Earnings Call Transcript - DBX Q1 2024

Peter Stabler, Head of Investor Relations

Good day, and thank you for standing by. Welcome to the Q1 2024 Dropbox Earnings Conference Call. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker, Drew Houston, Co-Founder and CEO. Please go ahead.

Drew Houston, CEO

Thank you. Good afternoon, and welcome to Dropbox's First Quarter 2024 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 forecast for our second quarter and fiscal year 2024 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 in 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'll now turn the call over to Drew Houston, Co-Founder and CEO. Thanks, Peter, and good afternoon, everyone. Welcome to our Q1 2024 earnings conference call. Joining me today is Tim Regan, our Chief Financial Officer. I'll first provide an overview of recent business and product highlights, and then Tim will review the details of our Q1 financial results and update our outlook for the remainder of the year. Revenue for the quarter was in line with our expectations. However, we still have work to do to return our core File Sync and Share (FSS) business to a growth rate that's more representative of the opportunity we see. As our teams work on initiatives to achieve that, and I'll share more about those efforts in a moment, we continue to manage our expenses carefully and we're pleased to have delivered better-than-anticipated profitability in the quarter. On another positive note, after a challenging fourth quarter, paying users returned to sequential growth with 35,000 net new additions in the quarter. We are encouraged by this return to paid user growth, but we're still facing macroeconomic challenges and an uncertain demand environment. Within our core FSS business, we continue to see pressure across our self-serve individual and Teams offerings while in the quarter we saw a better-than-anticipated performance across our Document Workflow group comprised of Form Swift, Sign, and DocSend. I'll now share more specifics on our core FSS business, starting with Teams. Improving our Team's offering is a focal point for us this year. Our Team's plans feature higher net revenue retention rates and an opportunity for license expansion. In Q1, we focused on reducing friction in the onboarding process, improving the Team admin workflow and streamlining the sharing experience. We're pleased that the changes we made led to solid top-of-funnel improvement during Q1 with trial starts, team invitations and weekly active usage, all posting year-over-year increases. These are positive indicators that customers are trying and using our products, and the next step is for us to convert and retain these potential new paying users. As we mentioned on our last call, late in Q4, we implemented tests and experiments for individual plans that didn't produce the expected results. In particular, our emphasis on higher-priced SKUs in our mobile channel ended up negatively impacting our top of funnel metrics, including trial starts for new individual plan users. Over the course of Q1, we continued our work on our go-to-market motion for our individual plans. And while our mobile channel hasn't yet fully recovered, we've seen some recent improvement in top of funnel, and we're confident we can further improve the efficiency of the mobile acquisition channel going forward. Moving on to a quick update on Bundles. As a reminder, we created bundled SKUs to offer multi-product capabilities to new customers at a higher price point, reflecting the additional value we were adding to the plans. These SKUs include FSS as well as limited or introductory functionality across products such as Dropbox Sign, DocSend, and Replay. On our last earnings call, we noted that while we saw improved ARPU and higher multi-product adoption rates for the introduction of these plans, we are also seeing reduced top-of-funnel demand and conversion challenges. Based on our learnings, in late Q1, we elected to roll back the pricing of our bundled SKUs to prelaunch levels to counteract the potential price sensitivity that these plans introduced. We're currently assessing the customer response to these reduced prices, while we also work to optimize the features included with these bundles as well as the underlying product experience. We'll continue to iterate and drive towards an intuitive lineup of offerings for our customers, and we'll have more to share on our progress here in the coming quarters. Customer feedback is a critical input into our product development. Our April 2024 release is a great example of our teams acting on this feedback as we release a