Earnings Call Transcript
Dropbox, Inc. (DBX)
Earnings Call Transcript - DBX Q2 2023
Operator, Operator
Good afternoon, ladies and gentlemen. Thank you for joining Dropbox Second Quarter 2023 Earnings Conference Call. All participants will be in a listen-only mode. After today's presentation, there will be an opportunity to ask questions. As a reminder, this conference call is being recorded and will be available for replay from the Investor Relations section of Dropbox's website following this call. I will now turn the call over to Karan Kapoor, Head of Investor Relations for Dropbox. Mr. Kapoor, please go ahead.
Karan Kapoor, Head of Investor Relations
Thank you. Good afternoon, and welcome to Dropbox's second quarter 2023 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 2023 and our expectations 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, industry trends, and the macroeconomic environment. 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'll 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?
Drew Houston, CEO
Thanks, Karan, and good afternoon, everyone. Welcome to our Q2 2023 earnings call. Joining me today is Tim Regan, our Chief Financial Officer. I'll first share our business and product highlights from the quarter, and then Tim will review our Q2 financial results and provide guidance for the rest of the year. I'm pleased to report that we had a solid quarter, once again beating our guidance across all metrics, led by revenue outperformance in FormSwift and some recovery within our Individuals SKUs as the progress we saw in late Q1 continued into Q2. However, we are still navigating a difficult macroenvironment that continues to impact our Teams customers and pressures growth in our DocSend and Sign businesses. Before I walk through the highlights from the quarter in more detail, I want to quickly remind you of our primary business objectives that I outlined last quarter. The first objective is around building AI-powered product experiences to help our customers organize their working lives. Our company mission at Dropbox is to design a more enlightened way of working and I'm proud that we've accelerated our roadmap here with Dropbox Dash and our progress in AI, which I'll discuss in a minute. Our second objective is continuing to evolve the core file sync and share experience to specifically address customers' workflows around documents and videos. Much of the work here has been foundational, focusing on driving retention and conversion, and I'll share more about the progress we made during the quarter. So, with that backdrop, I'll touch on what we're working on to drive these objectives, starting with our first objective of building AI-powered product experiences to improve knowledge work. As we discussed on our last call, we took some important actions in Q2 to better align our investment strategy with our long-term growth initiatives and to drive product velocity against our AI roadmap. While Dropbox has been investing in AI and machine learning technology for many years, we're all witnessing an unprecedented wave of innovation around generative AI and large language models. And seemingly overnight, we now live in a world where machines can read and write, talk to us, and answer our questions in natural language. While there's a lot that these AI chatbots can do, there are many questions these chatbots can't answer when it comes to questions about you, your content, or your company because they aren't personalized. It's clear that customers need more personalized AI that can answer questions and provide insights on their own content, their company's content, and help them find what they need at work. With hundreds of billions of pieces of content already stored on Dropbox, and as a service that is trusted by hundreds of millions of users, we see ourselves as uniquely positioned to build personalized AI at scale. That's why, in June, I was really excited to introduce our first generation of AI-powered product experiences to help our customers organize their working lives. I'll start with Dropbox Dash. Dash is our AI-powered universal search product that connects all of your cloud tools and apps and content to a single search bar that searches everything. With more of our work spread across 100 tabs in a browser, a common pain point for knowledge workers is that they spend too much time looking for their work and having to navigate between apps. Dash connects to major platforms and tools like Google Workspace, Microsoft Outlook, Asana, Notion, and many others, allowing users to quickly find everything from one place. Because Dash is powered by machine learning, it evolves and gets smarter the more you use it. We've talked about universal search over the last couple of years since our acquisition of Command E and our teams have been working hard to build on top of that functionality. We rolled out two additional features within Dash beyond universal search. The first is Stacks, which are smart collections for all the cloud docs in your browser. Similar to how files have folders and songs have playlists, Stacks gives you an easily shareable organizational layer for your URLs, so that you can seamlessly share multiple links at a time. Stacks uses machine learning to offer smart suggestions and organize links for you, saving you from the process of having to manually save all your links. The other feature within Dash is the start page, which is a single dashboard that lets