has given rise to new opportunities for us and set up several trends that were already in play. We've seen some spikes in the rich media and video content. We've seen the rise of freelance economy and an accelerated shift of businesses to the cloud. And we're seeing these trends reflected in our own business with the increased growth in our professional…

Thank you, Drew. As I've done before, I want to begin with a reminder of our financial objectives as this provides the context for how we operate the business and outlines where we are headed. The core tenets of our financial plan are as follows: 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 our shareholders by allocating some 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, and we remain committed to making decisions in line with this financial trajectory. Today, I'll talk through our performance for the quarter, our updated guidance for this year and about some of the actions we've taken in the period, which I'll tie back to and demonstrate our progress executing against these objectives. Let's first turn to our quarterly results. Total revenue for the first quarter have increased to 12% year over year to $512 million, beating the high end of our guidance. Foreign exchange rates provided a one-point tailwind to growth. Total ARR for the quarter was $2.112 billion, up 13% from the year ago period. On a constant currency basis, ARR grew $61 million sequentially and 12% year over year. I'd note that we update the FX rates used to calculate ARR at the start of each year. We have continued to drive growth in ARR through the release of value-enhancing features, the introduction of new SKUs, such as Family plan, the expansion of HelloSign's capabilities and market awareness and the acquisition…

Thank you, Tim, and thank you all for joining us today. As our Q1 results demonstrate, we remain focused on executing on our 2021 priorities, our long-term financial goals, and our commitment to our shareholders. We believe we're well positioned to meet the opportunity ahead of us as customers continue to look for technology that helps them adapt to their rapidly evolving working environment. On behalf of our management team, I'd like to thank our customers, our partners and the entire Dropbox team. And with that, I'd like to open up the call for Q&A. Operator?

[Operator instructions] Our first question comes from Mark Murphy with JPMorgan. Your line is open.

Yes. Thank you very much and congratulations on a healthy result. So I'm noticing that the rate of deceleration is improving quite a bit. You have three consecutive quarters where revenue growth is basically 12.5% to 13.5%, and you're lifting it on the year. Can you shed any light on which levers you're pulling to influence that? In other words, the conversion retention, new products, etc. And just how sustainable do you think this improvement is in terms of kind of improving that rate of desell?

Sure. Thanks, Mark. This is Drew, and I can start, and Tim can build on and cover some of the specifics. But I mean, the way we look at it is we have a lot of opportunity in the core business, and we're driving growth from a broader portfolio of products. So in the core business, we spoke to some of the improvements we've been making, and we see -- we continue to see lots of levers there to drive conversion and retention and improve the experience in things like Transfer and Passwords, Family plan, all good examples. And then we're growing the portfolio. So HelloSign has been one of our fastest growing businesses. We just added DocSend, and we'll continue to have a broader innovation pipeline, both organic and -- organic bets on M&A. So all that is to say, we have a lot of different levers. We're pulling many of them, and we're excited about the progress we've been making.

That's exactly right. And maybe to build on that. So our guidance does have us growing at about 11% at the midpoint, which is a 1% increase from the guidance we shared with you in February, where half of that is from DocSend and the other half is from the expected organic performance. And it's really attributed to all the factors Drew discussed in his prepared remarks, the Family plan, adding Passwords to our basic plan, launching the stand-alone Transfer SKU, HelloSign, Docsend where we have many initiatives we're working on to drive growth, and we're not overly reliant on the success of any one initiative, and we absolutely will continue to invest to drive sustainable revenue growth, where we are seeing a compelling ROI.

OK. So it sounds like it's a diversified kind of portfolio effect across the products. I wanted to just ask one other quick one, which is the top of the funnel activity. I recall that had spiked at the onset of the pandemic. And then I think logically, we were expecting that, that would start to subside. I'm just wondering, how is the top of funnel behaving into return to the office activity and business cycle recovery?

Sure. So I mean, there's a surge -- as you mentioned, there's a surge of demand in Q2 last year. But overall, our business has been pretty stable. I mean, our customers needed Dropbox before lockdown, during lockdown, and they'll need it afterwards is kind of the way I see it. And that said, I mean, it's been a big tailwind for HelloSign as lots of customers started adopting using it for the first time. So in total, we think the world moving to distributed work will be a big tailwind for our business. And as we move toward reopening, as most companies have some kind of hybrid model, there's a lot of room for improvement in the tools we use to manage that. So HelloSign and DocSend are a couple of examples that we're thinking much more broadly to. Excellent. Thank you very much.

Our next question comes from Brent Thill with Jefferies.

Hi. This is Luv Sodha on for Brent Thill. Thank you, guys, for taking my question and congrats on a great quarter. I wanted to ask one on DocSend. I think if you could maybe talk a little bit about the vision with the acquisition and maybe give us any insight into the number of its users or the ARR contribution from DocSend for the year?

Sure. I can start just at a high level. So we think DocSend is a great fit. And they help customers -- DocSend helps customers manage and share their business-critical documents. They give business leaders more control, visibility, powerful engagement analytics. And the reason is that this is a national expansion opportunity for us, for Dropbox, where there's also tens of billions of documents in Dropbox. Our customers want to do a lot of things with them. The more we can help with workflows, these are natural adjacencies. And then for DocSend, we can help them accelerate their growth and reach a larger audience. And then jsut more broadly, the combination of Dropbox plus DocSend plus HelloSign means that we can address the whole life cycle of a document or address these workflows end to end. So you could start with contracts saved in Dropbox, you can share it and iterate on it through DocSend and get feedback analytics. And then sign it in HelloSign. And so being able to handle the whole experience and then we think there's an opportunity where the -- where it's additive. And the -- and overall, these are individually big markets, collectively, they're big and growing, and there's lots of these natural alignment on many dimensions. But with DocSend, in particular, the product strategy, the go-to-market motion, they similarly have a self-serve model, it's really efficient and scalable. So overall, we see a really great fit, all particularly as the world moves to distributed work and needs better ways of managing content. Can't rely on any of getting the office together, which are really exciting opportunities.