collection of product updates designed to make it even easier for Dropbox users to secure, organize, and share their work across different devices, locations, and platforms. To help our users secure their content, we released new Advanced Data Protection features, including Advanced Key Management and full end-to-end encryption offering our FSS users complete control over how their data is secured. The kernel of this end-to-end encryption capability stems from our acquisition of BoxCryptor in late 2022. Now our users can take advantage of this capability natively within Dropbox, providing additional protection for both our end users and their administrators, who are key influencers in purchasing group decisions. We also consistently hear from our users that they want more help organizing and sharing their content efficiently across distributed teams. For example, our users have sought ways to improve collaboration across Microsoft applications. That's why we're excited to announce real-time Co-Authoring integrations with Microsoft 365. Dropbox Teams users can now edit Microsoft Office files on the desktop simultaneously and save natively within Dropbox without conflicting copies. With real-time editing, they can be confident they're working off the latest version. We also launched a Microsoft Copilot Integration, giving users the ability to query their Dropbox files directly from within Microsoft Teams. Our April release also featured the launch of DocSend Advanced Data Rooms. Users are now able to securely share multiple files with a single link while maintaining complete control of viewing with group permissions, visitor verification, and built-in NDAs. With an easy-to-use virtual data room solution, DocSend is now even better positioned as an attractively priced full-featured solution to address the middle market deal flow opportunity. Sharing quickly and easily across teams is especially important for projects with large video files, which is the fastest-growing content type on the Dropbox platform with over 1.5 billion videos uploaded each year. To support video-based projects, we've continued to invest in Dropbox Replay, our rich media review and approval tool. Since Replay's general release, active users have been growing on average 15% quarter-over-quarter. I'll now shift gears and share an update on Dash, our stand-alone universal search product that leverages AI and machine learning to help organize all of your cloud content. Last quarter, we shared that we were prioritizing collecting input from our beta users and focusing on maximizing the utility and virality of the Dash product; and we've been making significant progress in Q1. For example, we've recently seen double-digit percent increases in search success for existing and new users, and we've reduced average search latency by over 50%. We're conducting near daily user sessions and the feedback has been valuable. As we better align Dash's key features with user needs and achieve stronger product-market fit, we're eager to leverage our platform's user base and distribution to address this growing market opportunity for cloud-based universal search. We're also working on reducing onboarding hurdles. For example, early on, we prioritized Dash development for Chrome, and while this allowed us to move faster, we created unnecessary friction for Safari and Firefox users. We've eliminated this gap. And as a result, we've seen improvements in onboarding success rates and app connections. Early engagement trends are moving in the right direction as well, up over 70%. Our newly redesigned Dash Start Page also enables users to get shortcuts to their recent work projects and view stacks which are smart, shareable collections for any kind of cloud or file content. In each quarter, we're adding more integrations with the most widely used workplace tools and apps. In closing, we had a good start to 2024. While not without challenges, we delivered against our key business objectives of enhancing the product experience for our core FSS users while investing in our next-generation AI-enabled product experiences. Given the ongoing uncertainty in the macro landscape, we'll stay disciplined in our operations, seeking efficiencies and remaining committed to judicious capital allocation. I'm excited about our roadmap for the remainder of 2024, and I'd like to thank all of our Dropboxers for their continued focus on delivering a more enlightened way of working for our customers. And with that, I'll turn the call over to Tim to share a recap of our first quarter financial performance as well as our expectations for the remainder of the year. Tim?