you access Dash's universal search, view your Stacks, integrate your calendars to start meetings from there, and get shortcuts to recent work. So, if users close their browser and restart the computer, the start page picks up where they left off, letting users get back to their most important work. Dash is currently in closed beta and we've been carefully rolling it out to more users over the summer. Early feedback has been positive and we're seeing healthy activation rates and retention rates. While we're leveraging our self-serve go-to-market strategy to acquire users, we're also working with our managed sales force to identify SMB customers that can test and use Dash as early Teams customers. We're excited to continue scaling Dash and iterating on the product based on customer feedback. Over time, we plan to release more advanced use cases, such as Dash Answers, where users can ask any question or receive a specific answer about a piece of content instead of having to click through lots of search results or dig through specific files and folders. I'm looking forward to getting Dash in the hands of many more customers over the coming months. Along with Dropbox Dash, in Q2, we also advanced our core product roadmap with the launch of Dropbox AI. Now, Dropbox Professional and Dropbox Teams users can leverage Dropbox AI on their file previews page to summarize their content with a single click, whether it's a 100-page document or even a long video. Users can also ask questions for Dropbox AI to answer based on content within a file, and over time we plan to apply this functionality to folders and eventually the user's entire Dropbox. We're encouraged by the early engagement from the users who have tried Dropbox AI for their files. As we increase discoverability for this new functionality for more users, we're excited to see how Dropbox AI can ultimately increase customers' productivity. We'll continue to evaluate the performance on these new AI-powered product experiences as well as other in-house capabilities we're building within Dropbox. And we're not doing this alone. Last month, we were featured as a global partner for Meta's Llama 2 launch. We also announced Dropbox Ventures to support the next generation of AI start-ups. As we stay on the forefront of this new AI wave, continuing to use AI responsibly while protecting our customers' privacy is more important than ever. So, in June, we published our AI principles, which guide our teams as we develop AI products and features in the years to come. Moving to our second objective, which is evolving the existing Dropbox file sync and share user experience to seamlessly address customers' workflows around documents and videos. In Q2, we made progress in a number of areas to improve churn with individuals and drive higher top-of-funnel activity for our work users. We also continued driving our company-wide effort to deliver a multiproduct solution, integrating several of our workflow businesses beyond FSS. First, I'll touch on improved churn with individuals. As we've discussed in the past several calls, as the macroenvironment has become more challenging, we saw an uptick in churn amongst our individual users, notably our Mobile Plus customers. Some of this was driven by recent mobile operating system changes, which increased transparency around subscriptions, and some was due to areas of app instability. To address the latter issue, our team made significant progress in enhancing our tooling and instrumentation to detect and address reliability issues, which helped reverse the sequential declines in mobile churn that we had seen over prior quarters. We also made some optimizations in our payment processing to make it easier for customers to keep their wallet up to date, which also drove some modest improvements to Individuals churn. In addition to these behind-the-scenes upgrades for our customers, we improved the UX experience and the performance of file uploads. This led to improvements in upload success, and our internal testing has shown that we have regained the number one position for upload speeds for large files. We also improved the speed of our camera uploads on iOS that increased the speed of our most common upload size by up to 40%. I'm proud of the team's work here in quickly addressing areas to drive performance and reliability, ultimately delivering a better experience for our customers. We remain focused on driving our top-of-funnel. In Q2, we made a more concerted effort to surface Teams and Professional plans, resulting in an increase in Teams trial starts as well as pro conversions through this more targeted effort. While it's important to focus on top-of-funnel, we also made improvements in driving engagement for Teams admins starting a trial, which are necessary leading indicators in our efforts to increase conversion of these users and ultimately team expansion. In Q2, we launched a new activation homepage for admins to easily set up their team and learn about the product. Over time, this homepage will also serve as a jumping-off point for Dropbox to introduce higher-value capabilities, including our document and video workflows and our new AI-powered features. During this environment where we've seen continued fee contraction among our larger Teams customers, who have faced challenges within their own businesses, I'm encouraged to see our increased focus on how we can better serve professionals and small teams. I've talked