Dropbox, Inc. (DBX) Q2 2022 Earnings Call Transcript

Dropbox, Inc.  (NASDAQ: DBX) Q2 2022 earnings call dated Aug. 04, 2022

Corporate Participants:

Karan Kapoor — Head of Investor Relations

Drew Houston — Co-Founder, Chief Executive Officer And Chairman

Tim Regan — Chief Financial Officer

Analysts:

Phil Rigby — RBC Capital Markets — Analyst

Jason Ader — William Blair — Analyst

Joey Marincek — JMP Securities — Analyst

Brent Thill — Jefferies — Analyst

Presentation:

Operator

Good afternoon, ladies and gentlemen. Thank you for joining Dropbox’s Second Quarter 2022 Earnings Conference Call. [Operator Instructions]

I will now turn it 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 2022 Earnings Call. Before we get started, I’d like to remind you that our remarks today will include forward-looking statements, such as our financial guidance and expectations, including our long-term objectives and forecasts for our third quarter and fiscal year 2022 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 and markets.

These statements are subject to risks and uncertainties that could cause actual results to differ materially. They are also based on assumptions as of today, and we undertake no obligation to update them as a result of new information or future events. Factors and risks that could cause our actual results to differ materially from these forward-looking statements are set forth in today’s earnings release and in our quarterly report on Form 10-Q filed with the SEC. We will also discuss non-GAAP financial measures, which are not prepared in accordance with generally accepted accounting principles. A reconciliation of GAAP and non-GAAP results is provided in our earnings release and on our website at investors.dropbox.com.

I would now like to turn the call over to Dropbox’s Co-Founder and Chief Executive Officer, Drew Houston. Drew?

Drew Houston — Co-Founder, Chief Executive Officer And Chairman

Thanks, Karan, and good afternoon, everyone. Welcome to our Q2 2022 earnings call. Joining me today is Tim Regan, our Chief Financial Officer. And I’ll first share our business and product highlights from the quarter, and then Tim will review our Q2 financial results, provide guidance for the third quarter and update our outlook for the remainder of the year. I’m really pleased with the resilience of our business and our execution in Q2, especially against the challenging macroeconomic backdrop. We saw continued growth in our professional and teams plans and strong performance in our managed sales business. We also saw increased adoption of some of our newer products, Dropbox Backup and Capture, and we announced the pricing and packaging update for standard and advanced plans in June, delivering more value to our teams customers around security and data protection.

Lastly, we continue to deliver profitability through operational efficiencies across the business, which Tim will discuss shortly. While we’re certainly keeping an eye on the macro environment, we remain confident in our strategy that we outlined at the beginning of the year. First, we’re continuing to evolve our core FSS business by improving retention and monetization to stabilize growth. Second, we’re driving more adoption of workflows beyond FSS around video and documents to better serve distributed teams, small businesses, solopreneurs and creators. Finally, we’re maintaining operational excellence by continuing to balance growth and profitability. And with a healthier and more stable foundation in our core business, we’re laying the groundwork to achieve our vision of being a solution that organizes all your cloud content and the workflows around it.

I’ll start with how we’re evolving our core business. Consistent with last quarter, we once again saw our overall churn rate fall year-over-year. This was a result of ongoing improvements to core FSS user experience, particularly on mobile. For example, we enhanced the mobile uploads experience for our users, driving significantly faster speeds on our iOS app, which led to nearly double the percentage of active users on the app who upload content compared to a quarter ago. We also improved the performance and design of the photos tab in the mobile app, which increased the overall number of photos previewed on our mobile experience by over 10% since the start of the year. This builds on the work we talked about last quarter around driving faster performance with previews on the web.

These pages are some of the most trafficked surfaces for our users, and these ongoing enhancements are saving them time and allowing them to do more with their content, especially with their photos and videos. In addition to UX improvements, we’re seeing increased adoption of multiple Dropbox features among our paid users. And we’re discovering that customers that leverage multiple capabilities retain at higher rates than those who do not. For example, there are millions of paid individual users using Dropbox Backup and these users retain at higher rates than those who haven’t turned on Backup. Similarly, we’re seeing early signals that customers who use Dropbox Passwords retain at higher levels than those who don’t. Given this, in Q2, we rolled out Passwords to teams users as part of our update to our standard and advanced plans and are already seeing strong early adoption.

