Dropbox, Inc. (NASDAQ:DBX) 51st Annual J.P. Morgan Global Technology, Media and Communications Conference May 22, 2023 4:30 PM ET
Company Participants
Tim Regan – CFO
Conference Call Participants
Mark Murphy – J.P. Morgan
Mark Murphy
Okay. Good afternoon, everyone. I’m Mark Murphy, software analyst with JPMorgan. And it’s a real pleasure to be here with Tim Regan, who is the CFO of Dropbox. So first of all, Tim, thank you for taking some time out of your schedule to be here with us.
Tim Regan
Terrific. Thanks for having us, Mark.
Mark Murphy
Yes. Pleasure’s all mine. Maybe you can give us the brief 30-second version of an introduction of yourself and Dropbox for the benefit of anyone out there who might not be familiar?
Tim Regan
Sure. So, I’ve been with Dropbox for almost seven years now. I joined just before we went public as the Chief Accounting Officer, took over the CFO role about three years ago. And if you think about what Dropbox is, it really started when Drew forgot his thumb drive on a bus trip and got frustrated by not being able to keep his devices in sync. And since then, we’ve created a company that has $2.5 billion in ARR, 700 million registered users and stores over 800 billion pieces of content. So, an online storage and cloud collaboration software service that really has come a long way since that bus ride?
Question-and-Answer Session
Q – Mark Murphy
Well, maybe you can flesh that out for us a bit because there’s been a lot going on at Dropbox. What do you think is different about this company today? If we look back and compare it to, I’m thinking 3 to 4 to 5 years ago because it’s been constantly evolving and kind of diversifying outside and beyond the core file sync and share.
Tim Regan
Sure. So file sync and share is still the vast majority of our business. It’s the bulk of our ARR, but it’s given us a big platform to build off that strength. So, I go back to — we have 800 billion pieces of content. And so really, what we’ve been trying to do over the last stretch of time is take advantage of that content and give people more to do with that content. And so, if you think about some of the acquisitions we’ve made in recent years, we acquired HelloSign back in 2019, rebranded that as Dropbox Sign last fall. So that’s an e-signature product that we’ve been able to offer to our customer base.
DocSend, we acquired DocSend back in 2021. That’s a secure sharing and analytics company. So if you think about a founder that is sharing a pitch deck with a VC, they can send their very sensitive information through DocSend and track how someone is engaging with that content, really know who’s paying attention to their materials or not, what slides they’re focused on and those sorts of things. So, that’s what DocSend does.
We acquired FormSwift, that’s a templates company. So the vast library of templates, tax forms, real estate forms, legal forms. So we acquired them back in Q4. So, diversified on the M&A front. And then, we’ve been developing these more organic products, capture that’s a — I can screen share my screen and create a video based off of that. I can — and then with Replay, it’s another product we just introduced actually went GA in April. That’s a video editing tool, right? So we’re seeing a lot more video files added to the platform, so enabling people to do more with video.
And I’m sure you’re going to ask me a question around AI. So, we too have an AI capability that we’re working on, and so that will be coming soon.
So, we have definitely been working to cultivate this more diverse product portfolio. So, been a focus for us for the last few years.
Mark Murphy
You preempted me on AI, but I’m going to get to that in just a couple of moments because we do want to try to understand what exactly you’re cooking up across all those hundreds of billions of pieces of content. But let me ask you first about a question on the macro. It’s obviously on everyone’s mind, with the number of users that you have, you have some kind of read-through into it. People have been worried about the trends they’ve seen in optimization for the hyperscalers. And there’s been a lot of consolidation of spend, right, for application providers as well.
So, how would you characterize the macro today? It’s obviously complicated, and it’s obviously volatile. But if you look back and try to compare it to where you think it stands coming out of last year, what’s worse, what’s hanging in there? What’s better, if anything?
Tim Regan
Yes. Good question. So, I’d say it’s been roughly consistent with what we saw in the fourth quarter and in the first quarter. If I break down the various components of our business, first, I’ll start on the Teams side of the business. We did launch a new pricing and packaging program back in June of last year. So we raised prices on our teams plans as part of offering more value with those plans for security features that we rolled out — and so that did quite well, I’d say, last summer But really, in the fourth quarter, we started to see some heightened price sensitivity across those teams users, and that’s played through into the first quarter as well, particularly for those, call it, tech companies that have gone through layoffs themselves, we’re funding some heightened price sensitivity across those users. And so, that’s carried forward.