before about our investments in workflows around videos and documents and the efforts we've made in integrating several of our businesses into the core Dropbox experience to make it more seamless for customers. In Q2, we began rolling out an integrated bundle including FSS, DocSend, Sign, and PDF editing for the first time to some of our professional users. Previously, we had sold standalone offerings, such as our Pro-FSS and eSign as a bundle, but the user experiences were disjointed for customers as the two products weren't tightly integrated. I'm excited to see our deeper integration efforts provide a more frictionless experience for customers, and we'll have more to share next quarter about our multi-product strategy. While driving multi-product attach rates across our Dropbox users is a long-term opportunity, I'm pleased to also see some momentum in our standalone businesses such as FormSwift, which we acquired late last year, and our in-house video editing tool, Replay, which just launched into general availability in April. As a reminder, FormSwift provides an online library of forms and templates for small businesses and individuals. We saw outperformance in FormSwift's business for the second straight quarter, driven by improved retention and increased account creation through Google Sign-in. While FormSwift benefits from some seasonality earlier in the year around tax planning, we see opportunities to further leverage FormSwift's performance marketing engine, and we're continuing to make progress towards rebranding and deeper integration of FormSwift within Dropbox this year. In our video workflows, Replay has shown a solid start in its first couple of months since we launched it to a wider audience. We're already seeing some beta customers subscribing to the premium add-on, and customer satisfaction scores remain high across our user base of creative professionals. We see a greater opportunity to drive Replay adoption as we advance towards our multi-product suite offerings, and I look forward to sharing more next quarter as part of our multi-product update. In closing, we delivered a solid quarter and introduced some exciting AI-powered product experiences to our customers. While we recognize the macroenvironment remains uncertain, we're focused on improving the product experience within core Dropbox and attaching more value across workflows in AI-driven capabilities. I remain focused on working closely with our product and engineering teams to strengthen our foundation while innovating for our next act. We look forward to sharing more of what we've been building at our upcoming customer conference in October in New York. It will be our first major in-person customer event since the pandemic, and I'm excited for more of you to see our product enhancements up close. We'll be sharing more details in the coming weeks, and I hope to see many of you in person soon. With that, I'll pass it on to Tim.
Tim Regan, CFO
Thank you, Drew. I'll walk through some financial highlights for Q2 and provide an outlook for Q3 and 2023, as well as an update on our financial targets for 2024. Let's start with our second quarter results. Total revenue in Q2 increased 8.7% year-over-year to $622 million, beating our guidance range of $612 million to $615 million. Foreign exchange rates provided an approximate $14 million headwind to growth. On a constant currency basis, revenue grew 11.2% year-over-year. The upside to our revenue guidance was driven by outperformance from FormSwift as well as the improvement we saw across our Individuals plan that Drew mentioned. Total ARR for the quarter grew 7.2% year-over-year for a total of $2.5 billion. On a constant currency basis, ARR grew 10.9% year-over-year, primarily driven by FormSwift and our Teams price increase. ARR grew $33 million sequentially, driven by the retention improvements within our Individuals plans. We exited the quarter with 18 million paying users and added approximately 140,000 net new paying users sequentially, a modest improvement from Q1, driven by some improvement in Individuals churn as compared to the trend in prior quarters, as well as an uptick in professional users from our more targeted top-of-funnel efforts. Average revenue per paying user for Q2 was $138.94, which is flat compared to the first quarter of 2023, as the benefits we saw from our pricing initiatives were largely offset by FX headwinds and the continued adoption of our Family plan. ARPU increased by over $5 year-over-year, driven by the Teams pricing increase, FormSwift, and a shift to premium plans. Before we continue with further discussion of our P&L, I'd like to note that unless otherwise indicated, all income statement figures mentioned are non-GAAP and exclude stock-based compensation, amortization of purchased intangibles, certain acquisition-related expenses, impairments of our real estate assets, expenses related to our reduction in force, and net gains on equity investments. Our non-GAAP net income also includes the income tax effects of the aforementioned adjustments. Moving to our real estate strategy, we have been taking steps to reduce the cost of our real estate portfolio as a result of our transition to a virtual-first model. This quarter, we incurred a nominal impairment charge of $2 million due to a small sublease we executed outside of San Francisco. Overall, our assumptions regarding our real estate portfolio remain consistent, and we continue to anticipate a