And then let me try to give you some color on their financial impact. So we purchased DocSend for roughly $165 million with about $30 million held back for key executives to be paid over a three-year period, similar to how we structured the deal with HelloSign. And some further insight, DocSend contributed about $15 million to ARR in the quarter, where as a reminder, we record the ARR from acquired companies in the period we closed the acquisition. We also added about 35,000 paying users to our totals. And then as related to the P&L, the impact to Q1 was nominal as the deal closed on March 22nd. For the full year, we do expect the revenue contribution to be roughly half a point to our total revenue, and we are absorbing their expenses into our P&L, where this has been factored into our guidance.

Got it. Great. And maybe one quick follow-up on the top of the funnel question that was asked earlier. I guess, in terms of the overall demand, are you seeing like SMB spend come back? I know, obviously, last year you might have seen some impact from the SMB site, so will that sort of be a tailwind going forward?

Yes. I mean, we're fortunate to have a lot of stability in general, and then -- all right, the SMBs that are on Dropbox tend to be knowledged workers, so they're relatively less impacted, which has been a good thing. And then, I mean, one thing -- one dynamic we are seeing is our professional SKU has been doing really well. So it's been growing 30% year-over-year. And one big strength that we have is as we -- is Dropbox through our self-serve and viral motion that we can reach and we can profitably acquire small business customers, freelancers, the SMBs more than if we just had this -- and if we were more reliant on the conventional sales force. So part of the tailwind is just following demand. There's the whole passion economy, creators, rise in freelancers that we're seeing contribute to demand. And we expect will continue.

Thank you.

Our Next question comes from Steven Enders with KeyBanc. Your line is open.

Hi. Great. Thanks for taking my question. I just want to follow-up a little bit there on the DocSend plans. I'm wondering how you're thinking about incorporating DocSend into the rest of the product, if you have plans to incorporate similar to what you're doing with HelloSign, where you build into plans or what's kind of the expectations there going forward?

Sure. Well, immediately, we'll start integrating -- well, we're already starting to integrate them into our go-to-market motion, so making DocSend more available to our customers, to our sales team. And then similarly DocSend, we're -- or sorry, similar to HelloSign, we're building integrations in the product experience and also bringing them closer together. We see it as a -- we see it -- and so mainly, we're focused on driving distribution of DocSend to our existing audience. And then in parallel, we'll be building greater integrations.

OK. That's helpful. And then I know you just raised the convert in the last quarter. But I guess, how you're kind of thinking about the rank order of those plans. I think you laid out a few things from M&A to these buybacks to your organic growth, but then how you kind of think about the rank ordering of importance there as you think about the plans there going forward?

I think we absolutely have the room to do each one of them. So we plan to allocate a significant portion of our annual free cash flow to share repurchases. That's absolutely still the plan. M&A., that will continue to be an important part of our strategy. You can look at DocSend, HelloSign as great examples of the types of deals we're interested in, and we strengthened our balance sheet with the convert where we can continue to pursue those strategies, and we will absolutely still continue to be disciplined with valuations. So we structured our business where we continue to be able to invest in growth -- organic growth, continue to invest in M&A and continue to pursue share repurchases.

OK. Great. Thanks for taking my questions.

[Operator instructions] Our next question comes from Ben Rose from Battle Road Research. Your line is open.

Yes. Hi. I wanted to ask on a couple of items. One is, either Tim or Drew, could you speak to the contribution of international revenue during the quarter, total international and how that changed from last year?

Sure. That hasn't changed materially. It's about a 50-50 split as far as the international contribution to revenue. And so yes, so that will be disclosed as part of our 10-Q filing tomorrow but that has not changed materially.

OK. And then just a question on product pricing. I was just curious to know how you are thinking about the pricing of various different plans whether you are anticipating or contemplating any price increases for your user base over time?

Nothing specific to share about future plans there. And one thing we are focused on is we have an enormous space for users, which represent a big opportunity. We will certainly continue to drive them to the standard Dropbox plans, but we're also creating a broader menu for new subscription options and entry points basically and optimizing pricing and packaging in general. So Dropbox Transfer is an example of the stand-alone SKU we launched in Q1, and we'll also continue to experiment and double down on what's working. So we certainly are looking at pricing that -- or we continue to look at pricing and packaging in general, and that's an important monetization lever for us.

OK. And if I may just to ask one additional question, I know that part of the changes over the last several months has been you're doubling down on -- reaching users via the self-serve model and sort of have less emphasis on direct sales. I was just curious to know your thoughts on how that has been contributing to your strong growth that we're seeing in recent quarters?

Yes. So I mean, our rationale for this is -- we'll continue to serve larger customers. And one of our strengths is that Dropbox is organically adopted and companies of all sizes, including large companies, so that's going to continue. But when it comes to paid customer acquisition, we want to play to our strengths and be disciplined in our investments and streamline some of our efforts. So our land-and-extend model and self-serve motion is really scalable and profitable in general. And we find that our outbound efforts in mid-market -- or in the mid-market segment tend to be more efficient and profitable than some of the high end of the enterprise. So these changes are more than just about focus and really doubling down on our most efficient go-to-market motions. And we find that the very large customers or the revenue coming from very large customers is less than 10% of revenue.

OK. Thank you very much.

Thanks.

And I'm currently showing no further questions at this time. I'd like to turn the call back over to Drew Houston for closing remarks.

Great. Well, thank you, everyone, for joining us. We hope you and your families are staying safe and well, and we'll see you next quarter.

[Operator Instructions]