Good afternoon, ladies and gentlemen, and thank you for joining Dropbox's Third Quarter 2021 Earnings Conference Call. All participants are in a listen only mode [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 Web site following the call. I will now turn it over to Karan Kapoor, Dropbox's Head of Investor Relations. Mr. Kapoor, please go ahead.

Thank you, and good afternoon. And welcome to Dropbox's third quarter 2021 earnings call. Today, Dropbox will discuss the quarterly financial results that were distributed earlier. Statements on this call include forward-looking statements, including future financial results, including our goals and expectations regarding future revenue growth, profitability and our ability to generate and sustain positive free cash flow; our expectations regarding remote work trends related market opportunities and our ability to capitalize on those opportunities; 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; our capital allocation plans, including expected timing and volume of share repurchases; future M&A opportunities and other investments; the potential amendment to our San Francisco lease and potential resulting financial impact, as well as the potential closing of our previously announced acquisition; our ability to drive user growth, upgrades and retention by enhancing our products developing and offering new products or features and through acquisitions; and our strategy, overall future performance and prospects and ability to achieve our business goals and 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 June 30, 2021 and the risk factors that will be included in our Form 10-Q for the quarter ended September 30, 2021. You should not rely on our forward-looking statements as predictions of future events. All forward-looking statements that we make on this call are based on assumptions and beliefs as of today, and we undertake no obligation to update them, except as required by law. Our discussion today will include non-GAAP financial measures. These non-GAAP measures should be considered in addition to and not as a substitute for or in isolation from our GAAP results. A reconciliation of GAAP to non-GAAP results may be found in our earnings release, which was furnished with our Form 8-K filed today with the SEC and may also be found in the supplemental investor materials posted on our Investor Relations Web site at www.investors.dopbox.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. Drew?

Thanks, Karan, and good afternoon, everyone. Welcome to our Q3 2021 earnings call. On the call with me is Tim Regan, our Chief Financial Officer. And today, I'll provide an update on our product strategy and share business and product highlights from the quarter. Tim will then review our Q3 financial results and update our outlook for the remainder of the year. We had another strong quarter across the board with revenue outperformance driven by continued momentum with our professional SKU, expansion in teams and better retention across teams in mobile, all while achieving record free cash flow. We made great progress against our strategy of evolving the core Dropbox experience to meet the growing needs of freelancers, small teams and mobile users, while investing in adjacent workflows to help our customers do more with their content. We're well on our way to achieving our long term vision of creating one organized place for your content and all the workflows around it. Before I walk through highlights from the quarter, I want to share some context around why we believe this vision matters in today's world. As we shared before, the pandemic accelerated many trends already in play for us. It's like digital transformation and the rise of the creator economy. But at the highest level, one of the most consequential changes was that 2020 was the year where knowledge workers globally and probably most of us on this call moved from working primarily in physical offices to working primarily in digital screens, and we believe this is a permanent shift. And just as we're relying on them the most, these digital screens have become even more chaotic and overwhelming. Over the last several years, work has extended into the browser and across the sea of web-based productivity apps. What…

Thank you, Drew. Before turning to our quarterly results, I'd like to start with a reminder of our financial strategy. We continue to focus on balancing growth and profitability in a thoughtful, disciplined way. We remain committed to our long term objectives, including delivering operating margins of 28% to 30% and generating annual free cash flow of $1 billion by 2024. And we continue to allocate capital to organic initiatives and acquisitions that align with the vision that Drew outlined while also returning cash to shareholders in the form of share repurchases. Today, I'll talk through our performance for the quarter and our updated guidance for the year to demonstrate that we continue to operate the business in line with these principles. Let's turn to our third quarter results. Total revenue for the third quarter increased 12.9% year-over-year to $550 million, beating our guidance range of $543 million to $546 million. Foreign exchange rates provided an approximate 2 point tailwind to growth. Total ARR for the quarter grew 12% year-over-year for a total of $2.218 billion. On a constant currency basis, ARR grew by $52 million sequentially and 10.4% year-over-year. Our continued growth in ARR reflects our efforts to attract new users to our premium SKUs and to drive better retention by improving user experience with a specific emphasis on mobile, work and teams users. We exited the quarter with 16.49 million paying users and added approximately 350,000 net new paying users in the quarter, driven by strength in teams and the continued self serve adoption of our family plan. Average revenue per paying user was $133.79 in Q3. Before I turn to the P&L, I'd like to highlight some of our go-to-market progress in the quarter. As a reminder, our go-to-market strategies involve both our self serve motion as…