softer real estate market over the next couple of years. We also continue to actively seek subleases and consider buyouts of the remaining space available within our San Francisco headquarters. With that, let's continue with the second quarter P&L. Gross margin was approximately 83% for the quarter, roughly flat as compared to the second quarter of 2022. Operating margin was approximately 34%, up roughly 200 basis points year-over-year. We beat our operating margin guidance by over 250 basis points, mainly due to delayed marketing and project spend following our reduction in force in April, as well as our revenue outperformance. Operating expenses were $302 million, up about 3% year-over-year. While we did see a partial quarter of cost savings in Q2 from our reduction in force announced in late April, this was offset by our annual merit increases and continued investment in talent supporting our AI efforts, as well as marketing spend for FormSwift. Net income for the second quarter was $174 million, up 26% versus the second quarter of 2022, driven by operating income growth and higher interest income. Diluted EPS was $0.51 per share based on 344 million diluted weighted average shares outstanding, up from $0.38 per share based on 366 million diluted weighted average shares outstanding for the second quarter of 2022. Moving on to our cash balance and cash flow. We ended the quarter with cash and short-term investments of $1.2 billion. Cash flow from operations was $188 million in the second quarter, down from $210 million in the second quarter of 2022, mostly driven by $34 million in severance payments related to our reduction in force. Capital expenditures were $3 million during the quarter. This resulted in a quarterly free cash flow of $185 million compared to $206 million in Q2 of 2022. In the quarter, we also added $33 million to our finance leases for data center equipment. Let's turn to our share repurchase activity. In Q2, we continued to execute against the $1.2 billion authorization that was approved in 2022 by repurchasing 7 million shares, spending approximately $154 million. At the end of the second quarter, we had approximately $419 million remaining under the current authorization. Additionally, as I will discuss in greater detail shortly, we're pleased to announce today that our Board has authorized an additional $1.2 billion share repurchase program. I'd now like to share our guidance for the third quarter and provide an update to our full year 2023 guidance, where I will also provide some context on the thinking behind this guidance. For the third quarter of 2023, we expect revenue to be in the range of $626 million to $629 million. On a constant currency revenue basis, we expect revenue to be in the range of $634 million to $637 million. We are assuming a currency headwind of approximately $8 million in the third quarter, which translates to a 130 basis point headwind to year-over-year growth. We expect the non-GAAP operating margin to be approximately 33%. This includes roughly a 130 basis point headwind from FX and FormSwift. Finally, we expect diluted weighted average shares outstanding to be in the range of 347 million to 352 million shares, based on our trailing 30-day average share price. For the full year 2023, we are raising the midpoint of our as-reported revenue guidance up by $14.5 million to $2.487 billion to $2.497 billion from our previous range of $2.470 billion to $2.485 billion. On a constant currency revenue basis, we are raising by $12.5 million at the midpoint to $2.525 billion to $2.535 billion, up from the prior range of $2.510 billion to $2.525 billion. We estimate a full year 2023 currency headwind of approximately $38 million or approximately 160 basis points headwind to growth, with minimal FX impact in Q4. We now expect FormSwift to contribute closer to 300 basis points of growth, up from our prior forecast of approximately 250 basis points of growth. We expect gross margin to be approximately 82%, up from our prior guidance of 81.5% to 82%. We expect non-GAAP operating margin to be approximately 32%, up from our prior guidance of 31% to 32%. This is inclusive of approximately a 100 basis point headwind from FX and FormSwift. We are maintaining our free cash flow guidance of $820 million to $840 million. This includes cash outflows of approximately $23 million in cash outflows for the 2023 installments of acquisition-related deal consideration holdbacks for DocSend and Command E; one-time severance payments of approximately $40 million related to our reduction in force; and consistent with our initial guidance, this includes an approximately $50 million headwind as a result of R&D tax legislation. As related to our capital expenditures and additions to finance leases, we are increasing our prior guidance. In recent years, we have seen users uploading increasing levels of high-density files, such as videos and images to our platform. To address these usage and storage needs, we're adding some extra capacity and upgrading some of our existing infrastructure this year, which is reflected in our revised guidance. We now expect our additions to finance leases to be approximately 5.5% of revenue, up from our prior guidance of approximately 5%. We're increasing our cash CapEx range by $5 million to now expect $30 million to $40 million in cash CapEx in 2023. Finally, we expect 2023 diluted weighted average shares outstanding to be in the range of 345 million to 