I’ll discuss how this update aligns with our pricing and packaging strategy in a moment, but I’m pleased to see how we’re monetizing multiproduct adoption in the form of higher retention. Outside of our self-serve business, we also saw a strong renewal activity among some of our larger strategic customers due to a new account management structure that we implemented last year. I’m really encouraged to see that despite the uncertain macro environment, our account reps were able to drive healthy renewal activity earlier in the quarter. Building on our strong retention wins, we also made progress driving monetization through upsell, cross-sell and conversion. In our managed sales business, we saw a healthy number of renewal customers purchase products like our data governance add-on. And in multiple cases, customers purchased a combination of Dropbox, HelloSign and DocSend. This improved cross-sell motion is the result of optimizing our sales force to sell the broader suite of Dropbox products.

Similarly, we made progress with cross-sell activity in our core FSS business. Earlier this year, we released our first self-serve add-on called Extended Version History, which allows Plus users to extend deleted file-recovery in version history from 30 days to a year. Early adoption has been encouraging, and we’re experimenting with other add-ons where we can seamlessly offer additional premium capabilities to our self-serve users. These efficient revenue opportunities require low incremental costs, and I’m excited to see us expand on our early progress here. We also continue to see an opportunity to improve top-of-funnel activity through targeted marketing in mobile. Mobile represents an important channel for acquiring and converting new basic users, and in Q2, we increased our conversion rate through more targeted mobile prompts. We also saw an increase in mobile trials driven by higher adoption of Pro on mobile due to enhancements made to the mobile landing page.

Another important piece of our monetization strategy is around pricing and packaging changes. In June, we rolled out a number of highly requested security and data protection features for our standard and advanced teams users. One of the enhancements we made to these plans was the inclusion of Dropbox Passwords, which saw a strong early activation in its first month. Passwords for teams provides admins consolidated dashboards to alert them whether passwords are weak, reused or breached. We also enabled admins to receive reporting and monitoring capabilities to see how files and folders are being shared outside of their teams, with the ability to revoke access where needed. In addition, following our successful rollout last quarter of Backup and external drive backup as a stand-alone SKU and feature for paid individual plans, we introduced this offering to teams and saw a strong early adoption. And for advanced teams, our premium offerings, we launched new ransomware detection and recovery.

This capability relies on machine learning to monitor for behavioral attacks and offers protection against new strains of ransomware. By bundling a number of highly requested new capabilities into our teams plans, we updated our pricing to reflect the added value. Tim will discuss this more, but I’m really pleased with the early response and our ability to monetize important new products through our existing paid plans. Through our focus on security and data protection, we’re confident that we’re providing value that customers find essential. Moving to our second objective of driving adoption of workflows beyond FSS, specifically around documents with DocSend and HelloSign and video with Capture and Replay. DocSend, which is now in its second year as part of Dropbox, has accelerated its growth since we acquired them. While we’re seeing some pockets of softness in areas like venture capital fundraising, we continue to see opportunities for strong organic growth along with greater revenue synergies.

We’re investing further in DocSend’s capabilities as well as marketing to expand into new verticals. In Q2, we added the ability to view images in the DocSend viewer instead of having to download content out of the browser, creating a stickier experience, which resulted in a significant increase in image file uploads. In Q3, we plan to offer additional capabilities for video, enabling more use cases and expanding the audience of potential DocSend users. And integrating the DocSend experience into Dropbox continues to track well. Last month, we launched Save to Dropbox, which allows users with both a Dropbox and a DocSend account to save final documents from DocSend into Dropbox in one click. HelloSign continues to show solid growth despite moderating following the pandemic surge, consistent with the broader eSignature space.

We saw a greater mix shift towards higher price plans as well as healthy upsell of the HelloSign API. This is an opportunity to continue to differentiate HelloSign as we’ve enhanced our offering to improve a developer’s ability to explore and build with our API. And last month, we announced an integration with HubSpot, which allows sales teams to automate critical agreement processes through one unified workflow. Initial feedback from the integration is encouraging, and I’m looking forward to driving more awareness through joint marketing campaigns this quarter. We’re excited about the continued momentum of these businesses, especially through deeper integrations within Dropbox, increasing revenue synergies and offering our users a more cohesive experience. Finally, I’ll cover our product experiences around video capture and replay, which saw strong adoption in Q2.

