Good afternoon, ladies and gentlemen, and thank you for joining Dropbox's Third Quarter 2020 Earnings Conference Call. 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 call over to Rob Bradley, Head of Investor Relations for Dropbox. Mr. Bradley, please go ahead.

Thank you, and good afternoon, and welcome to Dropbox's Third 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 our expectations regarding anticipated benefits to our business and the impact to our financial results and business operations, including estimated impairment charges and subleasing income as a result of our shift to a Virtual First work model; our expectations regarding remote work trends, related market opportunities and our ability to capitalize on those opportunities; operational efficiencies we may achieve as a result of changes to our organizational structure; expected performance of our business; our capital allocation plans, including expected timing and volume of share repurchases; future M&A opportunities and other investments; 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 ability to extend our platform by 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. 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, 2020, and the risk factors that will be included in our Form 10-Q for the quarter ended September 30, 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.

Thanks, Rob. Good afternoon, everyone, and welcome to our Q3 2020 earnings call. Joining me today is Tim Regan, our long-time Chief Accounting Officer and newly appointed Chief Financial Officer. I'm excited to have Tim in this critical role and to have him join me today. I'll start by walking through some of the key elements of the third quarter, and then Tim will share the details of our financial performance and update our outlook for the remainder of the year. Before jumping into the quarter, I'd like to quickly reflect on 2020 as we approach the end of the year. In many ways, this was a critical year for Dropbox. And when I spoke to all of you on our earnings call in February, neither I nor anyone else could have imagined how the world would be upended by the pandemic. 2020 has certainly had its challenges. But we also believe that the shift to distributed work means that our opportunity has never been bigger. This year, our customers relied on us more than ever to help them with the transition to distributed work, and we were fortunate to have the building blocks in place to be resilient in the current environment. We continue to be focused on the commitments we made in February towards our long-term model, driving operational efficiency and generating value for our shareholders. This quarter, I'm happy to share some of the progress we've made. First, I'd like to share more detail on our workplace strategy with Virtual First, and then some context on recent changes to our organizational structure, which we believe set us up for greater focus, faster decision-making and operational excellence going into 2021. After that, I'll talk about the continued success we're seeing in our product portfolio and with our ecosystem before turning it over to Tim. I'll start with Virtual First. Last month, we announced that Dropbox is moving to a Virtual First way of working. I don't think anyone could have anticipated how the entire world went to working from home overnight in the most dramatic and abrupt way possible. But we believe this shift to distributed work will continue long after the pandemic ends. And we're well positioned for this shift. Our product at its core helps enable distributed work. Our customers have been turning to Dropbox to work more flexibly since our founding in 2007. And so when we first shifted to remote work earlier this year following the lockdown, our product helped us transition seamlessly and helped many of our customers. It helped a publisher in London that was forced to migrate off their in-house servers get up and running on Dropbox in a week. The Italian Red Cross relied on Dropbox to help coordinate their emergency response during the crisis. And these are just a few examples. As a result of COVID, we've seen increased adoption and usage this year across a variety of industries. And as virtually all knowledge work becomes digital, organizing all your team's content-based workflows in one place has never been more important. For our employees, the vast majority embrace this new reality and have said that they don't want to return to the way things were before. They don't want to lose the flexibility and focus they've gained; they don't want to go back to long commutes. But we also know that things aren't perfect. I think we're all adjusting to sitting on Zoom meetings all day, getting bombarded with emails and notifications, and we miss being in the office and bonding and collaborating with our coworkers. Many companies responded to this by announcing either a fully remote or an ad-hoc hybrid approach. But we saw challenges with both of these. Going fully remote cuts out the in-person experience that's critical to building relationships and culture. And leaving it up to employees when they come to the office not only reduces the benefit of having a physical