Thank you, Tim, and thank you all for joining us today. I'm incredibly proud of our third quarter results and excited about the opportunity ahead of us. I believe Dropbox is well positioned as our customers continue to look for technologies that help them adapt to the rapidly evolving work environment. We remain focused on executing against our 2021 strategic priorities, our long term financial goals and further solidifying our position as the go-to solution for distributed work. And with that, I'd like to open up the call for Q&A. Operator?

[Operator Instructions] Our first question comes from Rishi Jaluria with RBC.

First, I wanted to touch, Drew, on a comment you made in your prepared remarks, which is regarding supply chain issues. So I understand, obviously, you have much more efficient infrastructure with SMR probably with some of the other investments you've made, so maybe a little bit more insulated. But can you talk a little bit about how does this impact some of your future CapEx plans, and at what point does the supply chain issues out there start to become a worry? And then I've got a follow-up.

Well, I can start. And Tim, feel free to add on. So I mean, as you'd imagine, we're obviously keeping a close eye on shortages inside the supply chain. It's something our team has been out in front of our infrastructure team has done an excellent job in securing the supply we need. This year, we don't see a reason why that would change. We've always had great relationships with our vendors and partners. And today, our teams have been pretty proactive about it. I mean, obviously, you never say never. The environment is somewhat unpredictable but to date, we feel good about how we've been able to keep on top of this.

And then I want to maybe think a little philosophically about the virtual-first model. So it feels like you guys were very much early in this. And as Delta has pushed the office reopenings out, it seems like more and more companies are adopting that kind of virtual first model to a certain extent you guys pioneered. How have you shaped your view in what that virtual first model looks like since you announced it and as things have been pushed out? And maybe more importantly, how do you think about wanting to keep the same culture that's kept Dropbox going so strong all these years later, while also maintaining that sort of flexibility that you really want? And what lessons maybe do you think that has for other companies looking to emulate that sort of virtually first mover going forward?

Well, I mean, we're about a year in. And on the one hand, I'm really happy with the decisions we made last October. And I don't think I'd make very many different decisions, although, I don't think anybody could have exactly predicted the sequence or things like Delta. I mean some things that are top of mind for me, like we and a lot of other companies in tech and beyond are still kind of virtual only or remote only, we haven't really been able to meaningfully reintroduce the in-person experience in a consistent way. And I think a lot of companies that's going to happen Q1 of next year. I mean hopefully, things continue to trend in a positive direction with Delta and others. So all that is to say like we haven't really been able to fully neither we nor most companies have been able to fully implement their hybrid models. But I'm proud of the work the team has done to anticipate some of these issues. I mean, I think the sort of default consensus compromise version of hybrid is like are we two days, three days a week, which we envision would have major issues where given that -- well, if it's the same two days a week, you have a utilization problem where the office is empty five days a week, and if it's not, then you lose, then you sort of get the worst of both worlds where you're commuting but you don't have community. And I think something that we didn't even really fully anticipate was that the degree to which people have kind of spread out. So I think for most companies, they find -- even anti remote companies in the old world, are now finding themselves on their way to having…

Our next question comes from Brent Thill with Jefferies.

This is Luv Sodha from Brent. I wanted to echo the congrats as well on another solid quarter. Maybe the first question would be for Drew. It sounds like you have a lot of different levers, if you will, on the innovation front, the creator economy, teams, HelloSign, DocSend. Could you maybe talk to us about like your top two or three levers that you think will help you sustain the current growth momentum?

