Good afternoon, ladies and gentlemen. Thank you for joining Dropbox's First Quarter 2022 Earnings Conference Call. All participants will be 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 website following this call. I will now turn the program over to Karan Kapoor, Head of Investor Relations for Dropbox. Mr. Kapoor, please go ahead.

Good afternoon, and welcome to Dropbox's first quarter 2022 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; our expectations regarding the future 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; our ability to drive user growth and retention through marketing and by enhancing our products, developing and offering new products or features and strategic partnerships; our strategy, as well as the ability of our key employees to execute our strategy and our 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 the risk factors included in our Form 10-Q for the quarter ended March 31, 2022, and the risk factors that will be included in our Form 10-K for the year ended December 31, 2022. 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 @ 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 Karan. And good afternoon, everyone. Welcome to our Q1 2022 earnings call. Joining me today is Tim Regan, our Chief Financial Officer. And I'll first share our business and product highlights from the quarter. And then Tim will review our Q1 financial results, provide guidance for the second quarter and update our outlook for the remainder of the year. Before we begin, I'd like to extend a warm welcome to our newest board member, Abhay Parasnis, who was appointed in March. Abhay serves as Chief Technology Officer at Adobe for seven years. And over the course of his tenure held other leadership roles including Chief Product Officer and Chief Strategy Officer. I first met Abhay many years ago and I'm thrilled to have him join our board. His familiarity with our customers and his experience leading technology operations and engineering during times of transformation will be really helpful to us as we work towards our long-term vision of building one organized place for all your cloud content and the workflows around it. And as we and the rest of the world navigate through this period of geopolitical and economic uncertainty, our strong performance and execution this quarter reflect the resilience of our business and our team's ability to stay focused on our strategy. We saw solid growth in our teams and professional plans, along with continued strength from DocSend and our family plan while driving stronger than expected profitability. Before I walk through some of the product highlights from Q1 in more detail, I want to quickly remind you of our 2022 initiatives that we outlined in February. First, we're continuing to evolve our core FSF business to improve retention drive monetization. Second, we're expanding into workflows beyond FSF around documents with HelloSign and DocSend and rich media content…

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 30% to 32% and generating annual free cash flow of $1 billion by 2024. We also remain focused on allocating capital to growth initiatives, both organic as well as through acquisitions, while also returning a significant portion of our free cash flow to shareholders in the form of share repurchases. We believe that execution against these objectives will generate long-term value for our shareholders. Today, I'll talk through our performance for the quarter and our updated guidance for the year that demonstrate that we continue to operate the business in line with these principles. Let's begin with our first quarter results. Total revenue for the quarter increased 9.9% year-over-year to $562 million, beating our guidance range of $557 million to $560 million. Foreign exchange rates provided an approximate $1 million tailwind to growth in line with our guidance. Total ARR for the quarter grew 8.4% year-over-year for a total of $2.290 billion. On a constant currency basis ARR grew by $40 million sequentially, and 8.9% year-over-year. I know that we update the FX rates used to calculate ARR at the start of each year. We continue to drive growth in ARR through strength in our teams, the adoption of our family plan, and momentum in our document workflow businesses HelloSign and DocSend. We exited the first quarter with 17.09 million paying users and added approximately 300,000 net new paying users sequentially driven in part by our family plan. Average revenue per paying user was $134.63 in Q1. ARPU decreased by $0.15 sequentially. As the…

[Operator Instructions] Our first question comes from the line of Brent Thill from Jefferies.

Thank you, again, this is Luv Sodha on for Brent Thill. Thank you for taking my questions. Maybe the first one for Drew, could you talk about maybe the overall demand environment that you're seeing out there in the light of macro concerns, both from the war and higher interest rates here in the United States? And what impact that is having on your customer base?

Sure. So I'd say overall, things have been pretty stable. I mean, I think we like most companies have been impacted by the situation in Russia and Ukraine. And as we share this, like, high single digit million dollar revenue hit, but more broadly, we see things are pretty stable. I mean, our churn rates continue to improve, and a lot of opportunity around the business. And we find that Dropbox is kind of or it's a fundamental product that people need and in kind of all environments, and we saw that in the pandemic, people needed Dropbox before the pandemic during and after. So there was lot stability there.