space if a large percentage of the team is working from home, but also contributes to an unequal playing field for remote employees. So we saw this as a unique opportunity to reinvent how we work to combine the best elements of the remote and in-person experience. We landed on a new model that we call Virtual First, which means that most focused solo work will happen at home. But we know that in-person collaboration is still critical for building relationships and healthy teams and maintaining our company culture. So we're turning our offices into collaborative spaces we call Dropbox Studios. We believe this approach gives our team increased flexibility in how they work and live. It allows us broader access to talent that was previously out of reach, and it has the potential to create efficiencies consistent with our commitments to profitable growth. But the most important reason we chose this approach is that it truly allows us to live out our mission. While we build products that help people work from anywhere, we know that all the tools people use at work today weren't truly built for distributed teams. We believe the world is permanently shifting in this direction, and now we have an opportunity to build even better products to address all the pain points we're experiencing. But we can only do that if we're on the leading edge ourselves. With Virtual First, we'll be a distributed team building for distributed teams. I'm really excited about the shift for us and look forward to sharing more about how this will play out in our product strategy in the coming quarters. I'm also happy to share our recent news that Timothy Young, our Senior Vice President and General Manager of Core Dropbox, has been promoted to President, and he'll continue to report to me as part of my executive team. In this new role, he'll oversee an expanded scope of our engineering, product, design, and go-to-market teams, which means our COO, Olivia Nottebohm, and her respective teams, along with our platform engineering teams, will begin reporting into Timothy. This will allow us to have closer collaboration between engineering, design, product, and our go-to-market teams and will ultimately help us create better products and experiences for our customers. In addition, this new structure will allow me to spend more time working on longer-term strategy and innovation, while Timothy handles more of the day-to-day business operations. Timothy is a rare combination of an excellent product leader, successful entrepreneur, and experienced operator at scale. And I'd like to congratulate him on his new role. We believe the shift to distributed work presents a massive opportunity. Our leadership changes and Virtual First strategy give us the opportunity to realign our resources in order to create a more nimble and streamlined organization that will allow us to perform at our best. Now I'll turn to our quarterly results. In Q3, we continued to see broad strength across our business. Both actual and constant currency revenue grew 14% year-over-year, driven by the addition of nearly 300,000 paying users and growing ARPU. We also exceeded our operating margin guidance in the quarter, demonstrating our commitment to efficiency gains and operational discipline. Tim will discuss some of those specifics shortly. But before that, I'd like to provide an update on the progress we made this quarter to deliver products that help our customers organize their lives at home and work. As you may recall, we announced a number of new features in June, including Dropbox Passwords, Vault, and Backup. We also rolled out our new Family plan. These products address the needs of many of our customers who use Dropbox to store and protect their sensitive information and share important content with family members. These new features are all generally available now in our Plus, Professional, and Family Plans, and early indications are positive. We're seeing strong adoption from our user base, and we've seen a nice lift in trials and purchases. At the core of these new offerings are two main objectives: first, they provide value to our paid users and help our customers stay better organized across both their work and personal lives; second, they help improve customer retention and conversion, as users who do more with our products and use them both at home and work have higher engagement and lower propensity to churn. We're encouraged by the early signs we're seeing. We also saw strong adoption of HelloSign in Q3, and it continues to be our fastest-growing product. We're generating awareness with an international marketing campaign and are hosting webinars in numerous geographies. Additionally, our native Dropbox integration and expansion of HelloSign to 21 new languages allowed us to introduce the product to millions of Dropbox users worldwide. We believe these investments will help HelloSign thrive as more and more people turn to eSignature to support their digital workflows in the remote work environment. And the market has noticed our progress. In Q3, HelloSign was recognized as the number two overall eSignature vendor in G2's fall report, as well as being ranked number one for ease of adoption. We're