Timothy Regan, CFO

Thank you, Drew. I'll cover our financial highlights from Q1, provide guidance for Q2, and offer some updated thoughts on our full year 2024 outlook. Starting with our results for the first quarter. Total revenue for Q1 increased 3.3% year-over-year, to $631 million, slightly ahead of the high end of our guidance range. As expected, foreign exchange rates had a minimal impact on revenue for the quarter, amounting to a 10 basis point tailwind and a 3.2% year-over-year constant currency growth rate. Total ARR grew to a total of $2.556 billion, up 3.6% year-over-year. On a constant currency basis, we added $16 million sequentially and 2.8% year-over-year. We exited the quarter with 18.16 million users, adding approximately 35,000 net new paying users on a sequential basis. Average revenue per paying user was $139.59. Before we continue with further discussion of our P&L, I would like to note that unless otherwise indicated, all income statement figures mentioned are non-GAAP and exclude stock-based compensation, amortization of purchased intangibles and certain acquisition-related expenses. Our non-GAAP net income also includes the income tax effect of the aforementioned adjustments. With that, let's continue with the first quarter P&L. Gross margin was 84.6% for the quarter. As mentioned previously, the primary driver of the year-over-year increase in gross margin was the increase in the useful life of our servers from 4 to 5 years effective January 1 of this year. This change resulted in approximately $10 million of benefit to gross margin in the first quarter. The impact of this change is weighted towards the first half of this year, where we expect the full year benefit to be roughly $30 million. Operating expenses were $303 million, down approximately 8% year-over-year. Operating margin was 36.5%, ahead of our guidance of 33% and up roughly 800 basis points from the year-ago period. A substantial portion of our better-than-anticipated results was timing-related as we delayed spending behind certain projects and marketing efforts. Much of this delayed spend will be allocated across subsequent quarters of this year. Net income for the first quarter was $197 million, up 35% year-over-year. Diluted EPS for the first quarter was $0.58 based on 341 million diluted weighted average shares outstanding. This compares to $0.42 per share and 349 million diluted weighted average shares outstanding for Q1 2023. Moving on to our cash balance and cash flow. We ended the quarter with cash and short-term investments of $1.2 billion. First quarter cash flow from operations was $176 million, an increase of 25% versus the year-ago period. Capital expenditures in the quarter totaled $9 million. This resulted in quarterly free cash flow of $166 million compared to $138 million in Q1 of 2023. In the quarter, we also added $27 million to our finance leases for data center equipment. While this figure represents a material step down from finance lease additions in Q4, we continue to anticipate full year 2024 addition to approximate 7% of total revenue. As related to our share repurchase program, in Q1, we repurchased just over 11 million shares, spending $279 million. As of the end of the first quarter, we had approximately $1.1 billion remaining under our current repurchase authorization. Our philosophy on share repurchases has not changed. We remain committed to returning a significant portion of our free cash flow to shareholders in the form of share repurchases with the intention of reducing our share count over time, that are related to 10b5-1 grid structured to buy more shares at lower price points. I'd now like to share our 2024 second quarter and updated full year guidance, where I will also provide some context on the thinking behind this guidance. For the second quarter of 2024, we expect revenue to be in the range of $628 million to $631 million. We expect a roughly $1 million positive impact from FX this quarter. We expect non-GAAP operating margin to be approximately 33%. Finally, we expect diluted weighted average shares outstanding to be in the range of 327 million to 332 million shares based on our trailing 30-day average share price. For the full year, we are maintaining our previous guidance for reported revenue to be in the range of $2.535 to $2.550 billion. Our constant currency revenue guidance range is also unchanged at $2.532 billion to $2.547 billion despite FX rates worsening in Q1. Changes in FX have a more immediate effect on billings than on revenue and thus, the impact on revenue this year is not significant. As with prior guidance, we expect gross margin to be in the range of 83% to 83.5%. For non-GAAP operating margin, we now expect to land between 32.5% and 33% for the full year, up from our prior guidance of 32% to 32.5%, representing an increase of $13 million of operating income at the midpoint. As mentioned previously, roughly half of our outperformance in Q1 was driven by delayed spend that we expect to incur over the remainder of the year. Our expectation for free cash flow is unchanged at $910 million to $950 million. We continue to expect $20 million to $30 million in capital expenditures, and our outlook for finance lease additions is unchanged at approximately 7% of revenue for the full year. Finally, we expect our diluted weighted average shares outstanding to be in the range of 326 million to 331 million shares based on our trailing 30-day average share price. This represents a reduction of 10 million shares for each end of the range when compared to our previous guidance of 336 million to 341 million shares. I'll now share some additional context on the thinking behind our guidance. Consistent with our historical approach, our guidance reflects what we have a high degree of visibility into today. As a result, we are maintaining our revenue guidance for the year given the challenging state of the macroeconomic environment, particularly within the SMB space, as well as the work and progress status of a number of our initiatives for our core File Sync and Share business and Dash. We are also monitoring the recent security incident with our Sign business which represents a low single-digit percentage of our total revenue. And while we do not anticipate a material impact on our revenue, this could lead to incremental customer churn. Regarding paying users, our comments offered last quarter still apply. We still expect paying user growth for the full year, and we project adding users in the second quarter as well. That said, we want to remind everyone that our quarterly performance could vary should we experience any large Team churn, key changes in the macroeconomic environment, or experience incremental churn due to our recent security event with our Dropbox Sign product. As related to non-GAAP operating margin, we are raising our outlook by 50 basis points as we remain focused on being disciplined with our spend. We are maintaining our free cash flow guidance for the year. While we are maintaining our revenue guidance and increasing our operating margin guidance, we also saw FX rates worsen during this past quarter, where FX movements have a more immediate impact on billings and cash. Therefore, the improvement we are driving on operating income is roughly being offset by deterioration in FX. Finally, as related to our share count, we are reducing our expected share count range to reflect our increased pace of repurchases in accordance with our 10b5-1 grid. In conclusion, we continue to focus on efficiently operating our core File Signature business as we seek to drive revenue growth, margin expansion, and share count reduction. Concurrently, we continue to invest in new AI-enabled experiences that have a large opportunity to serve new and existing customers. We are making progress across these dimensions and believe that these efforts will culminate in creating long-term value for our shareholders. With that, operator, please open the line for questions.