350 million shares, up from our previous guidance range of 340 million to 345 million shares. To share some additional context on this guidance. As related to revenue, we are raising our revenue guidance for 2023, driven by outperformance in Q2 from FormSwift and improved trends across our Individuals plans. These positive trends are outweighing macro headwinds on our Teams plans, as well as both DocSend and Sign. Additionally, and as a reminder, we will be lapping the benefit of our Teams price increase in the second half of this year, which is reflected in our guidance. As related to operating margins, we are raising our operating margin guidance to approximately 32%, up 50 basis points as compared to the midpoint of our prior guidance, driven mostly by our revenue outperformance. As a reminder, we expect to invest some of the savings from our reduction in force towards long-term growth initiatives, particularly hiring talent skilled in AI and early-stage product development. We've also shifted some project and marketing spend from Q2 into the second half of 2023. As a result, we expect that our Q2 operating margins will represent the high mark for the year. As related to full year free cash flow, we are maintaining our free cash flow guidance range of $820 million to $840 million. While we are raising our revenue and operating margin guidance, we are maintaining our free cash flow range due to the higher levels of CapEx needed to support our recent infrastructure capacity needs. Additionally, as a reminder, we still foresee a potential impact of billings later in the year as a result of our reduced levels of headcount and marketing investments stemming from our restructuring. As related to our share count and plans to return capital to shareholders in the form of share repurchases, as of the end of Q2, we had approximately $419 million remaining on our existing $1.2 billion share buyback authorization. We remain committed to allocating a significant portion of our annual free cash flow to share repurchases. Consistent with the strategy, we are pleased to announce that our Board has authorized an additional $1.2 billion in share repurchases. This brings our total current capacity under our share repurchase program to approximately $1.6 billion. As a reminder, our buyback program is structured to buy more shares at lower price points. As a result of our recent share price performance, we have adjusted our full year share count guidance accordingly. Lastly, as related to our long-term financial targets of delivering gross margins of 80% to 82%, operating margins of 30% to 32%, and $1 billion of annual free cash flow by 2024. As you can see, we are operating at or above these margin levels this year, driven by efficiencies in our data center infrastructure and savings from our reduction in force. While we are not offering more specific 2024 guidance at this time, we expect to remain at the high end of these ranges next year. Consistent with what we shared last quarter, we expect to invest a portion of our savings from our recent workforce reduction towards our long-term initiatives, including Dropbox Dash and Dropbox AI. As we roll out these products to a broader audience of users and gain clarity on the customer response, we will assess the appropriate levels of investment to support their momentum. Therefore, we are maintaining our range at this time. As related to our $1 billion of annual free cash flow by 2024, we are maintaining our target at this time. While we exceeded our revenue and operating margin guidance in the second quarter, we continued to face significant headwinds from exogenous factors such as R&D tax legislation, which came to light after we initially developed our long-term targets. We are also keeping in mind the potential for further investment that I just mentioned, where we intend to ensure that we're appropriately funding our long-term growth. In short, we remain focused on achieving our $1 billion target. However, we still have work to do. In conclusion, we continue to drive foundational improvements to our core business while carefully investing towards new AI-powered products that we're excited to roll out to more customers. While the macroenvironment remains uncertain, we will stay focused on our customers, operating the business efficiently, and driving long-term value for our shareholders. With that, I'll now turn it over to the operator for Q&A.
Operator, Operator
Thank you. And our first question coming from the line of Rishi Jaluria with RBC Capital Markets. Your line is open.
Rishi Jaluria, Analyst
Wonderful. Thanks, guys, so much for taking my questions. I had two. I wanted to first start, maybe, Drew, if you could go a little bit deeper into your strategy around Dash and particularly you had mentioned Dash Answers as an area you want to get into later. Can you talk a little bit about kind of some of the use cases? And maybe more importantly the use case you're trying to solve for, at least the way it sounds to us, it seems like a big pain point for a lot of customers. I know the idea of search has been important to you for years, so this isn't a brand new or coming out of nowhere. But how do you think about positioning yourself to your customers as the center of gravity for solving that problem and driving adoption of these solutions, especially just kind of given maybe some of the learnings out of the new Dropbox in the past? And then, I've got a quick follow-up.