excited to see this traction and continue to be optimistic about the opportunity ahead. Turning to an update on our new product efforts. We had a busy quarter with some exciting developments that I'd like to touch on. First, we introduced two new add-ons, Creative Tools and Data Migration. With these add-ons, we're excited to give customers more choice to construct the product suite that best fits their needs. Taking work from kickoff to the finish line can often be a complicated multi-step process, particularly for media professionals. And today's tools don't solve all the problems the creative community faces while trying to keep their projects on track. That's why we made investments earlier this year to offer integrations to help take the headache out of creative, post-production, and social media workflows. As this community relies more and more on Dropbox to get their work done, this quarter, we were happy to announce our new Creative Tools add-on, designed to help our users who work with large media files. Creative Tools will help simplify viewing, facilitate remote collaboration, including frame-based commenting, and allow for flexible workflow management. More than most, media professionals work with large files that create unique challenges. And working remotely adds to that challenge, creating roadblocks to efficient output. The new Creative Tools add-on makes large file transfers secure and easy. Importantly, for media professionals on the move, it also provides the capability to preview large files without downloading. Similarly, this quarter, we also partnered with Adobe to launch Dropbox Transfer for Adobe Creative Cloud, streamlining the way users deliver final projects. We've seen increased adoption and usage of Dropbox Transfer in this environment. Transfer is designed to allow users to securely send large files to anyone with optional custom branding, even those without a Dropbox account. With our Creative Tools add-on and the new Adobe integration, we're continuing to make Dropbox the best place to keep creative work moving. Data Migration was another important add-on we introduced this quarter. Data Migration allows business customers to quickly migrate files and permissions from local storage and other cloud storage solutions into Dropbox Business. With this add-on, access rights and pre-existing file structures can be automatically mapped to Dropbox, minimizing potential pain points of a migration to our product. In addition, users of this add-on will benefit from analytics and comprehensive reporting capabilities that are critical to the management of company data by admins. Beyond the improvements to our core products, we've also been focused on expanding our ecosystem of trusted partners to position Dropbox at the center of our users' workflows. The new Dropbox app center, launched in Q2, is a place where our users can discover, learn about, install and connect apps to their Dropbox account, helping to create a more engaging and streamlined experience with our platform. Users can find apps categorized by use cases, including communications, marketing and design and project management, and we're continuing to expand the number of available apps and simplifying the process for developers to connect their apps to Dropbox. We've also been focused on expanding and deepening our collaboration with our ecosystem of trusted partners. And part of the strategy is to continue to improve integrations with apps frequently used together with Dropbox, such as Zoom. As part of Zoom's recent launches and apps, we were excited to preview a deeper product integration that allows users to prepare for meetings in one organized place. Customers will be able to use the Dropbox Zoom app to put together an agenda for an upcoming meeting and make sure everyone is on the same page before, during, and after the meeting. They'll also be able to sign action items and share notes with the rest of the team to ensure everyone is in the loop. This is important progress towards our vision for a smart workspace. We want to help streamline our users' most common workflows so that they can spend less time switching between apps and more time getting important work done. Helping people with their meeting workflows, as we're doing with Zoom, is just one example of many new opportunities we have for making distributed work more effective. And back in March, we completely reoriented our product roadmap to address the distributed work opportunity. And we're excited to share more of the details and launch some of these new efforts over the next few quarters. In summary, we delivered another great quarter. Demand for our products remains strong, as more people have turned to both Dropbox and HelloSign to manage their most important workflows. It's clear to us that in the long run, the shift to distributed work will be as significant as a shift to mobile or the shift to cloud. We see an even greater opportunity to improve the remote work experience by helping our users organize their work and home lives. And by truly living our mission as a Virtual First company, we believe we're on the leading edge of developing the tools our users need for the new world.

