Good afternoon, ladies and gentlemen. Thank you for joining Dropbox's Second Quarter 2022 Earnings Conference Call. All participants will be in listen-only mode. After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] As a reminder, this conference call is being recorded and will be available for replay from the Investor Relations section of Dropbox's website following this call. I will now turn it over to Karan Kapoor, Head of Investor Relations for Dropbox. Mr. Kapoor, please go ahead.

Thank you. Good afternoon, and welcome to Dropbox's second quarter 2022 earnings call. Before we get started, I'd like to remind you that our remarks today will include forward-looking statements, such as our financial guidance and expectations, including our long-term objectives and forecasts for our third quarter and fiscal year 2022 regarding our revenue growth, profitability, operating margin and free cash flow as well as our expectations regarding our business, assets, products, strategies, technology, employees, users, demand and markets. These statements are subject to risks and uncertainties that could cause actual results to differ materially. They are also based on assumptions as of today, and we undertake no obligation to update them as a result of new information or future events. Factors and risks that could cause our actual results to differ materially from these forward-looking statements are set forth in today's earnings release and in our quarterly report on Form 10-Q filed with the SEC. We will also discuss non-GAAP financial measures, which are not prepared in accordance with Generally Accepted Accounting Principles. A reconciliation of GAAP and non-GAAP results is provided in our earnings release and on our website at investors.dropbox.com. I 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 Q2 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 Q2 financial results, provide guidance for the third quarter and update our outlook for the remainder of the year. I'm really pleased with the resilience of our business and our execution in Q2, especially against the challenging macroeconomic backdrop. We saw continued growth in our Professional and Teams plans and strong performance in our managed sales business. We also saw increased adoption of some of our newer products, Dropbox Backup and Capture, and we announced the pricing and packaging update for Standard and Advanced plans in June, delivering more value to our Teams customers around security and data protection. Lastly, we continue to deliver profitability through operational efficiencies across the business, which Tim will discuss shortly. While we're certainly keeping an eye on the macro environment, we remain confident in our strategy that we outlined at the beginning of the year. First, we're continuing to evolve our core FSS business by improving retention and monetization to stabilize growth. Second, we're driving more adoption of workflows beyond FSS around video and documents to better serve distributed teams, small businesses, solopreneurs and creators. Finally, we're maintaining operational excellence by continuing the growth and profitability. And with a healthier and more stable foundation in our core business, we're laying the groundwork to achieve our vision of being a solution that organizes all your cloud content and the workflows around it. I'll start with how we're evolving our core business. Consistent with last quarter, we once again saw our overall churn rate fall year-over-year. This was a result of ongoing improvements the core…

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 to our performance for the quarter and our updated guidance for the year, each of which demonstrate that we continue to operate the business in line with these principles. Let's begin with our second quarter results. Total revenue for the quarter increased 7.9% year-over-year to $573 million, beating our guidance range of $568 million to $571 million. Foreign exchange rates provided an approximate $5 million headwind to growth, above our previous guidance range of a $3 million headwind. On a constant currency basis, year-over-year growth was 8.8%. Total ARR for the quarter grew 7.7% year-over-year for a total of $2.333 billion. On a constant currency basis, ARR grew by $44 million sequentially and 8.3% year-over-year. We continue to drive growth in ARR through strength in our Teams and Professional plans, with retention improving year-over-year, driven by mobile enhancements and stronger renewals by our account management team as well as healthy cross-sell activity. HelloSign and DocSend also continued to show solid ARR growth. We exited the quarter with 17.37 million paying users and added approximately 280,000 net new paying users in the second quarter. Average revenue per paying…

[Operator Instructions] Our first question comes from the line of Richard Poland of RBC Capital Markets.

This is [Phil] on for Richard Poland. I want to start in on the Teams plan pricing update. So it looks like about a 20% price increase, and I'm not mistaken is the first one since 2017, so it seems incredibly reasonable to me. But -- you talked about receiving some early positive signals on the pricing change. Maybe talk about any potential impacts you're maybe assuming on in terms of monetization or renewals on this? And then can you give us a sense of the linearity over the next 12 months of moving the subscribers to the new pricing?

Yes, sure. So this is Tim. I'll take that one. So we did raise prices for these plans by 20%. This is our Standard and Advanced Teams plans, which we have not changed these prices in '17. So you're exactly right. Again, for new customers, these began to have the higher price plan starting in June. And for existing customers, they began renewing at the higher price point starting in July. The subset of our user base that is subject to -- it comprises about 1/3 of our total ARR. And as a reminder, we will see the benefit of the pricing change flow to ARR's customer billing cycles occur, with monthly customers flowing through in the first month of the change. And then given our ratable revenue recognition model, the revenue impact will flow through to both 2022 and 2023. And so maybe one other point along those lines, just to give you a sense of the timing, is that our annual customers tend to represent about 2/3 of our customer user base, whereas our monthly customer is about obviously 1/3, where the monthly customers will be subject to the change largely in the third quarter. So therefore, we expect most of the impact to flow through in the third quarter.