On the individual side of the business, we saw mobile providers make it easier for you to see and cancel your subscriptions. Just a couple of steps now in your mobile devices. So, we saw that translate through to churn. That continued really in the first part of Q1, but we saw it get better, turn — get better on the individual side of our plans as we’ve been really focused on correcting and making enhancements to our individual plans and addressing the main customer complaints.
So that’s seen a bit of a turnaround. Individuals also, we’ve seen sign-ups actually improve year-over-year, which is an interesting trend as we’ve made some improvements to the onboarding process and rolled out things like Google One Tap, which have helped. So seeing some positive trends on the individual side of the business. Then if I think about e-signature that had a nice boost during the pandemic. Most pandemic, it’s pulled back as others have seen in the e-signature space.
And then DocSend, that’s a bit more susceptible to the fundraising vertical. And so that has seen a bit of a pullback in recent quarters. And so, we’ve seen that hold true through Q1 as well. So definitely seeing some pressure points, and all this has been factored into our guidance, and we’re not assuming anything turns around. Obviously, we’re going to try to do our best to make things turn around, but effectively, that’s what we’re seeing right now.
Mark Murphy
So despite all the cross currents out there, right? And as you said, you’ve got some pressure points. You have some interesting vectors of the business, it sounds like they might have stabilized or picked up a little bit as well in Q1 or coming out of Q1. Despite all that, you grew ARR about 12% in constant currency in Q1, probably organically, by our math, it is probably a little more high single digits. But I would argue that’s a great performance, right, for a business that is at that scale, I think, to be humming along that way in a challenging environment. So, if I flipped it around and just said, well then — so to what do you attribute the resiliency, right, of Dropbox to still be growing pretty well organically in that kind of an environment. How is that possible?
Tim Regan
Yes. Well, I think it’s interesting, again, that sign-ups are up year-over-year, and you think about file sync and share a bit of a mature category, not many people haven’t heard of cloud storage, and yet people are still very interested in the product. And so to the extent we can make that a more seamless experience, reduce some friction in the onboarding process. We’re seeing that actually pan out. And I think some of it does come back to 80% of our users use us for work. So people still need us in downturns. And so, I think those are some key factors. We’re still a mission-critical tool that people need even in these tough times.
Now, if I think about the specific drivers of the Q1 growth rate, we still are seeing the benefits from that pricing and packaging change that I talked about. So, that’s still flowing through and contributing to that growth rate. And then, the FormSwift acquisition, we’ve — as you are aware, we talked about, that did contribute to growth about 2.5 points to growth. So, there’s a few tailwinds that we’re seeing from M&A in pricing and packaging, but still, again, seeing growth just in people needing our product.
Mark Murphy
Okay. The — just to clarify, when you say you’re seeing the individual sign-ups trending better year-over-year, the — to what extent are you saying it’s due to your own kind of internal improvements? And then, to what extent do you think it somehow relates to the environment?
Tim Regan
I think it’s largely our own internal improvements. Yes.
Mark Murphy
That’s not a case of macro tailwind.
Tim Regan
I don’t think so. I mean, it’s hard for us to really parse some of these nuances, but — you can almost tie back and correlate we launched Google One Tap and then pretty quickly thereafter, you can see this uptick in sign-ups and there’s other changes that we’re making on the onboarding flow. And so, you can tie it to these product releases. So, that’s why I’d point to it being more internal.
Mark Murphy
Okay. Now, maybe we can switch gears and just talk about one of the other actions that you’ve taken, which was a headcount action of around 16%. The — I think what was a little different about it was it that might have happened actually a little later in the sequencing versus what we had seen from some of the other software providers out there. Can you contextualize some of maybe the factors that went into that decision to be doing that at that point in time because you’re also very profitable in generating pretty good cash flow.
Tim Regan
Yes. So, we did do a 16% RIF, about 500 folks, certainly not a decision we take lightly, put a lot of thought into it. And so, the way we thought about it is we — clearly, we’re seeing the macro economy impact our business and impact our growth rates. So growth has been trending down. And so, what we’re trying to do is really look at our R&D spend and benchmark that against our peer set, and challenge, are we seeing the right return relative to the R&D spend? And so we took a hard look and came to the conclusion that, no, we were not being as efficient as we could be, particularly within our existing business lines, particularly file sync and share. Some of our other workflow businesses, we felt like the growth rate is not commensurate with the level of spend.