Thank you, Drew. I'm excited to join today with this being my first earnings call as the CFO of Dropbox. As many of you know, I've been with the company for many years, formerly as Chief Accounting Officer, and have helped scale the finance organization as we developed the longer-term financial targets that we shared during our earnings call in February. In particular, our objectives of aiming to deliver operating margins between 28% to 30% and annual free cash flow of $1 billion in 2024, these long-term targets exemplify some of the core tenets of our investment thesis, which I would summarize as follows: as an organization, we are committed to, and focused on, consistently executing against the guidance that we give, while also investing for continued revenue growth; driving annual improvements in operating margins; doubling free cash flow to $1 billion in 2024, representing a CAGR of roughly 20% over this time horizon; and thoughtfully allocating capital to organic initiatives, M&A opportunities, as exemplified by HelloSign; and returning capital to shareholders through share repurchases. As we work to achieve our stated long-term targets, we plan to leverage our ability to generate cash by allocating a significant portion of our annual free cash flow to share repurchases on an ongoing basis with the intention of maintaining a spend level that will at least offset dilution and potentially reduce share count. We also expect to invest in future M&A opportunities, utilizing the cash on our balance sheet, cash we generate and do not spend on buybacks, and our balance sheet debt capacity. Lastly, I will note that this financial model and targets include ongoing investment in future product bets that could yield additional upside. We believe that execution against these objectives will generate long-term value for our shareholders. With that, I would like to turn to our Q3 results that demonstrate our execution in line with this investment thesis. Total revenue for the quarter was up 14% year-over-year on an actual and constant currency basis to $487 million. ARR ended the quarter at $1.981 billion, an increase of $50 million quarter-over-quarter and an increase of 12% year-over-year. On a constant currency basis, year-over-year growth would have been 13%. Our continued growth in ARR reflects our strategy to attract new paying users, drive users to our premium plans, and improve retention. We ended Q3 with 15.25 million paying users, adding over 290,000 net new paying users in the quarter. ARPU was $128.03. Now I'd like to recap some of the go-to-market strategies we utilized in the period. As a reminder, one of our go-to-market motions includes leveraging data science to identify self-serve users within our basic user base with a high propensity to convert to paid plans. During the third quarter, the data science team used machine-learning methods to target users that have a high propensity to adopt the Family SKU. This strategy is designed to drive net new paying users and simultaneously reduce potential cannibalization of existing paying users. Additional efforts were made by our data team to best predict which paid offerings were the best fit for existing basic users. The model is used to segment hundreds of millions of users into various categories based on their likelihood to upgrade to either Plus or Business plans. These initiatives have had encouraging early signs by improving trial conversion rates through specific prompts. I want to now move on to some customer wins within our outbound go-to-market motion, where the team drove wins in a variety of sectors, including software, telecom, and retail, among others. We are excited to announce that TV Asahi, a leading Japanese media company, is now a Dropbox enterprise customer. TV Asahi is migrating from an existing solution based on Dropbox's collaborative strengths, excellent product, and security performance. Hundreds of their employees in production, sales, and business planning will use Dropbox enterprise as they prepare for the broadcast of the 2021 Olympic Games. We also continue to see strength in the education space as a globally ranked top research university in the U.K. is now a Dropbox enterprise customer. We partnered with this research leader to address their top initiatives to improve innovation amongst researchers and staff, transform to a cloud-first approach, and consolidate legacy hardware solutions and costs. Already identified by the university's researchers and industry peers as their research platform of choice, Dropbox was evaluated and determined to be the best strategic partner to enable collaboration. Finally, we expanded our relationship with a leading video game company. The developer currently relies on Dropbox as part of their game development. Due to the sheer size of the files they are working on, Dropbox was the best solution that provided a way for 1,500 developers to sync and access their content in a timely manner. With that, I'll now review the rest of the P&L. But before I do, I want to note that unless otherwise indicated, all income statement measures that follow are non-GAAP and exclude stock-based compensation, amortization of purchased intangibles, and certain expenses related to the acquisition of HelloSign. 