Capture, our all-in-one visual communication tool that helps teams share their work and ideas asynchronously once again saw active users increase significantly versus last quarter, with customer satisfaction scores also improving. We removed the 5-minute limit for capture videos, which was a top request among our beta users, differentiating Capture from the competition. We see an opportunity to drive Capture’s adoption to a wider audience of Dropbox users and continue to evaluate the best pricing and packaging approach for it. Replay has already become an essential tool for the creator audience due to its ease of use, performance and convenience as part of the Dropbox product suite.

Beta user retention is strong and we see an opportunity to drive product awareness further to grow its user base. We’re leaning into these organic bets as we’ve seen an increase in the percentage of our weekly and monthly active users that engage with video, including uploading, sharing and viewing. As this mix continues to rise, we see significant potential in creating larger flywheels around video workflows. I’m excited for the potential for Capture and Replay to reach more creators and distributed teams. And as we expand our workflows around content types, we’re also focused on evolving from syncing files and folders to organizing all of your cloud content. Universal search is a key part of this road map, which is why I’m excited about our recent acquisition of Command E.

I look forward to sharing more about our progress here in the coming quarters. In closing, it was a solid quarter with increased multiproduct adoption, retention wins, updated pricing and packaging for teams, and strong performance in our managed sales business. The core Dropbox FSS experience continues to improve with faster performance and enhanced security. The changes we continue to make strengthen our platform’s foundation and our disciplined approach allows us to be opportunistic with our growth bets. We believe we’re operating from a position of strength given our healthy financial profile and our strong balance sheet and the work we’ve done over the last several years to build even more resilience into our business. And we remain focused on our customers, especially during this challenging macroeconomic environment, solving for what they need to do their most important work faster and more easily.

And with that, I’ll hand it over to Tim to walk through our financial results.

Tim Regan — Chief Financial Officer

Thank you, Drew. Before turning to our quarterly results, I’d like to start with a reminder of our financial strategy. We continue to focus on balancing growth and profitability in a thoughtful, disciplined way. We remain committed to our long-term objectives, including delivering operating margins of 30% to 32% and generating annual free cash flow of $1 billion by 2024. We also remain focused on allocating capital to growth initiatives, both organic as well as through acquisitions, while also returning a significant portion of our free cash flow to shareholders in the form of share repurchases. We believe that execution against these objectives will generate long-term value for our shareholders.

Today, I’ll talk to our performance for the quarter and our updated guidance for the year, each of which demonstrate that we continue to operate the business in line with these principles. Let’s begin with our second quarter results. Total revenue for the quarter increased 7.9% year-over-year to $573 million, beating our guidance range of $568 million to $571 million. Foreign exchange rates provided an approximate $5 million headwind to growth, above our previous guidance range of a $3 million headwind. On a constant currency basis, year-over-year growth was 8.8%. Total ARR for the quarter grew 7.7% year-over-year for a total of $2.333 billion.

On a constant currency basis, ARR grew by $44 million sequentially and 8.3% year-over-year. We continue to drive growth in ARR through strength in our teams and Professional plans, with retention improving year-over-year, driven by mobile enhancements and stronger renewals by our account management team as well as healthy cross-sell activity. HelloSign and DocSend also continued to show solid ARR growth. We exited the quarter with 17.37 million paying users and added approximately 280,000 net new paying users in the second quarter. Average revenue per paying user was $133.34 in Q2. ARPU decreased by $1.29 compared to Q1, primarily due to FX rate headwinds and continued strength from family plans, which, as a reminder, is comprised of six seats and therefore, carries a lower ARPU profile.

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, certain acquisition-related expenses, impairments of our real estate assets and net gains on equity investments. Our non-GAAP net income also includes the income tax effect of the aforementioned adjustments. I’ll now provide a brief update on our real estate strategy, where we are taking steps to de-cost our real estate portfolio as we — as part of our transition to our Virtual First model. In the second quarter, we continue to make progress against our goals, executing subleases in San Francisco as well as Seattle. As a result, we have now executed all of our planned subleases outside of San Francisco.