Got it. That's very helpful. And then, Drew, you mentioned the softness that we're seeing in the VC market. I noticed you also released Dropbox for Startups recently. It seems like a great pie. Maybe talk about your expectation for some of your VC customers. And I don't know if you quantified it, but may give us a sense on your exposure to VC-backed startups?

Sure. So that's certainly a popular use case for DocSend or they got some early traction with founders and investors and start-ups. And so as some of that activity is cooled off, we've seen some of that reflected on DocSend. That said, there's a lot more use cases for DocSend beyond fundraising. Pretty much -- there are lots of roles in a company that involve deals or closing deals or sharing content externally and needing to analytics and security options. So -- just to be clear, there's a lot more customers beyond the venture capital and founder ecosystem. So if you think about sales and marketing and many other functions that need to share richly. So we think there's -- so we continue to be excited about DocSend and there are a lot of other adjacencies and target customers there. And -- let's see. And then I think the other part of the question was on Dropbox for Startups. So I think more broadly, we're finding that there are a lot of freelancers and creators and solopreneurs who adopt Dropbox. And a lot of those folks have pretty common needs. So you think about they need Dropbox for their core storage. All companies need eSignature with HelloSign. And then certainly, if you're fundraising, DocSend is a great fit for that, too, and then we see a number of other opportunities in our portfolio to kind of give professionals and solopreneurs or people starting something more of a bundle. So still early innings on that, but that's an opportunity area we see growing.

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

Maybe Drew, talk about any other impact you've seen from the macro environment. You talked about the fundraising space, but any other regions, verticals, anything that you saw in terms of just the metrics in the business that would suggest that we're in a weaker economic environment?

Sure. Overall, things have been pretty stable. And -- I mean we're not immune to the macro environment. Obviously, you heard a lot about -- we're affected by things like FX given our international mix like most companies, we've been impacted by the Russian-Ukraine situation, kind of high single-digit millions in revenue and so on. And like while we talked about there's softness in fundraising, that's not really material to the Dropbox business overall. So just to quantify things, it is a signal, but I wouldn't say it's like a huge signal. We find that Dropbox, when we talk to our customers, they need Dropbox in all macroeconomic environment for a lot of our customers is really a mission-critical thing, not optional. I think the pandemic was illustrative. People need to Dropbox before during and after the pandemic. And so while we didn't necessarily see a huge run-up in the Dropbox core business during COVID, we also didn't see a run down. So all that is to say, things look pretty stable. Again, we're not immune to the macroeconomic environment and we're also mindful that we -- no one knows exactly what the future holds. So we're monitoring everything carefully as anything that's not good for our customers isn’t good for our business. But so far, the early signals have been positive or stable.

Okay. And then, Tim, can you talk about the ARPU dynamics right now and where you expect our ARPU to trend over time, and you've got some price increases. You've got the Family plan, just I know a bunch of moving parts here, but maybe just talk us through the puts and takes there?

Yes, sure. So we did end Q2 with ARPU at $133.34. It did decline about $1.29 sequentially, where FX did play a big part in that. So FX was about $0.88 sequential headwind for us. And then, of course, greater adoption of our family plan, which, as you know, carries six licenses with each plan. As about looking forward, we don't formally guide to ARPU. There are some factors that do play a part. Clearly, the pricing change will play a part in that. We're not guiding, obviously to ARPU, but as far as pricing that will be a tailwind for us. But again, we will have these headwinds from the family plan perspective as well as FX.

Okay. Great. And then one quick last one for Drew. I think you guys -- you seem to be hitting a nice rhythm around kind of upsell and keeping people on the platform, reducing churn, adding new features to plans. Are there some specific things you're also doing around just monetization of the free user base? Maybe talk us through that.

Sure. So certainly monetizing -- better monetizing our freezer base continues to be a priority for us, and we have a lot of ways of doing that. So one is just adding a broader product portfolio. So a few years ago, maybe we just had the Dropbox core product to offer but now we have HelloSign and DocSend. That portfolio will be growing with some of our newer bets like Capture and Replay and Shop and so on. And so we continue to iterate on the pricing and packaging in general. And we have also launched a number of other SKUs that get people onto the platform or into a paid subscription at a lower price point. So our Backup SKU is an example of that. So we found that. Customers may -- or these kind of -- customers with lighter weight needs need to backup a computer. So we launched a cheaper SKU for that and that provides an upgrade path into our more mainline plans. So we -- there's still a ton of headroom here and then with both, of growing the portfolio and iterating on different kinds of bundles and suites. And then after just getting people into some kind of paid plan, obviously, there's a lot that we're doing to focus on particular customer segments. I talked about kind of creators and solopreneurs and so on before. But we continue to be very focused on better monetizing free users, and we've seen a lot of gains in our ability to better monetize users in their first year or that raising those curves of monetization in the first few years of being a base user.