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. Gross margin for the quarter was 80%, which was an increase of 3 percentage points compared to Q3 2019. This improvement was driven by unit cost efficiency gains with our infrastructure hardware, including lower depreciation as a share of revenue. For operating expenses, third quarter R&D expense was $132 million or 27% of revenue compared to 30% in Q3 a year ago. The decrease as a percent of revenue was driven by lower professional services and personnel spend. Sales and marketing expense was $96 million in the third quarter or 20% of revenue compared to 23% in Q3 a year ago. This decrease was due to lower event-driven spend due to COVID-19. In addition, we launched our brand campaign late in the third quarter to most closely align with our product launches. As a result, the associated expenses and payments related to this brand campaign will now shift to Q4. G&A expense in Q3 was $50 million or 10% of revenue, which was in line with the third quarter of 2019. In total, operating income in the third quarter was $112 million, reflecting an operating margin of 23%, an all-time high. Operating income increased 100% over Q3 2019 and is the result of driving revenue growth; increasing our operational efficiency with respect to headcount costs; being prudent with our spend, particularly in light of COVID-19; and the shift of the aforementioned brand campaign from Q3 to Q4. We believe this improvement in our operating margins affirms our ability to execute against our longer-term targets. Net income for the quarter was $110 million, up from $56 million a year ago. Diluted EPS was $0.26 per share based on 420 million diluted weighted average shares outstanding, up from $0.13 per share in the third quarter of 2019. Turning to our cash balance and cash flow. We ended Q3 with cash and short-term investments of $1.226 billion. Cash flow from operations was $201 million in the quarter. Capital expenditures were $14 million, yielding free cash flow of $187 million or 38% of revenue. Excluding the headquarter spend, net of TIAs of $3 million, and the payout of HelloSign deal consideration holdback of $4 million, free cash flow would have been $194 million or 40% of revenue. In Q3, we also added $42 million to our finance lease lines for data center equipment. We expect additions to our finance lease lines to be approximately 8% of revenue in 2020. Now let's turn to guidance. For the fourth quarter of 2020, we expect revenue to be in the range of $497 million to $499 million. On a constant currency basis, we estimate that revenue would be approximately $2 million lower; non-GAAP operating margin to be in the range of 22% to 22.5%; and diluted weighted average shares outstanding to be in the range of 417 million to 422 million shares based on our trailing 30-day average share price. For the full year 2020, we are raising our revenue guidance range, which was previously $1.891 billion to $1.901 billion, to $1.907 billion to $1.909 billion. On a constant currency basis, we estimate that revenue would be approximately $9 million higher for a range of $1.916 billion to $1.918 billion. We are raising our non-GAAP operating margin guidance range, which was previously 18% to 18.5%, to approximately 20%. And we are raising our free cash flow guidance range, which was previously $465 million to $475 million, to $480 million to $490 million. Finally, we expect 2020 diluted weighted average shares outstanding to be in the range of 420 million to 425 million shares based on our trailing 30-day average share price. In addition to this guidance for the remainder of 2020, I wanted to highlight a few additional items that we believe will contribute to our execution against our investment thesis. First, as Drew noted, we are moving to a Virtual First company. This will have a financial impact as we take steps to de-cost our real estate portfolio, work to generate a return on our facilities through subleases, and work to balance out our employee population by hiring in low-cost locations. We believe these steps will yield a net positive impact to our financial statements over time and will help us generate a return on our facilities. While the actual amount and timing of the benefits will depend on the outcome of negotiations with potential subtenants, we estimate that this strategy may generate in excess of $800 million in cash flows over the course of these agreements, which predominantly range in duration between 13 and 15 years. This enhances our ability to invest in growth initiatives, return capital to shareholders and achieve our long-term targets. This said, as we do not expect to recover the full value of our lease obligations, we will record a GAAP impairment charge in the range of $400 million to $450 million related to our right-of-use and other lease-related assets. The vast majority of this impairment charge will be recorded in the fourth quarter of 2020, though a portion may be incurred during the first half of 2021. I would also note that we plan to exclude this impairment charge from our non-GAAP operating income. And as such, these charges have not been included in our operating margin guidance. Next, I wanted to highlight our approach to managing our capital. Looking forward, as we work to achieve our long-term goals, we intend to allocate a significant portion of our annual free cash flow to share repurchases on an ongoing basis with the intention of maintaining a spend level that will at least offset dilution and potentially reduce share count. In addition, in the near term, we intend to increase the pace at which we repurchase shares under our existing repurchase authorization, with the potential to exhaust our current share repurchase authorization by the end of the first quarter of next year. We believe that utilizing our capital in this way is efficient, and we will ensure that we put the strength of our ability to generate cash to work. Collectively, our financial results and these future planned steps demonstrate our commitment to, and execution against, our investment thesis. We will continue to invest in revenue growth, improve our operating margins, aim to deliver $1 billion of free cash flow in 2024, and allocate capital to high-ROI initiatives. While it is early in the journey, we made good progress on these goals in this most recent quarter, and we remain on the path of delivering against our long-term targets.