Drew Houston, CEO
Thanks, Rishi. We’re really excited about Dash, which I view as a natural progression for Dropbox from simply organizing files to managing all cloud content. The challenge arises from customer experiences, including my own; we've all faced the frustration of knowing a document is somewhere but not being able to locate it. This resembles an issue we initially faced, where our files were dispersed across various devices and operating systems. Now, the equivalent is having numerous tabs open in your browser instead of files scattered around. There’s an essential need for a better way to organize cloud content because the current search functionality is inadequate. Instead of a single search interface, we juggle multiple apps, each with individual search capabilities that only cover a fraction of our data, resulting in a lack of an organizing framework. There’s no continuity or concept of collections for links, and I could detail many more pain points. We view this issue as a prominent opportunity, similar to the challenges Dropbox aimed to solve at its inception. The need for improved organization is significant, more so than even file synchronization and sharing. The growth in this area, coupled with advancements in large language models and generative AI, allows for more natural interactions and could completely transform search paradigms. Although generative AI tools like ChatGPT are impressive, they often fail to provide personalized answers, such as specific details about a user’s documents. Therefore, we recognize a substantial opportunity for Dropbox to offer personalized AI solutions, considering the millions of users who trust us with their critical information. During our launch in June, we introduced Dropbox AI, enabling users to summarize extensive documents and videos while facilitating natural language queries, leading to a personalized chatbot experience alongside Dash, which will also feature Dash Answers for content. We’re eager about these advancements and look forward to enhancing customer experiences. Our established trust with customers positions us well; many already store their crucial files in Dropbox, making it easier for them to adopt Dash. In the realm of one billion knowledge workers, no current solution addresses the organizational challenges related to cloud content, presenting a considerable chance for us to grow our market potential. We have embraced numerous lessons from previous product initiatives, and the advent of AI gives us the necessary tools to create long-desired products. Dash is purpose-driven, focusing on enhancing search functionalities, developing smart collections, and creating a productive start page. We have been iterative in our approach, working closely with customers, and a pivotal part of this is our earlier acquisition of Command E. We are thrilled about launching Dash and our broader product lineup to more users.
Rishi Jaluria, Analyst
Awesome. No, thanks. Very thorough. I guess just a quick follow-up. As we think about generative AI, I know it's too early to give prices around monetization. But I want to better understand your monetization strategy. Is this something that you might gate behind higher-tier SKUs and use that to drive upgrades? Are there certain modules that you might consider monetizing discreetly? Is this more about driving value, and therefore, you're going to get more new customers and better gross retention? I really just want to understand your philosophy regarding monetization without having to put numbers around it.
Drew Houston, CEO
Sure. There’s going to be a portfolio of applications of AI, and I think the way I think about it is similar to how you could replace machine learning. There are many different applications of machine learning even before large language models. Some are just table stakes features of the product, some are available only in higher-tier plans, and then some are explicit add-ons. We expect this to be true for AI as well; that's already somewhat the case. For instance, Dropbox AI, which is part of the Dropbox file sync and share product, is only available to paid customers currently in alpha. Products like Dropbox Dash will have similar considerations. When looking at the broader market, there are various approaches from integrating AI capabilities into paid SKUs or higher-tier plans, or, for example, what Microsoft does with an add-on for AI capabilities. It's a bit too soon for us to share exactly what we're planning, but we think of it as a portfolio and we aim to ensure that we create the right amount of value for most users while designing our pricing and packaging to capture the value we create effectively.
Tim Regan, CFO
Real brief, Rishi, this is Tim. Our focus this year, particularly on Dash, is on bringing a quality product to market and driving customer adoption. We expect that it will take several quarters before we start seeing a contribution to revenue from Dash.
Operator, Operator
Thank you. And our next question coming from the line of Mark Murphy with JPMorgan. Your line is open.
Sonak Kolar, Analyst
Great. Thank you for taking the question. This is Sonak Kolar on for Mark Murphy at JPMorgan. Tim, at our TMC conference this year, you shared some color around a customer survey indicating about, I think, 8% of existing customer awareness for Dropbox Sign. Could you please provide us with some additional context on the progress Dropbox is making in terms of spreading that awareness of the full capabilities of the platform? And how that might be driving incremental cross-sell or up-sell opportunities?
Tim Regan, CFO
Sure. Good questions. We have been working towards bundles for a while, where we're excited to roll those out soon. To your point, we ran a recent survey where roughly half of our users want capabilities such as e-signature, but less than 10% know we offer it. This presents an opportunity to solve these problems for our customers. We have addressed foundational items, such as rolling out a single legal terms of service and a unified customer identity. We're now testing a bundle that includes file sync and share, Sign, and DocSend for professional users, where early signals on conversion are positive. We're also working on our Teams version of these bundles, and we will have more to share soon. We're excited that we are making progress on this dimension.
Sonak Kolar, Analyst
Great. Thank you, Tim. And then maybe a quick follow-up is just in terms of the macro, I'm curious if we have to say relative to Q1 if the macro is fairly consistent or would you say that there are pockets of incremental improvement or worsening? Just any color that you can provide on how the macro has trended sequentially?