And so, one of the mechanisms that we’ve adopted really across our business units, if you look at them each individually, is we’re applying this weighted Rule of 40 concept, where growth is valued a bit more than the profitability side. And so, we’re challenging our business leaders to say, look, if your growth is coming down, your profitability needs to go up. And so, that’s how we’re thinking about this, particularly across those existing business lines.
And so, that’s where we felt like we could get much more efficient with those businesses. And the way we did it is we looked across things like role consolidation or delayering, right, getting rid of extra layers to which have just increased those coordination costs. Candidly, there is some extent of performance management right? And so, that’s just a pruning exercise that I think is healthy across all businesses.
And then, ultimately, this did translate to the lion’s share of the RIF landing within R&D as we’re trying to get more efficient with that spend. And so that’s how we looked about it — looked at it from the management perspective. And then, what we also did is then free up and rotate resources to invest in these AI and organizing the cloud initiatives that there’s a big opportunity in that space.
And so, we’re trying to get more efficient in our existing businesses, still spending enough to drive a healthy level of growth, but then free up resources, free up capacity to invest in AI and organizing the cloud, which we think have substantial growth potential. And so, that’s how we’re positioning the business going forward. We still did raise our margin profile 150 basis points for the year, and again, investing in those high potential growth initiatives.
Mark Murphy
Yes. Well, it takes some discipline and rigor to be willing to do that, right? So, let’s go. You just touched on AI again. Let’s go into that. Thinking back to the Q1 earnings call, there was a comment, I think Drew made it that you have been developing an AI-driven search product. And you’ve probably been working on that for some period of time. Can you explain to us just in layman’s terms, what is that product? What are we going to experience? What is it going to unlock for us?
Tim Regan
Yes. Well, it may be different for those in the banking industry that maybe don’t have the same experience that I do on an everyday basis where if I start with, okay, what’s the customer problem? And today, we do a lot of our work in the browser across the various tabs in our browser. And so, it’s less about working in files. It’s more working in browser tabs. And those tabs can be Dropbox tabs or Google tabs or Adobe, all these different providers. So, the first step is organizing this cloud content within Dropbox. So, bringing in your cloud content because it’s not only about files. Okay.
So now once we have your cloud content organized within Dropbox, the next thing we’re doing is bringing in this universal search capability. And it started — the kernel of that was this acquisition of Command E back in 2021, right? So we have been working on this for quite some time. And the way I think about universal search is it’s almost a personal search engine.
So if you think about Google, Google, you can search the world’s content. With this personal search engine, you can search your content, your company’s content, it’s personal to you. And then, you can start bringing in AI capabilities to collaborate with that content. And if I think about, okay, so what are some examples of that?
One is we had a Board meeting last week. And so, this AI capability can tell me, hey, Tim, here’s all the files that are pertinent to your Board meeting, which may again be across Google Docs, Excel docs, Paper docs. And so it can help me stay organized heading into that board meeting or I may be having a one on one with Drew that it can surface here’s your one-on-one doc with Drew and here’s the three other docs you’ve recently collaborated on.
And so it brings all together your content in a way that helps you stay focused and organized throughout your day, right? And so, we just released this to a private beta a few weeks ago. We’ll be rolling this out more broadly throughout the summer and the fall. And one thing I’m encouraged by is we’ve been using it internally for a couple of months.
I actually use it, I use it almost every day, which to me is encouraging. I’m not the biggest early adopter of tech. So, if I’m using it, I appreciate that early signal. But that’s certainly what we’re going to be paying attention to is these customer signals on adoption to see how far we keep investing in this.
Mark Murphy
So it’s amalgamating content, right, from across whether it’s Google, whether it’s Dropbox, whether it’s somewhere else. It is applying search. You’ve had the search capability for a while. I assume it’s kind of an upgraded search. But then you’re saying it will kind of detect these scenarios and sort of nudge you, right, like saying, hey, we went out, we see this meeting under calendar when we pulled all this together for you.
Tim Regan
That’s correct. Yes.
Mark Murphy
For example. Okay. What about — so again, what was the number $800 billion pieces of content? Okay. It’s a lot of content. As you think about applying AI to that, do you see an opportunity to monetize it, or can this — why shouldn’t it end up being something where you just say, hey, users, you get this for free. Your experience is better. And they become stickier. I mean if that’s one end of the spectrum right and then the other end of the spectrum is $5 a month, like kind of something that’s separately priced?