While we continue to estimate that our total impairment charges will be up to $450 million, lower than expected subleasing in San Francisco resulted in an additional $9 million in impairment charges in Q2, bringing our cumulative impairment to $438 million. With that, let’s continue with the P&L. Gross margin was 83% for the quarter, representing an increase of nearly two percentage points on a year-over-year basis. The improvement in our gross margin was primarily driven by ongoing efficiencies in our data center infrastructure as well as slower-than-expected onboarding of outsourced customer support. Second quarter R&D expense was $155 million or 27% of revenue, which increased compared to 25% of revenue in the second quarter of 2021.

The increase in R&D was primarily driven by an increase in headcount to replace the elevated levels of attrition we saw last year and as we continue to invest in growth and other key initiatives. Second quarter sales and marketing expense was $96 million or 17% of revenue, which remained flat as a percentage of revenue compared to the second quarter of 2021. Sales and marketing expense increased on a sequential basis, driven by a shift of some marketing campaigns from Q1 to Q2. Second quarter G&A expense was $41 million or 7% of revenue, which decreased compared to 8% of revenue in the second quarter of 2021. In total, we earned an operating profit of $183 million in the second quarter, which represents an operating margin of 32%, which is flat compared to the second quarter of 2021. Our Q2 operating margin exceeded guidance by over three points, driven by stronger-than-expected gross margin, efficiencies stemming from hiring in lower-cost locations, lower-than-expected T&E costs as well as the timing of spend shifting from Q2 to future quarters. Net income for the second quarter was $138 million, which is a 14% decrease versus the second quarter of 2021.

Diluted EPS was $0.38 per share based on 366 million diluted weighted average shares outstanding, down from $0.40 per share based on 397 million diluted weighted average shares outstanding for the second quarter of 2021. Our net income and EPS declined year-over-year as our income tax expense increased significantly year-over-year through the impact of new R&D tax legislation and given that we have now fully utilized our NOLs for non-GAAP tax purposes. Moving on to our cash balance and cash flow. We ended the quarter with cash and short-term investments of $1.4 billion. Cash flow from operations was $210 million in the second quarter. Capital expenditures were $4 million during the quarter.

This resulted in quarterly free cash flow of $206 million compared to $216 million in Q2 of 2021. In the second quarter, we added $14 million to our finance leases for data center equipment. Let’s turn to our share repurchase activity. In Q2, we repurchased 8.9 million shares, spending approximately $190 million. During Q2, we exhausted our previous $1 billion share repurchase authorization from 2021 and began executing against our new $1.2 billion authorization that was approved in Q1 of this year. As of the end of the second quarter, approximately $1.1 billion remains under the current authorization. I’d now like to share our guidance for the third quarter and provide an update to our full year 2022 guidance.

I will also provide some context on the thinking behind this guidance. For the third quarter of 2022, we expect revenue to be in the range of $584 million to $587 million. We are assuming a currency headwind of approximately $13 million in the third quarter. Thus, on a constant currency basis, we expect Q3’s year-over-year revenue growth to be roughly consistent with that of Q2. We expect non-GAAP operating margin to be approximately 29%. The expected sequential decline from Q2 operating margin is primarily driven by the continued progress on our planned hiring strategy in 2022 towards growth initiatives, increased levels of T&E and project spend in Q3 as well as an incremental FX headwind. Q2 operating expenses also benefited from the onetime release of certain non-income tax reserves in the quarter.

Finally, we expect diluted weighted average shares outstanding to be in the range of 360 million to 365 million shares based on our trailing 30-day average share price. For the full year 2022, due to the significant strengthening of the U.S. dollar since our last update, we are revising our as-reported revenue guidance range down by $12 million to $2.308 billion to $2.318 billion from our previous guidance range of $2.320 billion to $2.330 billion. However, on a constant currency basis, we are revising our guidance range up by $8 million to $2.342 billion to $2.352 billion, up from the prior range of $2.334 billion to $2.344 billion. We now estimate a full year 2022 currency headwind of approximately $34 million as compared to our prior forecast of $14 million. We now expect gross margin to be approximately 81.5%, up from our prior forecast of 81% due to ongoing infrastructure efficiencies. We are also raising our operating margin guidance to approximately 30%, up from our prior guidance of between 29% to 29.5%.