Tim Regan, CFO
Sure. As far as what we're seeing today, I'd say the macro trends are roughly consistent with what we've observed over the past couple of quarters. On one hand, we continue to see elevated price sensitivity and down-sell pressure from our Teams customers, particularly those that have faced layoffs themselves. Sign and DocSend are also continuing to face macro-related headwinds. On the other hand, we see positive trends around our individual SKUs, particularly on retention, but we believe this is largely due to actions we've taken rather than a change in macro dynamics. We're also seeing continued improvement in sign-up trends as a result of our rollout of Google One Tap and other streamlined onboarding processes, where our guidance factors in these latest trends.
Sonak Kolar, Analyst
Great. Thank you, and congrats on the results.
Tim Regan, CFO
Thank you.
Operator, Operator
Thank you. And our next question coming from the line of Steve Enders with Citi. Your line is open.
Steve Enders, Analyst
Great. Thanks for taking the questions here. I want to start on, it seems like last quarter and now there's a bigger push on the hiring side to hire AI talent and help diversify the employee base here. How are you finding the hiring environment today for those with expertise there? How should we view those incremental hires layering into the model through the rest of the year?
Drew Houston, CEO
Sure. We’re finding it a pretty fertile environment and having a lot of success hiring. It helps to have announcements like Dash to be able to talk about more broadly. Other factors include our virtual-first model, allowing us to hire more flexibly outside of major tech hubs. We've been building out leadership teams for AI skill sets, blending both experienced AI folks from industry and also training up existing engineers. There's a lot of enthusiasm around turning our engineers into AI-aware skilled professionals.
Tim Regan, CFO
And maybe just from a model perspective, our operating margin guidance is set to be approximately 32%, up 50 basis points from the midpoint of prior guidance of 31% to 32%, driven by revenue outperformance. We expect to invest some of the savings from our reduction in force towards longer-term growth initiatives, including this hiring and talent skilled in AI and early-stage product development. We’ve also shifted some project and marketing spend into the second half. As a result, we do expect our Q2 operating margins to represent the high mark for the year.
Steve Enders, Analyst
Okay. That's helpful. And then, maybe on FormSwift, I mean, good to see continued outperformance here in the quarter. I guess two questions on that. Firstly, what is it that's helping drive the performance above your expectations? And secondly, on the updated guide, it looks like most of that is coming from, at least on the top-line, is coming from the FormSwift outperformance. Is that the right way to be thinking about that? And what are the implications for how the rest of the business is executing versus your expectations?
Tim Regan, CFO
Sure. We’re raising the midpoint of our constant currency guidance range by about $12.5 million for the full year, mostly driven by Q2 outperformance as well as better trends in Individuals. Conversely, we continue to see macro headwinds weighing on our Teams customers, as well as both DocSend and Sign. FormSwift also outperformed our expectations for the second quarter in a row. We're pleased with their progress, seeing better-than-expected retention on their side due to UI and product enhancements, with the association to the Dropbox brand also helping.
Steve Enders, Analyst
Okay. Perfect. Thanks for taking the questions.
Operator, Operator
Thank you. And our next question coming from the line of Michael Funk with Bank of America. Your line is open.
Michael Funk, Analyst
Yes, thank you for the question guys. I really appreciate it. To dig in a bit more on the churn improvement sequentially during the quarter, I think previously you mentioned that you implemented some new customer retention initiatives. Love to get some more color around that, and then also an expectation for how much more churn could improve from here as we anniversary the price increase from last year.
Tim Regan, CFO
Yeah, sure. This is Tim. I can start. Drew, feel free to jump in. We saw our churn rate remained roughly consistent with last quarter, with ongoing macro pressure on our Teams customers offset by some improvement with Individuals. We continue to see elevated churn amongst our Teams customers, particularly those who have gone through layoffs themselves. On the positive side, we have seen churn stabilize for our individual plans, where our team worked on making the product easier to use, improving upload speeds, and reducing upload delays. They also introduced payment processing alerts to help users keep their credit card information updated. Overall, our churn rate does remain in the low teens.
Michael Funk, Analyst
Okay. And then, the impact on ARPU from the retention efforts, how should we think about it? I know it's flat quarter-over-quarter, but how should we think about the impact on ARPU from retention?
Tim Regan, CFO
Sure. To walk through some of the ARPU dynamics that we saw in the quarter: on a year-over-year basis, ARPU was up about $5, landing at about $139. This was driven by various factors: benefits from our pricing initiative, which continues to flow through, as well as a shift to higher-priced plans contributing about $7, and the acquisition of FormSwift, which added about $2. These were partially offset by FX and the continued growth in our Family plan.
