Dropbox, Inc. Q4 FY2024 Earnings Call

Good afternoon, ladies and gentlemen. Thank you for joining Dropbox's Fourth Quarter 2024 Earnings Conference Call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. As a reminder, this conference call is being recorded and will be available for replay from the investor relations section of Dropbox's website following this call. I will now turn it over to Peter Stabler, Head of Investor Relations.

Thank you. Good afternoon and welcome to Dropbox's fourth 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 forecasts for our first quarter and fiscal year 2025, and our expectations regarding our revenue growth, profitability, operating margin, and unlevered free cash flow, as well as our expectations regarding our business, assets, products, strategies, technology, employees, users, demand, and the macroeconomic environment. These statements are subject to risks and uncertainties that could cause actual results to differ materially. They are also based on assumptions as of today, and we undertake no obligation to update them as a result of new information or future events. Factors and risks that could cause our actual results to differ materially from these forward-looking statements are set forth in today's earnings release and in our annual report on Form 10-K filed with SEC. We'll also discuss non-GAAP financial measures, which are not prepared in accordance with generally accepted accounting principles. Reconciliation of GAAP and non-GAAP results is provided in our earnings release and on our website at investors.dropbox.com. I will now turn the call over to Dropbox's Co-Founder and CEO, Drew Houston.