Operator, Operator

Our first question will come from Steve Enders of Citi.

Steven Enders, Analyst

I guess maybe just to start out on, I guess, maybe the early feedback you're seeing from some of the AI products in Dash now that it's out there live. I guess what is the feedback so far? And how is this kind of maybe changing how you're viewing the opportunity and the monetization potential of those products?

Drew Houston, CEO

Sure, thanks for the question. The early feedback highlights a few key themes. First, my leadership team and I meet weekly with customers virtually to discuss their experiences and walk them through the product. We've found that almost all prospects and users acknowledge the universal problem of being overwhelmed by tabs and scattered content, which serves as strong validation for our solution. Additionally, we've seen that paying Dropbox File Signature users are adopting and retaining Dash at higher rates, supporting our hypothesis that transitioning from organizing files to managing all cloud content is a natural progression. This data is encouraging. Finally, we're actively working on enhancing the overall experience of the product based on user feedback. In Q1, we halved search latency. We have been enhancing the search success rate, which improved by several percentage points last quarter, along with onboarding success and connector success. These are some of the indicators we monitor as we transition from beta to general availability. While it’s still early and we have much work ahead, we are encouraged by some initial signs.

Steven Enders, Analyst

Okay. Great. The helpful context on that side. And I guess maybe to the packaging and tweaks that you've made historically on top of funnel, it sounds like maybe it's seen a little bit of improvement versus last quarter. But I guess, can you give a little bit more detail on what exactly you've changed? And maybe where the potential green shoots are coming from what you've tweaked so far?

Drew Houston, CEO

In the fourth quarter, we launched our first bundled SKU and while we saw mixed results, we learned valuable lessons. On the positive side, average revenue per user increased, and we experienced higher multi-product attachment rates. However, we also noticed a decrease in top-of-funnel conversions, partly due to existing price sensitivity related to the macroeconomic environment. This sensitivity meant that the higher prices weren't beneficial. We discovered that introducing multiple products at the same time caused some challenges in the onboarding process, leading to a slight decline in success indicators for onboarding. More generally, we've made many changes simultaneously. We are now taking a step back to implement these changes gradually and validate them individually or in a more thoughtful manner. This reinforces the importance of being cautious about altering too many variables at once. Another lesson is that there are significant opportunities, like the $1 billion potential associated with Dash. Moving forward, we are more focused on optimizing our Teams business on Dash, evolving from organizing files to managing all cloud-related aspects. However, awareness remains the biggest challenge among our customers. We have many satisfied customers who want more from Dropbox, yet we frequently hear that they are unaware of our capabilities beyond File Sync and Share. Therefore, we are actively working on promotional efforts to bridge that gap.