Thank you, Tim, and thank you all for joining us today. We're all really excited about the road ahead and believe we're uniquely suited to help our users thrive during the transition to distributed work. So on behalf of our management team, I'd like to take a moment to thank our customers, partners, and the entire Dropbox team. With that, I'd like to open up the call for Q&A.

Operator Instructions. Our first question comes from the line of Rishi Jaluria with D.A. Davidson.

This is Philip Rigby on for Rishi. I wanted to start with deeper integrations with Canvas that you announced back in August. Now that that's had a couple of months to settle in universities, curious if you have any insights you can share from usage of Dropbox by schools on Canvas? Or just even more broadly, what you've seen in terms of user adoption within education in the fall term?

Sure. This is Tim. I can start on that. So to your point, we did add an integration with Canvas. We also added one with Blackboard recently, and we've seen great traction with our EDU space, adding The University of Michigan last quarter and a few other universities in the past. So I think EDU is definitely part of our strategy and one of our long-term initiatives to keep driving ARR in the right direction.

Great. And then on R&D declining sequentially in the quarter, can you talk a little bit more about the drivers there? And just how you're thinking about hiring in R&D in the near term?

Sure. So we continue to see strong efficiency in R&D and really across all of our OpEx categories. I think that's where you see our operating income continued to be strong. We did increase operating income 100% year-over-year, ending the quarter with a 23% operating margin, up 10 points year-over-year, and expect to deliver a 20% operating margin for the year. Within R&D, we're seeing efficiency in our personnel spend, and we continue to expect that throughout the rest of the year.

Our next question comes from the line of Mark Murphy with JPMorgan.

This is Pinjalim sitting in for Mark. Drew, one product question for you. I mean, content is obviously at the center of the majority of the business processes. While we have seen some workflow capabilities in HelloSign and some inside of Paper, we have not seen a general-purpose workflow engine from Dropbox that could go into automating business processes around content. Do you think that's an area that Dropbox might venture into at some point?

Certainly, we have made significant strides in focusing on workflows. Our approach revolves around enabling end users to self-serve, emphasizing key workflows related to content and expanding into those areas. HelloSign serves as a notable example, along with others like Dropbox Transfer for sharing content. Initially, our attention has been on directly addressing workflows closely linked to content. However, there are indeed various workflows that concern content more broadly. We tackle these through our ecosystem integrations, collaborating with numerous horizontal workflow automation tools to facilitate the transfer of content in and out of Dropbox, which those tools generally support well. Overall, enhancing our customers' primary workflows surrounding content remains a major priority for us.

Understood. And Tim, I have a question for you. Thanks for reiterating the long-term goals, which is quite exciting. In the past, you mentioned that you would like to maintain a double-digit revenue growth rate as you work towards the long-term target. Is that still the case? How do you see that growth coming from ARPU versus user growth? Will it lean more towards ARPU or remain balanced?

Sure. Great question. We will have more to share on our February call when we issue 2021 guidance as far as long-term growth. I can say that we are investing for double-digit revenue growth. Perhaps more on the profitability front, even with conservative revenue growth rates, we have confidence in our long-term margin trajectory of 28% to 30%, and our cash flow target of $1 billion in 2024, compounding free cash flow at a 20% CAGR over that time horizon. So we are extremely focused on executing against that long-term model. As far as the split between paying users and ARPU, we don't formally guide to either paying users or ARPU. I'd look to our revenue guidance for the best reference point for our expectations of profitability. Growing our total ARR base is our goal as opposed to optimizing for paying users or ARPU. Historically, paying users have been the largest contributor to that growth, and I wouldn't see that changing materially into the future.

Our next question comes from the line of Brent Thill with Jefferies.

This is Luv Sodha on for Brent Thill. I had a couple of questions. One was around, obviously, the new product initiatives, especially the two add-ons that you mentioned, Creative Tools and Data Migration. Wanted to sort of see what kind of revenue opportunity this would provide. Are these add-ons that you're planning to monetize? Or any additional details there would be helpful.