Got it. And then maybe one question on the conversion that you've seen, you've sided higher conversion. Could you maybe talk about the initiatives that are front there? And could we expect the conversion to paid to improve over the next few quarters? Thank you.

Sure, we continue to do a great job with conversion, you can see that flowing through to net new paying users, where we added 300,000 net new paying users in the quarter, you can see that we beat our Q1 guidance range. And then of course, we're maintaining our full year guidance range despite absorbing the impact of Russia, again that's being in the high single digit millions. And so we see success across many different initiatives that we're working on. Drew talked a bit about retention. We're seeing team expansion success, we're seeing growth in areas such as DocSend HelloSign. And, of course, SKU such as Pro and Family Plan are also contributing to that growth.

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

Thank you so much for the questions. First one. So Drew just on the core business. I'm just curious to get your thoughts on how penetrated do you think that opportunity is? How do you think about the opportunity that lies ahead there, and sort of the runway for growth available to you?

Sure. So in the core business, or the FSS business, and we are still seeing a lot of headroom in the areas that Tim mentioned about improving and conversion or improving our retention. We're iterating on pricing and packaging in a number of ways. And you look at things like Dropbox Backup that started out as a feature in paid plans last year with millions of our subs or subscribers were adopting it. And now it's a separate SKU and lower price entry point into Dropbox. And which is important given the size of our free user base. So giving people stepping stones into paid plans. So I think there's continued headroom there and then in the FSS business across the funnel, but as, we were investing a lot of other adjacencies or certainly our workflow products. And then I think the big opportunity for us around evolving from syncing files to organizing all of your cloud content. And we watch as our customers, and probably all of us on this call struggle with keeping track of the 100 tabs you have open in your browser, and all your stuff and all these different drives and in different cloud tools. In many ways finding information, organizing information is much harder in the cloud era than it was in the file era. And we don't see anybody addressing these problems at scale. So when you think about what solving that look like we think Universal Search is important part of that. And acquisitions like Command E, an acquisition last year we made Command E is universal search company. They're fully integrated into Dropbox. And a number of other ways that you can better organize your cloud content. So I think we think that's a big opportunity that dramatically expands the market beyond the kind of classic constraints of FSS.

That's super helpful. Thank you for the color there. And then on the M&A front, given the pullback and valuation, how are you thinking about M&A at this point? And maybe any color you can share on the M&A pipeline would be helpful?

Sure, yes. I mean, as valuations moderate or as things correct in the broader market. Obviously, no one wants a challenging environment, but unbalanced that massively plays to our strengths. So M&A becomes a lot more affordable or efficient. We've had some good success there. And then we'll continue to be disciplined, but I think the door opens to do to make bigger bets on M&A. So we're certainly on the lookout.

Awesome. And then one more if I may, just for Tim, how do you feel about your progress towards the $1 billion free cash flow target? And what work do you feel like you still need to get done to get there? Thank you so much, guys. Congrats on the quarter.

Sure, so we are making strong progress in marching towards the $1 billion free cash flow target, we're obviously maintaining that target. Maintaining our and also maintaining our guidance for the year of 760 to 790. We do have a bit of a tax headwind this year with this new tax legislation. But despite that we are maintaining and marching toward that $1 billion, there's a few factors at play that we will continue to navigate. We are continuing to execute against our virtual first subleasing strategy. We've done a nice job executing sub leases for a portion of our San Francisco facility, this quarter it will Seattle and Ireland. So that's certainly a factor and then continuing to hire in lower cost locations, again, another part of our virtual first strategy. So those are two factors. And again, we feel very confident in our ability to land that $1 billion target.

Our next question comes from the line of Jason Ader from William Blair.

Hey, everyone, this is Billy Fitzsimmons on for Jason Ader. One of new features introduced to Dropbox over the past couple of years, a lot organically, some inorganically. And, Drew, you talked about capture replay and shop in the quarter. If you are looking broadly across these features and the ones introduced over the past couple years, any that are outperforming internal expectations, or maybe ones customers are gravitating more towards over others?