This operating margin guidance is inclusive of an approximately one point headwind from FX as compared to a prior estimate of approximately 0.5 point. We are maintaining our free cash flow guidance to be in the range of $760 million to $790 million. This includes $17 million in cash outflows for the 2022 installments of the acquisition-related deal consideration holdbacks. Additionally, our free cash flow guidance is inclusive of an estimated $25 million headwind and resulting from the impact of R&D tax legislation newly effective in 2022. We continue to expect capital expenditures for 2022 to be in the range of $25 million to $35 million. We continue to expect additions to our finance lease volumes to be approximately 5% of revenue in 2022. Finally, we expect 2022 diluted shares outstanding to be in the range of 364 million to 369 million shares, down from our previous guidance range of 366 million to 371 million shares. This reduction in our share count reflects our commitment to an anticipated impact of our share repurchase program.

To share some additional context on this guidance. For revenue, for 2022, we are raising our constant currency revenue guidance range up by $8 million. As a reminder, our guidance continues to include the impact of discontinuing new sales, along with financial sanctions in Russia, resulting in a headwind in the mid- to high single-digit millions of dollars to revenue this year. Additionally, this guidance also reflects updates to our pricing and packaging approach for our teams plans that we announced in June. As Drew discussed, we recently updated our standard and advanced teams plans, bundling a number of new capabilities around security and data protection. These plan prices were raised by 20%. New customers began purchasing the higher-priced plans starting in June, and existing customers began renewing at the higher price point starting in July.

As a reminder, we will see the benefit of the pricing change flow to ARR as customers’ billing cycles occur with monthly customers flowing through in the first month of the change. And given our ratable revenue recognition model, the revenue impact will flow to both 2022 and 2023. The subset of our user base that is subject to the price increase comprises approximately 1/3 of our total ARR. We are seeing positive early signals on this pricing and packaging change thus far. Given this positive customer reception as well as continued year-over-year improvements in retention, we are raising our constant currency revenue guidance range. As related to gross margin, while we achieved a gross margin level above the high end of our long-term target range in Q2, we continue to expect to invest in customer support, which will ultimately result in gross margin reverting within the parameters of our long-term guidance range in the coming quarters.

As related to operating margin, while we are experiencing incremental FX headwinds, T&E, and office reopening expenses as pandemic restrictions soften, we are raising our 2022 operating margin guidance as we continue to have success with our ability to hire top talent outside of traditional high-cost tech hubs such as San Francisco, New York and Seattle. As related to full year free cash flow, we are maintaining our 2022 free cash flow guidance. We are maintaining the range that we introduced at the beginning of the year as a result of the significant strengthening of the U.S. dollar, which is now more than a $30 million headwind to our initial free cash flow guidance. I note that FX has a more immediate impact on billings and hence, cash flow as compared to revenue, given our ratable revenue recognition model.

Thus, a larger cash impact will be absorbed this year, offsetting the benefits of our increased operating margins. Lastly, we remain committed to achieving our long-term targets of delivering operating margins of 30% to 32% and $1 billion of annual free cash flow by 2024. In conclusion, we continue to execute well against our initiatives, demonstrating stability and focus on our customers while driving continued operational efficiencies. This stabilization and discipline allows us to operate from a position of strength during an unpredictable macro environment as we continue to execute towards our long-term objectives.

With that, I’ll now turn it over to the operator for Q&A.

Questions and Answers:

Operator

Thank you. [Operator Instructions] Our first question comes from the line of Richard Poland of RBC Capital Markets. Richard Poland, please go ahead.