Operator, Operator

And our next question will be coming from Rich Hilliker of UBS.

Richard Hilliker, Analyst

I wanted to discuss the current demand environment. You mentioned the overall macro situation, which isn't new, but you also pointed out small and medium businesses (SMB). From your perspective, what insights do you have regarding the health of SMBs? I'm also curious about how the state of SMBs is affecting the top of the sales funnel compared to the factors you can control and have previously shared with us.

Drew Houston, CEO

Sure. I don't believe there has been any significant change in the trends we're observing. Many of the trends we see today are simply extensions of what we have previously identified in the macro environment. I can't say much about the overall state of small and medium-sized businesses, but what we're experiencing with them is quite similar to the behavior of customers of all sizes; people are becoming more price-sensitive and cost-conscious following a downturn or in a challenging economic climate. This does affect our top of funnel, but we also recognize that there are offsetting opportunities. When we analyze the process of signing up new SMBs on Dropbox, we notice that there is quite a bit of friction in that experience. We want to streamline it and improve metrics related to trial conversion and onboarding success. So just making it easier to get content in your Dropbox, get people properly set up. I mean these things sound pretty basic, but when we look at some of our metrics versus peer benchmarks, there are certain gaps in certain areas that represent upside just from getting people properly set up because we sort of lose more people through friction in the experience than is necessary. As far as how all that nets out, that's reflected in our guidance, but we still see a lot of opportunities to improve the experience. And I wouldn't say there was much change in the macro trends.

Timothy Regan, CFO

Yes, just to briefly add on. So as you know, as related to our Teams, most of our Team's plans are in the SMB space or as Drew was mentioning, we do continue to see a challenging demand environment. And we see this really reflected in downsell pressure as teams trim their license counts following layoffs or budget cuts. And we're seeing this particularly pronounced in the tech and manufacturing verticals.

Richard Hilliker, Analyst

Got it. Okay. My follow-up, sir. I guess, Drew, you hit on the awareness of all the things that Dropbox does is still an issue. But we have leverage on the S&M line this quarter. So I guess my question is, why not more efficiency from R&D instead of the sales and marketing line?

Drew Houston, CEO

Yes. So we're certainly mindful of spend in R&D. I mean there are a lot of investments we're making across the portfolio that go into that, both in our core business, our whole product portfolio, our infrastructure, investments in AI, things like Dash. There are a lot of investments there that we're making that we're excited about. And then to your point around kind of light on sales and marketing as a percent of revenue compared to other companies. I mean that's really because of our product-led growth motion and the efficiency. It drives a lot of efficiency in terms of OpEx in sales and marketing, but what we're really saying is like we're using the product to automate a lot of those activities, which is really scalable, but then shows up as in the R&D line.

Operator, Operator

And our next question will be coming from Matt Bullock of Bank of America.

Matthew Bullock, Analyst

I'm on for Mike Funk. Great to hear about the better performance of the Document Workflow business. I think it's the first time in a while we've heard positive trends there. Curious what drove that? And if you think that the onward trajectory is going to go forward through 2024?

Drew Houston, CEO

Sure. Yes. That seems broadly in line with our expectations. I wouldn't describe it as a major positive surprise or anything, but I agree it's good to see more stability after the significant COVID peak and the subsequent pullback in all areas, particularly in Document Workflow. For instance, much of DocSend's business is derived from founders fundraising, which has been affected in the current challenging fundraising and venture capital environment. Overall, it's reassuring to see greater stability in that area. I would say there is still incremental opportunity, but as I mentioned earlier, in the bigger picture, we see the most substantial upside through optimizations to our Teams business and future directions like Dropbox Dash.

Timothy Regan, CFO

And Matt, real quick, this is Tim. One specific to call out maybe FormSwift where we did see an increase in FormSwift in both usage and top of funnel activity in the first quarter, and that's due to tax season. So that leads to an increase in subscriber numbers.