Tim Regan
Sure. So, the focus right now is building a great product and driving customer adoption. And so, that’s really what we’re focused on in this early stage, at this summer or this fall time line. And now with that, we’ll hone our go-to-market approach, hone our monetization, pricing and packaging approach. Now early thinking is that it will be its own product and we’ll offer that both through our self-serve channels and our outbound channels.
Now eventually, we could also have a freemium version that we embed within our other products, sweets — other product sets, and then we can have a more premium version that we sell. But the initial thinking right now is it will be its own product that we sell, be it self-serve and outbound. It will take a little while for it to translate to billings and then to revenue and to have a meaningful impact on revenue, where again, my initial focus is that customer adoption angle.
Mark Murphy
Okay. Do we know anything yet or will we at some point about the technologies that you’re relying upon to build that? Like so in other words, it could be AI, it may or may not have something to do with generative AI, right, which means it may or may not be using kind of a foundational layer like ChatGPT. The large language model like GPT, it could be using Google Bard and the Google LaMDA and that entire stack too. Is there anything that we’re able to know about that at this point? Like just kind of who you’re working with or who you’re relying on?
Tim Regan
Sure. Yes, we’re partnering and building off of OpenAI and other large language models. I think this is where we’ll be learning from our customers and refining our approach to engaging with that data. And this is where ultimately we’ll add in the Dropbox touch, the Dropbox advantages, to really bring value on top of what’s already available with OpenAI and ChatGBT.
Mark Murphy
Okay. So the other thing that I recall coming off of the earnings call, Drew referenced this concept of the silicon brain, which I liked. And he was talking about a personalized GPT type of product. Can you help us understand? So if someone is out there who is a skeptic, and says ChatGPT and OpenAI will just be able to do it on their own somehow, right? You won’t have to have — that’s the debate for every software company in the background, by the way, right? That’s what people are trying to figure out right now. Is it defensible? Is it not defensible. What do you think are the kind of the assets of the differentiation that Dropbox has to kind of — these assets that you’re pulling together to create something unique?
Tim Regan
Yes. Great question. What’s the right to win that Dropbox has. I think it starts with customer trust, I would say. And so again, 800 billion pieces of content, customers trust Dropbox with their data, they trust Dropbox with their content. So again, you start with that 800 billion, those files we already have. You talk about this organizing cloud content solution that we’re working on, which will bring in even more content. So, that gives us a massive base of content and data to operate against.
And then, again, this is where Drew talks about the personalized GPT, the silicon brain. This is your data. This is your content. It’s not the world’s content. It’s your content. It’s pertinent to you and your company. And so, this is where you can do searches on things like, what’s my passport number again or remind me what my travel schedule is or what were the last five questions, Mark asked me on the earnings calls. What’s the company PTO policy.
You can engage with this at the personal level to you and your work and your personal life, right? And so that’s something different that Dropbox can offer because we have that corpus of data that we’re able to leverage. And then, I think another key factor for us is our neutrality, right? So, we are a bit more of a Switzerland. We’re more of an open platform. We engage with Slack. We engage with Google. We engage with Microsoft, Adobe. So we have these partnerships. We have these relationships. We’re not a walled garden approach. And so that enables you to find and track and engage with your content across all these different providers.
Now — so I go back to this customer trust. We take that very seriously. We want to make sure that customers continue to know that they will keep their data private. We’re also not an advertiser, right? And so, maybe they have a certain level of trust with other companies, for example, Google, which may use data for advertising. We’re not going to do that. This is our core business where we need to make sure that the data that we keep, we keep to ourselves and customers continue to trust us. So I go back to customer trust, the data that we sit on, our neutrality, all those are advantages and differentiators for us.
Mark Murphy
Okay. Those are great examples, by the way. The PTO or what are the last five questions that someone asked me. That helps a lot to bring it to life. Maybe we can double-click for a moment on one of your financial metrics that we’ll always take in interest in right or wrong, which is the paid user ads. The most recent quarter, we had 120,000 in Q1. If I think backwards in time and go back a couple of few years, those numbers have been 200,000, 300,000, right, type of range. So it has compressed a bit. Is that something you look at and say, well, that’s the economy and that’s doing a price increase, right? And so, if you see 100,000, that’s kind of temporarily depressed. And perhaps there could be something better than that. Whenever we get back into a more normal economy, right? Is that a possibility, or do you think for now — are we being more logical and rational if we’re just kind of dragging right for a little while on this 100,000 level.
Tim Regan
Yes. For now, I think we shared to expect about 100,000 per quarter this year. I think you hit on them. The big depressors to that number are the economy and the pricing and packaging changes, where we’re seeing price sensitivity. And so, those are items that are putting some pressure on that. Now what are we doing to turn things around and to drive more paid user growth. I’ll give you an example.