Phil Rigby — RBC Capital Markets — Analyst

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

Tim Regan — Chief Financial Officer

Yes, sure. So this is Tim. I’ll take that one. So we did raise prices for these plans by 20%. This is our standard and advanced teams plans, which we have not changed these prices since 2017. So you’re exactly right. Again, for new customers, these began to have the higher price plan starting in June. And for existing customers, they began renewing at the higher price point starting in July. The subset of our user base that is subject to — it comprises about 1/3 of our total ARR. And as a reminder, we will see the benefit of the pricing change flow to ARR as customer billing cycles occur, with monthly customers flowing through in the first month of the change. And then given our ratable revenue recognition model, the revenue impact will flow through to both 2022 and 2023. And so maybe one other point along those lines, just to give you a sense of the timing, is that our annual customers tend to represent about 2/3 of our customer user base, whereas our monthly customer is about obviously 1/3, where the monthly customers will be subject to the change largely in the third quarter. So therefore, we expect most of the impact to flow through in the third quarter.

Phil Rigby — RBC Capital Markets — Analyst

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

Drew Houston — Co-Founder, Chief Executive Officer And Chairman

Sure. So that’s certainly a popular use case for DocSend or — they got some early traction with founders and investors and start-ups. And so as some of that activity has cooled off, we’ve seen some of that reflected on DocSend. That said, there’s a lot more use cases for DocSend beyond fundraising. Pretty much — there are lots of roles in a company that involve deals or closing deals or sharing content externally and needing to have rich analytics and security options. So — just to be clear, there’s a lot more customers beyond the venture capital and founder ecosystem. So if you think about sales and marketing and many other functions that need to share richly.

So we think there’s — so we continue to be excited about DocSend and there are a lot of other adjacencies and target customers there. And — let’s see. And then I think the other part of the question was Dropbox for Start-ups. So I think more broadly, we’re finding that there are a lot of freelancers and creators and solopreneurs who adopt Dropbox. And a lot of those folks have pretty common needs. So you think about — they need Dropbox for their core storage. All companies need eSignature with HelloSign. And then certainly, if you’re fundraising, DocSend is a great fit for that, too, and then we see a number of other opportunities in our portfolio to kind of give professionals and solopreneurs or people starting something more of a bundle. So still early innings on that, but that’s an opportunity area we see growing.

Operator

Thank you. Our next question comes from the line of Jason Ader of William Blair. Jason Ader, please go ahead.

Jason Ader — William Blair — Analyst

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

Drew Houston — Co-Founder, Chief Executive Officer And Chairman

Sure. Overall, things have been pretty stable. And — I mean we’re not immune to the macro environment. Obviously, you heard a lot about — we’re affected by things like FX given our international mix like most companies; we’ve been impacted by the Russian-Ukraine situation, kind of high single-digit millions in revenue and so on. And like while we talked about there’s softness in fundraising, that’s not really material to the Dropbox business overall. So just to quantify things, it is a signal, but I wouldn’t say it’s like a huge signal. We find that Dropbox, when we talk to our customers, they need Dropbox in all macroeconomic environments. For a lot of our customers, it’s really a mission-critical thing, not optional.

I think the pandemic was illustrative. People needed Dropbox before, during and after the pandemic. And so while we didn’t necessarily see a huge run-up in the Dropbox core business during COVID, we also didn’t see a run down. So all that is to say, things look pretty stable. Again, we’re not immune to the macroeconomic environment and we’re also mindful that we — no one knows exactly what the future holds. So we’re monitoring everything carefully as anything that’s not good for our customers isn’t good for our business. But so far, the early signals have been positive or stable.

Jason Ader — William Blair — Analyst

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

Tim Regan — Chief Financial Officer

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

Jason Ader — William Blair — Analyst

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

Drew Houston — Co-Founder, Chief Executive Officer And Chairman

Sure. So certainly monetizing — or better monetizing our free user base continues to be a priority for us, and we have a lot of ways of doing that. So one is just having a broader product portfolio. So a few years ago, maybe we just had the Dropbox core product to offer but now we have HelloSign and DocSend. That portfolio will be growing with some of our newer bets like Capture and Replay and Shop and so on. And so we continue to iterate on the pricing and packaging in general. And we have also launched a number of other SKUs that get people onto the platform or into a paid subscription at a lower price point. So our Backup SKU is an example of that.