Sure. Well, I think there's, I'm really happy with the state of the portfolio compared to a much broader portfolio with multiple products really scaling, compared to a couple years ago. So I think there's a lot of good in there. I mean, things like capture, replay and shop are early but showing positive signs. And as a single example, I'd say DocSend is doing super well. I mean, they're -- they continue to outperform the expectations we had at the beginning and continue to be planned. And I think they're an example of something that's been a great addition to the portfolio.

Got it. And then if I'm not mistaken, you guys did a major price increase a few years ago. And I know you've made some changes to your SKUs and added a ton of new features kind of going off the first question, is it possible that especially in an inflationary environment, like we're in right now that a broad base price increase could be in the cards or make sense?

Short answer is yes. And we see a lot of other SaaS companies or other people saying the same environment, same factors. And we've had a lot of success, with iterating on pricing and packaging, generally, in the past. And so we think of it as kind of a flywheel where we add value to each of our plans. And as we add more value, pricing is a lever to capture more value.

And maybe Billy, this is Tim, I'll quickly add on to that, where specifically this year, we are building new capabilities such as security features, to address customer demand in this increasingly complicated environment where our 2022 guidance does include some updates to our pricing and packaging approach. And we'll actually have more to share this quarter on that. Where as a reminder, just given our ratable revenue recognition model, the revenue impact will flow to both 2022 and 2023 just based on the billing cycles of our customers.

Our next question comes from the line of Rishi Jaluria from RBC.

Wonderful. Thanks, guys. Thanks so much for taking my question. I guess number one, I wanted to follow up in an earlier question talking about the success that you're seeing on via monetization and conversion to paid users. Can you maybe give an illustrative example or two of some initiatives that you've been able to do to drive that and maybe how we should be thinking about the sustainability of that going forward. And then I've got a follow up for Tim.

Sure. And so at a high level, we look across the funnel, from top of the funnel and in signups all the way to how do onboard users, and then how they convert to paid plans and virality. Or in the virality, they have to sharing so, I'd say at the top of the funnel, lots of improvements to simplifying the onboarding experience and particular in mobile experience, we found that in the mobile sharing experiences, and we found that's like a key viral loop for us, we've seen lots of opportunity to simplify the experience and take friction out of that. And then that really helps on top of funnel or driving mobile signups by making that loop effective as possible. And then on the conversion front, I think, another example is just how we've been iterating on the packaging, and introducing new SKUs and things like Backup. So we tested Backup as part of our paid plans last year, and now it's a separate SKU. And that's just the example of us being able to monetize our free user base better by offering multiple ways in or multiple price points, or cheaper entry points, in addition to just having more products to offer our customers. So I'd say we have a lot more kind of parts to the engine than we used to do, and opportunity and all of them. And so we triage by like where's the area of highest opportunity and continue that. So I'd say, in fact, yes, that’s biggest one churn like there was a churn reductions that have come from improving performance, improving experience. That's such a huge lever, arguably the most important lever for the business - and expect that to continue.

Yes, got it. That's really helpful. And then Tim, I just wanted to may be a housekeeping question on the FX headwind that you talked about, so you talked about $14 million for the full year. Just to clarify, is that $14 million total in 2022 revenue, or is that $14 million additional FX headwinds on top of the $16 million that you talked about when you're importing people?

Yes, good question. It's $14 million for the full year, it is an update relatively $16 million we gave previously, but when I add the two together, it is updated view or it is $14 million for the full year now.

Okay, and just to kind of follow up on that, can you help us understand kind of, I guess I'm struggling to understand that how that's the case, when most companies are, software companies are seeing stronger FX headwinds then when they initially guided 90 days ago, maybe can you just remind us about your top currency exposures? And why that might be the case that you're seeing a relative tailwind of $2 million relative to 90 days ago, whereas most other software companies are talking headwinds? Thank you.

Sure. Yes, fair question. Hard for me to really comments on how to compare to others, just given that our billings can be denominated in varying currencies, but maybe just from a methodology perspective, walking into the start of the year, versus walking out of the end of Q1, we did see an improvement in rates from those moments in time. So for example, the lead up into January versus the lead up into April, rates improved, according to our billing currency.

Thank you. This does conclude the question-and-answer session of today's program. I'd like to hand the program back to Drew Houston for any further remarks.

Great. Well, all right, everyone. Thank you again for joining us today. We appreciate your continued support. And look forward to speaking again next quarter.

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.