So, a lot of our self-serve teams, our larger self-serve teams have never had any sort of customer support from Dropbox. So, they may not even know of some of these other solutions that we offer. Or if they’re about to churn, no one has been engaging with them as they’re about to churn and just say, hey, we know we gave you a price increase. Well, maybe there’s a discount, we can offer to keep you, right? So one of the things we’re doing is leveraging some outsourced support to engage with our larger self-serve teams to try to retain and attract them — or to retain them. And so this is a new muscle that we’re rolling out actually in this second quarter. I hope to see that drive some improvements. We’re also rolling out these new products. I talked about capture, talked about replay. I talked about this organizing cloud content.
These are all early days, so it’s hard for me to say that this is really going to inflect our paying user number, but we’re trying a lot of different measures to help drive growth. And then, I go back to the point I talked about earlier, we are seeing sign-ups increase, right? And it takes a while for sign-ups to convert into trials and then convert over to a paid state, but at least people are coming into that top of funnel and that gives us a runway to drag them into a paid state. So, there’s levers that can bring us there. But for now, I’m still assuming about 100,000 per quarter this year.
Mark Murphy
Okay. Excellent and well said, very helpful. Let’s jump back a little bit. You had mentioned FormSwift very briefly, I think in the beginning when we were talking about how the footprint had been expanding. So, that’s an acquisition you did in Q4. It’s a form management platform. And I think you went over that one sort of quickly, can we dig a little bit deeper into that just in terms of trying to understand what is that product and where did you see — where did you see the fit and the strategy to make a move in that direction?
Tim Regan
Sure. So FormSwift is a forms company that offers a large library of templates where — could include things like tax forms or legal forms, real estate, financial forms. And so, it fits within the strategy of enabling people to do more with their content. And if you think about an agreement workflow, one of the major customer problems is the cold start problem. People don’t want to…
Mark Murphy
Sorry. What problem?
Tim Regan
Cold start problem. They don’t want to start with a blank page. They want to start somewhere, right? So, we are offering them these forms, these templates that enables you to, if you think about workflow, start with the form. And then eventually, maybe you’ll want to send it for signature, if you’re talking about a will, if you’re talking about a real estate agreement. You can send it for signature, if you want to use DocSend, you can share it and track people are engaging with it. Eventually, you store the document. So it fits well within an agreement workflow thesis. It also fits a lot of the other things we look at when we look at M&A.
It’s largely self-serve, it focuses on individuals and SMBs. I think we — it was a reasonable valuation — and so I think all of these fit and we feel like we can continue to grow this business at a healthy pace. And so that’s where we’re focused on integration, right? So integration is something that Dropbox has continued to get better at and build its muscle towards. And so this is where — right now, you can go to the Dropbox website find these forms with templates and engage with those templates.
We’re seeing some momentum on that front. And then, you can also go to the FormSwift website, and we’ll offer you a coupon code for Dropbox products. And so, that’s a nice potential lift. We had 50 million people went to the FormSwift website last year, so it introduces another top of funnel for us. So, this is where bringing these products together that can drive some potential future growth.
Mark Murphy
So — and it’s going to be 2.5 points of growth this year, and so it’s fairly small. What do you think about long-term potential? Is this something that’s going to outgrow the core business for a while?
Tim Regan
Yes. Right now, it is outgrowing. It’s growing at a faster pace than the core business. We think that can keep up for the foreseeable future, just as we engage in some of these marketing motions as we bring it into the core product more, to introduce it to our customer set. So, we think the Company is off doing a nice job so far, and we’re going to continue to fuel that momentum.
Mark Murphy
Okay. So we have just about 7 minutes remaining, I thought I would do a quick scanning the audience and see if any hands go up. We would be very glad to get you a microphone. So we have one on the far side. We’ll get a microphone right over to you.
Unidentified Analyst
A quick question first on paid user growth. And if you could perhaps break it up by segment. When you look across the 100,000, what do you think, is it a mix in the shift from the past, or is it perhaps going to take the same kind of trajectory? I know I’m asking about expectations, all good. We understand the economy is not where it used to be. And then a second question around equity-based compensation and how you’re thinking about it. We’re proud of JPMorgan PLUG that we now have global shares. So just wondering how you think about equity-based compensation for all of your employees.