I mean the ones that are top of mind for me are kind of fall against the pillars that we talked about. So there's evolving in our core business, there's investing in future products and then there's operational excellence, and there are exciting things happening in each of those areas. So on the core side, there are a lot of continued sustained improvements. Some of the examples there are, we've invested a lot in the mobile experience and we've been really improving our app store ratings and driving conversion, retention, top of funnel, better sharing, things like that. So those are kind of somewhat incremental improvements, but a lot of them and they're really important to sustain our growth. But I think what I'm really excited about as well is a more transformative change in our core business as we evolve from syncing your files to organizing all your cloud content. I think this is a big deal. But as we sort of all have been living this hybrid remote life, I think we find that living out of our screens. Our screens, our digital environments can be very overwhelming and fragmented and distracting places. And some of the dynamics that we saw before like questions that I have, like, why is it easier to search all of human knowledge with something like Google than it is my company's knowledge and increasingly even my own knowledge, my own stuff, given that it now lives in 10 different places. So dynamics like -- so these are kind of huge problems hidden in plain sight that Dropbox is really well positioned to solve. So with my team, I talked about, hey, we're solving the 2021 version the problem we have -- that we solved back in 2007 and maybe back then, it…

And maybe a quick follow-up for Tim, just wanted to ask, it's really great to see the momentum you're having on teams and strategic accounts. Going forward, could we expect to see, I guess, more investments on that strategic side or are you still committed more to investing on the self-serve motion?

So while self-serve does remain the vast majority of our go-to-market motion, certainly encouraged by our outbound team's execution, and the team continues to execute well against the strategy that we adopted at the beginning of the year. And specifically, we more than doubled the number of reps focused on renewals. So this is driving improvements in our team retention. They were also cross-selling add-ons in newer products like HelloSend and DocSend. And then we're investing more in the channel, which is also gaining traction. So overall, certainly pleased with how the team is performing and with the higher levels of efficiency that we're seeing in our outbound side.

And building on that, we also see these as one integrated motion or one customer journey. So often folks start at Dropbox using the free version or an individual SKU and then they bring it with coworkers and become a self-serve team. But then self-serve expansion that there's a land and expand motion where you do hit limits on the self-serve side where you have enough people using in a company where it to really go wall-to-wall, you need to engage with IT and have a more managed outbound motion or channel. So we see teams graduating from self-serve and then moving into more of a managed mode as a connection between these two efforts. So they're both important. They kind of sit at different -- the self-serve motion is kind of at the start of the journey and the wall-to-wall motion is at the end in a larger account.

Our next question comes from Dan Church with Goldman Sachs.

This is Dan Church on for Kash Rangan. Just a couple of quick ones for me. With respect to --it’s safe to see DocSend and HelloSign kind of doing better and kind of outperforming plan. Can you give us an update on the traction you're seeing with cross-sell with the two products and the kind of the momentum? And any way to kind of frame the size or growth we're seeing from the new acquisitions? And then a quick follow-up on our margins for me.

So we've done our first round of integrations with HelloSign, things like our professional any signature bundle and some product integrations. But I'd say we're pretty early innings in terms of the depth of those integrations, very early innings with DocSend and pretty early in terms of the penetration of the overall Dropbox space. So it's something where we want to invest much more here in coming years, big opportunity.

Actually, kind of the last two quarters, I mean, last quarter, you mentioned an improvement in overall retention rates. We're hearing it again tonight, both from the self-service side and on the strategic side. You touched on it a little bit with respect to adding more doubling the reps focused on renewals. I guess with respect to the self-serve side, can you kind of give us an update on what's driving that retention rate and kind of how we should be thinking about the durability and levers of that? And if you could level set us on kind of maybe where we are now versus where we are last year and where we are at the time of the IPO or any kind of directional color would be great?

I can start and Tim can add. So I mean, retention starts with just the quality of experience. And as there's been a mix shift, as people have -- as mobile becomes more -- or they spend more time on our phones in addition to our laptops or desktops, that becomes a more important part of the experience and something like half of our top of funnel -- half of new sign-ups come from mobile. So a lot of it is getting back to basics and making sure that experience is as simple and fast and streamlined and just works, that's always been kind of our product philosophy and removing friction from sign-up or from sharing or different things pays dividends. So we've seen -- I mean one recent example is -- but we've seen like record App Store ratings or big improvements, improved conversion and retention, improved sharing activity and these kind of all the sort of self-reinforcing flywheel. And I could say similar things about just making it easier for -- I mean it sounds basic, but it's very important. Just if you're a self-serve team making it really easy to get your whole team signed up, figuring out what are all the steps in that experience and trying to remove or simplify as many of them as possible pays big returns in terms of that kind of viral flywheel. So we see a direct link between the simplicity of the experience and having a few steps as possible and really understanding what our customers are trying to do and make that as easy as possible. And we see that translating into improvements across the funnel from better engagement to better retention, to better conversion, to better virality, and we work all those things in parallel.