Matthew Bullock, Analyst

Really helpful. And then one more, if I could. It seems like there's a lot of moving pieces on the ARPU side with the pricing changes, bundling, and family plan emphasis. Just curious how we should think about modeling throughout the remainder of '24?

Timothy Regan, CFO

Sure. So there are a lot of moving parts, as you mentioned. But for the full year, we expect a modest lift in ARPU, largely driven by the adoption of our premium plans.

Operator, Operator

Our next question will be coming from Patrick Walravens of Citizens JMP.

Patrick Walravens, Analyst

Andrew, can I ask a broad question? We assisted you in taking this business public six years ago at a price of 21. The stock has remained relatively stable, with a slight increase. You hold 75% of the voting power, so ultimately, the decision rests with you. I’m curious if it’s time to consider significant changes at Dropbox to enhance shareholder value, and what those changes might entail.

Drew Houston, CEO

Well, I think I'm really excited about what we're investing in. So a lot of what I shared with Dash. I mean it's still a product that's in beta. We haven't even fully turned it on yet. We talked about some of the R&D investments or really we've done a lot in the last years to reposition the company towards AI and organizing all your cloud content. I think there's a lot of room for improvement in the knowledge worker experience. I often envision what the experience will be like when you open your laptop in 2030 to access your work files. I believe we can significantly enhance the current experience, which has remained largely unchanged since its inception with the Macintosh in 1984. Currently, one side of your screen holds a file management system, while the other side displays a web browser filled with numerous small tabs that barely show text. This is how we handle our most crucial work information, and it can be quite challenging to perform knowledge work without having the necessary information readily accessible. I am very excited because I see a huge opportunity similar to the one I encountered when I first started. At that time, I wondered why I was carrying a thumb drive and emailing myself files, thinking there had to be a better way. Seventeen years later, we are still addressing the same issue: my files are all over the place, and I struggle to find them. A lot has changed, but the basic challenges remain. What used to be 100 files on your desktop is now 100 tabs in your browser. But everyone is kind of dealing with this mayhem without good solutions from anyone. So what really gets me excited is the opportunity to really change how people work, the way we did in the beginning. And so there's no shortage of things to be excited about. Now obviously, as a public company, we've been getting our sea legs over the past 5, 6 years. Obviously, to be in a flattish place is not where we want to be. But I'm really excited about our investments. I think the picture will look pretty different in the future.

Operator, Operator

And our next question will be coming from Mark Murphy of JPMorgan.

Sonak Kolar, Analyst

This is Sonak Kolar on for Mark Murphy. Drew, over the years, Dropbox has created this immense repository of content, I think over 1 trillion now. So as we think about this Gen AI opportunity and the need to pull high quantities of content into the LLMs to train them, can you just help unpack how Dropbox's scale differentiation is resonating in the market? And maybe how many more deals or partnerships you're kind of getting pulled into specific to AI because of the centralized content repository?

Drew Houston, CEO

Sure. Well, I mean just a couple of clarifications. So we don't train foundation models. When you look at what OpenAI does or what Meta does with LLaMa, basically taking the whole Internet and training foundation models on it, that's not really something we can kind of get as a service or in Meta's case it is even open source. We take our responsibilities around privacy very seriously. While there are many benefits to having access to large amounts of data, we understand the importance of being cautious when it comes to training models on individuals' private information without full transparency and control. We believe that you can create a valuable AI-powered experience without needing to use people's private data for model training. The scale advantage comes from our ability to leverage other aspects of user engagement with Dropbox. With such a large audience and significant technical investments in understanding content, new capabilities from research in multimodal models, and improved handling of audio and video can provide us with substantial benefits. Our extensive repository of this type of content supports this. We have been enhancing our machine learning capabilities even before the large language models emerged, incorporating features like the ability to automatically scan documents with a phone, correcting them, or performing OCR to recognize text and images for search purposes. There's a lot of similar things that we've been doing, and we'll continue to do around applying AI to your content, whether that's transcribing things really easily. We already have that in a number of our products, being able to organize your Dropbox for you, being able to understand the images and video and audio in your Dropbox better. So there are huge advantages that we have across the board, both from the scale of our user base and then a lot of the technical investments we have in content. A lot of the technical investments that led us to optimize our margins and performance on the storage side, a lot of those kinds of technical problems translate super well to large language model inference and bringing a lot of that in-house over time.