Tim Regan
Sure. Maybe I’ll start with equity compensation. So, let’s see. So, we do grant RSUs to most of our employees. Now, we are trying to be thoughtful and disciplined as far as our stock-based compensation. I do expect, particularly after the reduction in force for SBC to see some leverage in SBC this year. And then hopefully, to see that translate through into the future as well. So we do grant RSUs to our employee base, but SBC is something I pay a fair amount of attention to as does our Board. And so we continue to drive that down as a percentage of revenue over time.
And then, on your other question on paid user growth. So, a few of the drivers of the paid user growth. We have introduced this family plan, which allows 6 licenses per license — or 6 seats per license. And so that’s been a key driver of our net new paying user growth in recent times. Acquisitions have also fueled.
So FormSwift had a nice Q4 and Q1 that contributed to that paying user growth. Now it’s offset by some of these teams churn, right? We’re seeing that heightened price sensitivity. DocSend and Sign also seeing some macro headwinds that’s putting some pressure on things.
Now if I think about what might be a future growth catalyst that really — because the thing I pay the most attention to is ARR growth as opposed to the growth of our paying users. One of the major angles that we have, major opportunities we have as a business, I think, is this multiproduct, this suite type approach that we’re contemplating. So, I’ll give you an interesting stat that we recently ran a customer survey and 50% of our customers say they would want us to offer an e-signature capability and only 8% know that we already do. And so there’s a big gap between end customer awareness, and it’s the same for send. It’s the same for the forms. Most of our customers want these capabilities, but they just don’t know we have it, right, because they see us as is invisible behind the scenes product that just stores and syncs your files. And so we have a lot of work to do to drive customer awareness to make things easier for our customers.
Another angle to that is we — we used to have three legal terms of service. If you wanted to buy file sync and share, if you wanted to buy send, if you want to buy signature, you had to go through three different legal terms of service gates and 90% of customers would drop as they hit that second gate, right? So we’ve unified our terms of service this past quarter. We’ve seen an uptick in trials as a result of that. So just simply making things easier for our customers, driving that awareness, integrating our products. And ultimately, this can culminate in bundles and suites, which as customers are looking to consolidate their spend across vendors, this is another key potential growth strategy that we’re contemplating. And it could be a driver for ARR growth and paying user growth.
Mark Murphy
Thank you for the question. Do we have any others in the room? No. Okay. So, in the final couple of moments, maybe what we could do is spend some time talking about the pricing and packaging change. That happened — that had happened last year back in June, right? So, we’re quickly getting to the point where it will be kind of the one-year anniversary. What do you think — any elements of that that have gotten better or worse than you would have thought? Because I think the piece that people are always trying to understand and trying to monitor is will it be kind of accompanied by a little bit of an increase in churn, right? Typically, or commonly, it would be, but I think the magnitude of that can be difficult to measure. And then sometimes you’ve had price increases that are also stimulating people to go from monthly to annual or like kind of further — different types of upfront billing. So, how has it gone?
Tim Regan
Yes. So — okay. So last June, we rolled out a 20% price increase across our standard and advanced teams plans. And we did that because we’ve been adding value to those plans really since 2017 when we first introduced those teams plans. And recently, we’ve introduced a lot of security capabilities that strengthen those plans. And so that was where we had raised the value associated with those plans. It was not an inflationary moment to raise prices. It was no — we’ve added a lot of value. And so this went into effect last June. It went into effect immediately for our monthly customers and flows through to our annual customers according to their billing cycles. In Q3, everything was good, off to a great start. But then as the macro economy started to turn, then we started to see this heightened price sensitivity. We started to see increasing churn. We really saw that flow through in the fourth quarter. And you can correlate it very closely with customers that have gone through layoffs, have gone through restructuring themselves. You can see, okay, there’s a clear cost-cutting methodology philosophy going into that customer, and that’s flowing down.
And so, even I am putting pressure on our internal software teams to find, hey, how can we call our licenses down. And so we have been seeing that flow through. And so, this is where going forward from a pricing and packaging perspective, this — while it still was a net benefit, it still was a positive, not as much as it was in Q3 and it’s been dwindling down in Q4 and Q1. And so, what we’ll be doing going forward from a pricing and packaging perspective is those bundles and suites as the core driver of our pricing and packaging strategy.
Mark Murphy
Okay. And perfect timing, we are exactly at the end. So Tim, I can’t think good enough for taking the time. It’s been super informative for us.
Tim Regan
Awesome. Thank you, Mark.
Mark Murphy
Thank you.
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