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

Drew, I know there's a lot of uncertainty out there, but I'm curious where you see the most opportunity for Dropbox in the near term?

So in the near term, we've had a lot of success with -- I mean, there's a lot of different levers for growth. And so we've talked a lot about pricing and packaging and the flywheel that we have of adding value to our plans in -- this most recent example was our Teams plan, standard and advanced plants. We found that a lot of customers had new demands after COVID. And when you think about security, what security means or what kind of protecting your digital environment means. And it has changed a lot when you're kind of in a distributed world or we're all working from home, that brings a number of new challenges. So one kind of category of opportunities thinking about the way that work has changed and then solving new problems for our customers as a result. And so with the going back to that Teams example, we found that the number of ransomware attacks has dramatically increased, some like tripled or quadrupled in the last year. Small businesses are half to 3/4 of the victims and half of small businesses don't have any resources for cybersecurity. So there is a natural adjacency for us. We're already protecting our files. Now we can add in ransomware protection, and then we also included our Passwords, Dropbox Passwords product in our Teams plans. And so a perfect example of how these kind of combine where we have both new value propositions for our customers. But then as we add these new features into our plans, create more customer value, then we can update our pricing and packaging or increase prices to better reflect the value that we're providing. More broadly, I think there's opportunities across our portfolio. I think we're participating in a lot of markets that are in their early innings. An area that I'm really personally excited about is the evolution of Dropbox from just sinking your files to organizing all your cloud content. So we bought a company called Command E last year. They do universal search. And I think another example of these are kind of problems we all have, like what started out as 100 files in our desktop are now 100 tabs in our browsers. And as we manage all these cloud drives, cloud docs, it's kind of a mess. So we think that -- I believe that there's a lot of universal problems that we're addressing in a lot of the areas we're in are in early innings. So finding a really exciting time to build.

One quick follow-up. Just given the pullback in valuations, how are you thinking about M&A at this time? How do you sort of weigh the decision between maybe a more transformative deal versus a tuck-in? Any thoughts there?

Yes, great question. And something certainly on our minds. Doing transformative M&A was pretty challenging when multiples were where they were, and we care a lot about deploying our capital efficiently and being disciplined. So as multiples continue to moderate, then M&A becomes that much easier for M&A to meet attractive return hurdles. So we're going to be opportunistic here. I think in general, we feel pretty grateful that our business is stable and resilient and product people need, sustainable business model, a healthy balance sheet, a lot of good places to invest. M&As, that window of opportunity is going to continue opening. That said, we'll continue to be disciplined, but we're happy to be able to play offense where a lot of other companies are having to pull back.

Our next question comes from Brent Thill of Jefferies.

[Audio Gap] Maybe what's not embedded, if you can just give us a little more color.

Hey, Brent, I might have missed your question.

Yes, we only caught the tail end of that question.

Sorry, just on the guidance, what is embedded in your guidance? And ultimately, what's maybe not embedded as it relates to within the guide? I mean are you taking -- yes, are you taking a more conservative view than ultimately what you saw this quarter, same or improving view? Just curious kind of how you're thinking through the environment?

Yes. So I'd say that our business does remain resilient in this challenging macro environment. As we talked about, we're raising our constant currency revenue guidance for the year by about $8 million or about 8.8% at the midpoint. As far as what's included, the range does include our mid- to high single-digit million impact from our discontinued services to Russia. As far as what's driving the raise, we are seeing positive early signals on our pricing and packaging change thus far, certainly seeing churn rates coming in better than we expected. So clearly, the pricing has been factored into our guidance. And again, we're seeing continued year-over-year improvement in retention across many different areas that Drew has alluded to. So we're very positive about many opportunities that are in play, including upsell, cross-sell, new products, new feature adoption, growth areas such as DocSend and HelloSign, all of that clearly has been on a philosophy perspective, perspective. We have no material changes from our historical approach, and we continue to guide to what we have a high degree of visibility into. So certainly keeping an eye on things like the macro economy. But to Drew's earlier points, we're seeing strength on that front. All of that, of course, is factored into our guidance.

Thank you. And ladies and gentlemen, at this time, that does conclude today's conference. Thank you for your participation. You may disconnect at this time. Have a great day.