Operator, Operator

Our next question will be coming from Brent Thill of Jefferies.

Luv Sodha, Analyst

This is Luv Sodha on for Brent Thill. Maybe first to start with you, Drew, just wanted to ask, maybe at a higher level, if you could talk about the core FSS business, one of the investor concerns which it sounds like from a bundling experience, there is a fear of commoditization in your end markets. And so how do you think of that core FSS business growth, say, 2, 3 years from now? Do you think that that business is still growing? Or is it declining? Just any color on that would be super helpful.

Drew Houston, CEO

Sure. So I mean we still see a lot of room to keep optimizing both in our Teams business, and I gave some examples of that earlier. We do hear things about commoditization and we certainly are operating in a competitive environment. But at the same time, we've been able to keep growing our business at $1 billion or more since we went public, and ARPU has been going up. So there's a lot of health in the fundamentals of the business, too. We see like files as an evergreen need, right? Dropbox is mission-critical for our customers. I spoke about the creative community and those who handle large files or content, indicating that Dropbox is particularly essential for them. Our customers frequently remind me that there are many areas for improvement and new initiatives we could pursue. While the category has matured over the past 17 years, the fundamental challenge we address goes beyond just file storage. It's about organizing all aspects of your work life and how we can introduce machine intelligence to that process. We are just beginning to explore these possibilities, and there are still many universal challenges that remain unresolved. I'm really excited about the evolution in front of us from organizing just your files to organizing all your cloud content. A lot of the path we're taking is similar to Netflix 10 or 20 years ago. They started with the vision that you should just be able to press play on anything you want to watch. The value proposition remained consistent, but the way they delivered the service changed significantly. Initially, they were mailing DVDs, but as they transitioned to streaming and broadband availability increased, their service delivery methods changed significantly. However, the value proposition remained the same, and the DVD mailing base ultimately supported the growth of the streaming business, allowing for a smooth transition. I believe there are many similarities for us. One distinction is that DVDs eventually disappeared, whereas files are here to stay. So, we need to focus on what the ideal content experience looks like and build towards that while also optimizing the FSS business and developing Dash. We believe there is an exciting overlap in convergence. The transition was also challenging for Netflix. It's easy to overlook now, but their stock dropped around 75% during that period before rising significantly, probably 50 times or more from those lows. While we hope to avoid that level of volatility, there's considerable precedent for what we’re aiming to achieve. I focus on understanding what our customers need, and I am really excited about the investments we have been making that will soon be shared with the world.

Luv Sodha, Analyst

Sure. I’d like to follow up on the HelloSign security incident. Can you explain the steps you’ve taken to address it? Additionally, how are you preventing further customer churn? Have you experienced any customer losses so far, and what measures are you implementing to avoid more churn?

Drew Houston, CEO

Sure. Yes. So first, we think the impact is relatively isolated. We believe the incident was isolated to the Dropbox Sign infrastructure; it didn't impact other Dropbox products. We believe it was isolated to the Meta data, not the actual customers' content or documents or things like that. And then the response from customers has been about in line with what we expected. I mean, obviously, it's not an event you want to have. But the customers have appreciated that we were proactive. We've done a lot for most customers, so they don't need to do very much. We rotate keys and passwords to make it easy for them to understand what to do next. There are also several other technical remediations and ongoing efforts. So far, we expect the impact to be relatively isolated, and Sign represents a very small percentage of our revenue. However, we're closely monitoring the situation and taking all necessary steps to prevent it in the future.

Operator, Operator

And there are no more questions in queue. Turning back to Peter.

Peter Stabler, Head of Investor Relations

Thanks very much, everyone, for joining us today, and we look forward to speaking with you next quarter. Have a great day.

Operator, Operator

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