So we found that — customers may or these kind of — customers with lighter weight needs need to back up a computer. So we launched a cheaper SKU for that and that provides an upgrade path into our more mainline plans. So we — there’s still a ton of headroom here and then with both of growing the portfolio and iterating on different kinds of bundles and suites. And then after just getting people into some kind of paid plan, obviously, there’s a lot that we’re doing to focus on particular customer segments. I talked about kind of creators and solopreneurs and so on before. But we continue to be very focused on better monetizing free users, and we’ve seen a lot of gains in our ability to better monetize users in their first year or that — raising those curves of monetization in the first few years of being a basic user.

Operator

Thank you. Our next question comes from the line of Joey Marincek of JMP Securities. Joey Marincek, please go ahead.

Joey Marincek — JMP Securities — Analyst

Hey Drew, thanks for taking the question. I know there’s a lot of uncertainty out there, but I’m curious where you see the most opportunity for Dropbox in the near term?

Drew Houston — Co-Founder, Chief Executive Officer And Chairman

So in the near term, we’ve had a lot of success with — I mean, there’s a lot of different levers for growth. And so we’ve talked a lot about pricing and packaging and this flywheel that we have of adding value to our plans. And so this most recent example was our teams plan, standard and advanced plans. We found that a lot of customers had new demands after COVID. And when you think about security, what security means or what kind of protecting your digital environment means, it has changed a lot. When you’re kind of in a distributed world or we’re all working from home, that brings a number of new challenges. So one kind of category of opportunities is thinking about the way that work has changed and then solving new problems for our customers as a result. And so with the — going back to that teams example, we found that the number of ransomware attacks has dramatically increased, some like tripled or quadrupled in the last year.

Small businesses are half to 3/4 of the victims and half of small businesses don’t have any resources for cybersecurity. So there is a natural adjacency for us. We’re already protecting their files. Now we can add in ransomware protection, and then we also included our Passwords, Dropbox Passwords products in our teams plans. And so a perfect example of how these kind of combine where we have both new value propositions for our customers, but then as we add these new features into our plans, create more customer value, then we can update our pricing and packaging or increase prices to better reflect the value that we’re providing. More broadly, I think there’s opportunities across our portfolio. I think we’re participating in a lot of markets that are in their early innings. An area that I’m really personally excited about is the evolution of Dropbox from just linking your files to organizing all your cloud content. So we bought a company called Command E last year.

They do universal search. And I think another example of these are kind of problems we all have, like what started out as 100 files in our desktop are now 100 tabs in our browsers. And as we manage all these cloud drives, cloud docs, it’s kind of a mess. So we think that — I believe that there’s a lot of universal problems that we’re addressing and a lot of the areas we’re in are in the early innings. So finding a really exciting time to build.

Joey Marincek — JMP Securities — Analyst

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

Drew Houston — Co-Founder, Chief Executive Officer And Chairman

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

Operator

Thank you. Our next question comes from Brent Thill of Jefferies. Brent Thill, your line is open.

Brent Thill — Jefferies — Analyst

[Technical Issues] Maybe what’s not embedded, if you can just give us a little more color. Thank you.

Drew Houston — Co-Founder, Chief Executive Officer And Chairman

Brent, I might have missed your question.

Tim Regan — Chief Financial Officer

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

Brent Thill — Jefferies — Analyst

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

Tim Regan — Chief Financial Officer

Yes. So I’d say that our business does remain resilient in this challenging macro environment. As we talked about, we’re raising our constant currency revenue guidance for the year by about $8 million or about 8.8% at the midpoint. As far as what’s included, the range does include our mid- to high single-digit million impact from our discontinued services to Russia. As far as what’s driving the raise, we are seeing positive early signals on our pricing and packaging change thus far, certainly seeing churn rates coming in better than we expected. So clearly, the pricing has been factored into our guidance. And again, we’re seeing continued year-over-year improvement in retention across many different areas as Drew has alluded to.

So we’re very positive about many opportunities that are in play, including upsell, cross-sell, new products, new feature adoption, growth areas such as DocSend and HelloSign, all of that clearly has been included on a philosophy perspective, perspective. We have no material changes from our historical approach, and we continue to guide to what we have a high degree of visibility into. So certainly keeping an eye on things like the macro economy. But to Drew’s earlier points, we’re seeing strength on that front. All of that, of course, is factored into our guidance.

Operator

[Operator Closing Remarks]