Yes. Both of these add-ons are designed to enhance the experience for our larger customers. Migration is focused on simplifying the onboarding process, making it easier to start using Dropbox. The Creative Tools aim at the creative segment, which often deals with large files and various creative suites. Our capability to manage large files effectively is crucial for them, and we have many opportunities to streamline their workflows. We are monetizing these add-ons directly, and they exemplify our commitment to supporting the creative community. Recently, we formed partnerships with Adobe and others, and we are concentrating on these communities where Dropbox stands out. We also see many broader opportunities for additional add-ons and cross-selling.

Got it. And maybe one quick one on the operating margin side. Obviously, historic margins, but I guess, could you contextualize how much of the benefit you saw was one-time versus how much is sustainable going forward? And any indication on like what sales and marketing spend will be for next quarter?

Sure. So again, we're extremely focused on executing against our long-term model, which targets 28% to 30% operating margin. And as noted, operating margin increased to 100% year-over-year. As far as the drivers in the third quarter, key drivers were higher revenue; increasing our operational efficiency with respect to headcount costs; being prudent with our spend, particularly in light of COVID; and improvement in our FX rates. I wouldn't necessarily call out any one-time items. One matter that I did mention in my remarks was our brand campaign shifted to the fourth quarter, so a bit of a delta relative to the guidance we gave last quarter as far as what drove some of that beat. Some of that is shifting into the fourth quarter, but that's all factored into our guidance.

Our next question comes from the line of Pat Walravens with JMP Securities.

This is Mark on for Pat. So I have two quick ones, if I may. So one is just could you give us an update on HelloSign this quarter? And two, how are you thinking about M&A to add additional functionalities to take advantage of the work-from-home trend?

Yes. Thanks for the question. So first, on HelloSign, we continue to see strong demand. I mean, trial volumes in Q3 continued to be 45% above pre-COVID levels. We've recently integrated HelloSign more fully into the Core Dropbox product as well as our go-to-market efforts. And then on the product itself, for example, in Q3, we made HelloSign available in 21 additional languages for broader reach. So HelloSign continues to be a big opportunity for us. It's one of our fastest-growing businesses, and we think it's still early innings for HelloSign. And then more broadly, with M&A, we're always on the lookout for great opportunities there. I mean, M&A has been a really important building block as we've grown the company. We are always looking for opportunities to accelerate innovation by adding to our team or product portfolio. Our strong balance sheet and free cash flow give us the firepower to pursue these opportunities with a big user base and platform to help drive distribution. So certainly, we'll be on the lookout for opportunities, and we'll be disciplined with these investments.

Our next question comes from the line of Heather Bellini with Goldman Sachs.

Most of my questions have been addressed, Drew, but I wanted to ask about the funnel. You mentioned enhancements at the top of the funnel during the pandemic, with many shifting to remote work. Could you provide an update on how conversions are progressing compared to your plans? Additionally, considering the current environment and significant job losses, what is the trend for gross churn compared to pre-COVID levels? Are there indications that gross churn might be decreasing?

Sure. This is Tim. The COVID demand surge that we experienced was largely constrained to the second quarter, and we're pleased to have converted and retained those users at levels consistent with historical trends. This has all been factored into our guidance and is part of what's driving our raise. In the third quarter, trial starts were closer to our historical norms. We do continue to see elevated trial starts in some of our premium SKUs and new products. Just to give a few examples: Professional is actually up 25% from pre-COVID levels, and HelloSign is up 45% from pre-COVID levels. We're seeing steady conversion and retention relative to historical levels. And then, to add a little bit on the churn front, not metrics that we're updating quarterly. Across the business, churn continues to be stable, and retention is within historical levels.

Yes. To expand on that, especially regarding the small and medium-sized businesses on our platform, Dropbox is often a crucial part of their operations rather than a luxury. This is because all businesses need to work together around content, and knowledge workers, who can typically work from home, have experienced less disruption.

There are no further questions. I would now like to turn the call back to your CEO, Drew Houston, for closing remarks.

All right. Well, I want to thank everyone for joining us. I really appreciate your support, and stay safe, and we'll talk to you next quarter.

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