Michael Funk, Analyst
Okay. And then really quickly on the repurchase. Great to see incremental $1.2 billion, so it's about $1.6 billion total; my math, about 18% of the cap. Any commentary on the adjustment to the year-end share count though? And how we should think about the pace of share repurchase and then kind of the signaling of the new repurchase program?
Tim Regan, CFO
Sure. Our buyback program is structured to buy more shares at lower price points. As a result of our recent share price performance, we've adjusted our full year share count guidance accordingly. We continue to repurchase shares as part of our 10b5-1 plan, and our updated share count guidance gives the best sense of our future repurchase expectations. We expect to allocate a significant portion of our annual free cash flow to share repurchases on an ongoing basis, with the intention of reducing our share count. The new authorization reflects our commitment to that program.
Michael Funk, Analyst
Great. Thank you all for the time.
Operator, Operator
Thank you. And our next question coming from the line of Brent Thill with Jefferies. Your line is open.
Eylon Liani, Analyst
Hello. This is Eylon Liani on for Brent Thill. Thanks for taking my question. Two things on my end. First, what do you think about the sustainable growth rate of the business and how do you break that out between core FSS and the other assets? Secondly, given that you raised the full year guide by more than the beat in the quarter, are you factoring in a greater sense of optimism in terms of macro for the back half of the year? Or just if you can talk through the factors that went into the full year guide.
Tim Regan, CFO
Sure. On guidance philosophy, I'd say we're being consistent with our historical approach. Our macro view is largely the same as it was last quarter, not assuming an improvement in the economy in our guidance. We are assuming the same trends we saw in Q2 will continue, including positive trends from our individual SKUs, which we directly acted upon to improve. This is offset by sluggish demand within our Teams SKUs. We also remain mindful of our reduction in force and the potential impact this could have on our billings, given our reduced levels of investment in headcount and marketing, where all of these considerations are factored into our guidance. As far as our long-term thinking, we’re not providing any revenue guidance beyond 2023 at this time. We're watching the evolving macro environment as we navigate our path forward. We are launching several new product experiences later this fall, such as Dropbox Dash and Bundles, where we'll have a better idea of the revenue contribution after we gain initial customer signals. Ultimately, we’re very focused on driving a healthy balance of growth and profitability as we pursue our financial targets.
Eylon Liani, Analyst
Thank you.
Tim Regan, CFO
Sure.
Operator, Operator
Thank you. And our next question coming from the line of Jacob Staffel with Goldman Sachs. Your line is open.
Jacob Staffel, Analyst
Hi, this is Jacob Staffel on for Kash Rangan. Thanks for taking the question. A couple of questions from me. So, Dropbox has expanded the product portfolio recently. We see that with Dash, Dropbox AI, DocSend, and Replay. Can you touch on how those offerings might be doing relative to the core FSS offering that Dropbox was founded on? Additionally, how are you thinking through hiring in the near term, specifically quota-carrying reps? Can you touch on maybe how the self-service channel has fared in Q2 on a sequential and on a year-over-year basis?
Drew Houston, CEO
Sure. We are pleased with the progress we've been making and broadening the portfolio you touched on. We started with FSS, but found our customers had multiple workflow needs around the content in Dropbox. Therefore, we have seen expansion into document workflows with FormSwift and DocSend and HelloSign, and increasingly we're doing more with video with Replay and Capture. Our customers have shifted workflows from files and desktop apps to cloud tools and browsers, highlighting the new need to organize all your cloud content and fix problems with search and organization. We seek to bring intelligence into the work experience transforming challenges into new opportunities. As for those products, I likely don’t have more to add but we’re very excited about potential products like Dash and Dropbox AI. I wouldn’t say there’s a significant shift in how we're thinking about hiring quota-carrying reps. As a reminder, 90% of our business is self-serve. We have a targeted outbound and managed motion designed to grow accounts once they reach a certain threshold. We're focused on scaling and embracing our new products.
Tim Regan, CFO
I think you asked about the performance of self-serve. It largely mirrors the trends Drew and I have discussed, where on the Teams side, we're seeing price sensitivity, and on the Individuals side, we’ve seen improvements in retention that we've already discussed.
Operator, Operator
Thank you. And I see we have no further questions at this time. Ladies and gentlemen, this concludes today's conference call. You may disconnect at this time, and have a wonderful day.