And maybe just to briefly add on to that, Dan. We don't update churn metrics quarterly, but churn did improve sequentially and year-over-year and our revenue guidance obviously factors in the latest trends, but certainly encouraged by the results of these efforts.

And we have a question from Pat Walravens with JMP.

This is Enzo on for Pat. Congrats again on another strong quarter. I know during the prepared remarks set there is a little bit of color about the self-serve adoption of family plans. I was curious if you guys could just expand a little bit on what that growth looks like kind of what that opportunity looks like as it stands now, and then how you expect that to trend going forward?

I mean I can speak to at a high level and then Tim can add on. So I mean family plan is a good example of how -- while on the one hand, most Dropbox subscribers use Dropbox for work, the vast majority, many also use it for personal use and family plan is something that was like commonly requested and it's been pretty popular and doing well. I mean I bring that up because one of the things that was clear after the pandemic is that the physical boundaries between home and work like fully dissolved for many of us. And the same thing is true of the virtual boundary between home work like we're all managing personal stuff and work stuff often on the same machine and that can be a big hassle. And Dropbox has always been -- where our customers have appreciated that we handle both your personal and working life together. So we'll continue to make investments like that. And Tim can speak to more of the growth momentum.

Maybe just to quickly add on. So in the third quarter, we did enhance our upgrade pages for those approaching their storage quotas where we did offer them the family plan for the first time. So that helped drive incremental traffic and conversion. And maybe one place you do see that is in net new paying users, where in the quarter we added about 350,000 net new paying users. So family plan was a contributor to that as was the strength in teams as was the strength in professional.

And we have a question from Steve Enders with KeyBanc.

In the prepared remarks like there was quite a lot of content around the broader ambitions around content workflow and how Dropbox is thinking about that. But just kind of wondering if you look at the kind of product road map and what happened here longer term. How does the product set evolve to match that vision that you are outlaying?

Well, I mean, at the highest level in the core business, it's that evolution from syncing files to organizing all your cloud content. And so a big part of that is search. Comandi is a great example of pretty important building block there with like universal search and being able to index all of your different cloud tools and services and have one search box instead of like one fully working search box instead of 10 kind of fragmented search boxes. And then organization like how do you help people build -- how do you give people one view of their stuff regardless of wherever may reside instead of having to visit 10 different different places. So organization, navigation, search, those are all certainly pillars of the future experience where those are. I'm really excited about our road maps in each of those areas and then second is all the workflows around content, as I mentioned. So there are document workflows with our products like HelloSign and DocSend. I'm really excited about the opportunity to build a more end-to-end solution with each of those that encompasses all those components, so bringing DocSend, HelloSign, Dropbox together so that when you say the contract in Dropbox, send it out for feedback in DocSend, get it signed in HelloSign, have the completed contract in Dropbox, there's a lot more that we can do to tie those products together. And then finally, a lot of the creative workflows, rich media workflows. So things like Dropbox Capture, which is a visual communication tool, Dropox Replay, a video collaboration tool and Shop, where we find we have a lot of demand from our customers to help monetize their digital goods or monetize the content they have in Dropbox without having to stitch together five different things. So there's a pretty big portfolio of products and potential growth levers.

And I know you mentioned Capture, Replay and Shop in there and you've come out with Passwords in the past year. But how do you think about the ability to kind of incrementally monetize these new solutions you're rolling out and how does that kind of play out over the next couple of years, and how would we see that develop?

I mean, I think it's going to be a portfolio and each of these investments is going to have different magnitudes over a different time scale. So I mean, the core business is obviously the biggest lever, and I've talked about kind of the range of more incremental improvements to more transformative changes, more incremental improvements that happen kind of week by week, month by month to this broader transformation that will take, we’re being measured more in years. And then the portfolio of workflows and similar kind of thing, we’ve got HelloSign and DocSend, which are already a meaningful scale in our fastest growing businesses. And then we'll always have a portfolio of green shoots where we'll double down on what works and keep iterating, but it won't be material to the business in '22.

Thank you. And there are no further questions in the queue. I'd like to turn call back to Drew Houston for any further remarks.

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

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