Thanks, Peter, and good afternoon, everyone. Welcome to our Q4 2024 earnings call. Joining me today is Tim Regan, our chief financial officer. I'll kick things off with a recap of 2024 followed by a look at our strategy for 2025. Tim will then dive into our Q4 and full-year financial results along with guidance for Q1 and 2025. Let's get started. We closed out the year on a positive note. Fourth quarter revenue and operating income came in modestly ahead of our guidance. Through our share repurchase program, we reduced our diluted share account by 12.5 million shares this quarter, resulting in 23% year-over-year growth in free cash flow per share for both the quarter and the full-year. Q4 capped a year that included difficult decisions as we continue to navigate a transition from our maturing FSS business to areas of significant growth potential. These decisions are aimed at strengthening and simplifying our FSS business, including reducing the size of our workforce and scaling back investment in non-core businesses such as FormSwift. While these decisions are introducing near-term growth headwinds, they also improve our profitability and efficiency, enabling us to invest in products like Dash that unlock significant long-term growth opportunities. So with that, let me briefly touch on the progress we made against our main objectives last year. As a reminder, we had two primary business objectives in 2024. The first was to improve the collaborative user experience of our teams product. We upgraded sharing and invitation functionality, which removed friction for both end users and IT admins. This led to improvements in key funnel metrics, including team invites, new team creations, teams' trial conversion rate, and teams' activations, all of which were up double-digit percent year-over-year. As a result, gross additions for Teams SKUs were up 10% versus a year ago. Our relaunched IT admin console also improved admin engagement and CSAT scores, which are crucial since IT admins are key purchase decision makers. However, over the course of the year, these gains were offset by elevated churn and down sell pressure as some teams' customers sought to reduce their software license exposure, often due to layoffs within their own companies. Conversely, we saw relative strength in our individual plans, particularly Essentials, Plus and our new lower-priced Dropbox Simple plan. Our second objective was to continue investing in Dash. We made significant strides here. In early June, we pivoted our development work towards launching Dash for business. While we still see a viable value proposition for a self-serve individual product, it became clear that the larger near-term opportunity lies with Dash for business, where we can partner with IT admins to streamline the onboarding process for end users. In October, we launched Dash for business as a separate SKU for our installed base of teams customers, as well as non-Dropbox customers that need AI powered universal search. And while still early, we've been pleased with the customer reception so far. We exceeded our sales goals for Q4 and our pipeline is building. The feature that's resonating the most is universal search. As users come to understand how much time can be saved by being able to search all of your most important cloud apps with a single query in Dash. The Head of IT at an outdoor retailer summed up Dash's impact by saying, Dash saves me and my team's valuable time by making information accessible in a faster and easier way. From IT to engineering to accounting, everyone's more productive. In addition, IT admins are also finding value in Dash's Protect and Control features, which address two critical admin concerns. One is ensuring that content is strictly protected, and two is having the tools to quickly remediate unapproved sharing. It's clear that security concerns are a major obstacle for AI tool adoption, and customers are telling us that Dash's security tools are a competitive advantage. Superhuman is a new Dash customer, and their CEO remarks, as a growing company, security is increasingly top of mind for us. Dash gives us visibility into any unexpected access and helps us close security gaps that naturally accumulate over years of file sharing. Now let's talk about our plans for this year. We have three primary objectives for 2025. Our first priority is scaling Dash. We're starting to sell Dash through our managed sales team and are focused on scaling all aspects of this go-to-market motion. This includes additional investments in marketing to drive awareness of how Dash can help customers solve their problems, adding more salespeople to the team as we continue to build our sales pipeline, leveraging our customer service teams to help customers onboard to the product and adopt its key features, and maintaining an active dialogue with our customers as they make expansion and renewal decisions. Over time, as we refine the product and onboarding process, we'll also tap into our product-led growth expertise to offer additional ways for customers to try, use, and buy Dash. We're investing aggressively this year to keep improving the Dash user experience, and I'm excited about our 2025 product roadmap. In our launches this year, we expect that you'll hear more about pioneering improvements to universal search and answers, new security and content governance features, improved GenAI content creation tools, and an expanded universe of SaaS application connectors, to name a few. And we expect to gain additional compliance standards that will help unlock international expansion. In short, we believe 2025 will be a big year for Dash, and we're more excited than ever about the opportunity we have in front of us. Our second priority is that we'll continue simplifying and strengthening our core business, while delivering greater operating efficiency. This means doing fewer things better and improving mission-critical features and functionality rather than pursuing inefficient or subscale growth. For our team's products, we'll optimize core invite flows and internal and external sharing motions. While our retention rates remain strong, we see an opportunity to reduce churn by enhancing the usability of the most critical product capabilities and refining key user workflows. We'll also continue optimizing our pricing structure to provide a simpler set of options that clearly illustrate our FSS value proposition. For our individual business, we'll focus on meeting customers where they are. Our traffic continues to shift towards mobile, and customers have been requesting a lower priced entry point for our paid plans. So in response, we launched Dropbox Simple last year in select countries. We've seen steady demand, strong retention, and limited Plus plan cannibalization. This year, we'll gradually roll out Simple in the U.S., and we'll focus on driving multi-platform usage across our FSS plans based on our knowledge that multi-surface users have higher retention rates. Our increased focus on efficiency extends to our document workflow businesses. DocSend will remain a priority as we see a solid growth opportunity building upon recent feature launches. We'll manage Dropbox Sign for efficiency rather than growth as we redirect investment spend into Dash. And as mentioned previously, we've been exploring strategic options for FormSwift. After surveying the market, we've decided to retain our ownership of FormSwift, while significantly reducing engineering and marketing investments as we aim to drive increased levels of profitability in this business. Our third priority is positioning our FSS business to serve as a launchpad for Dash. While our initial managed sales efforts will work to offer Dash to our installed base and Teams customers and new potential Dash customers as fast as it can, we also have the opportunity to introduce Dash to our entire FSS user base through bundling and product integrations. We want to make it easy for our customers to see and adopt Dash. So bringing our FSS and Dash experiences together will help accelerate getting Dash in front of our SMB and prosumer customers. In closing, like many successful technology companies before us, Dropbox is managing a generational transition. Just as Netflix evolved from DVDs to streaming, or Adobe from packaged software to Creative Cloud, we are evolving from traditional file sync and sharing to AI-powered universal search and content intelligence. As you've heard me say, in many ways we're solving a similar set of problems that customers faced when I founded Dropbox, helping them secure, organize, and share their content. Dash solves similar challenges, but for today's environment, helping customers secure, organize, and share both their files and their cloud content with the added capabilities of universal search and AI productivity tools. Business transitions can be challenging. They require focus, perseverance, and making a lot of difficult changes. And from the outside, they can look chaotic. We have a clear vision of where we're going, and we're starting from a position of strength. We have over half a million business customers, deep technical capabilities in content management, and a trusted brand. These are all significant advantages as we build our next chapter with Dash. And last but not least, I'd like to extend a warm welcome to our newest board member, Warren Jenson. Warren has decades of experience helping lead companies like Nielsen, Electronic Arts, Amazon, and NBC through significant transformations. We're lucky to have him on the team. I'll now turn over the call to Tim to review our financial results and outlook.

Thank you, Drew. I'll cover our financial highlights from Q4 and then provide guidance for Q1 and the full-year 2025. Starting with our results for the fourth quarter. Total revenue for Q4 increased 1.4% year-over-year to $644 million. Foreign exchange rates contributed $2 million to revenue in the quarter. Total ARR grew to a total of $2.574 billion, up 2% year-over-year. On a constant currency basis, growth was 1.3% year-over-year. Our year-over-year growth in ARR was largely driven by relative strength in our individual plans. With respect to our Teams plans, we continue to see year-over-year increases in sharing, signups, and user activation. However, these top-of-funnel improvements and the resulting growth in gross new ARR that Drew alluded to continue to be offset by pressure on down sell, churn, and team expansion activity. For the fourth quarter, ARR declined by approximately $5 million sequentially, due to these Teams dynamics as well as seasonality from FormSwift. This translated to exiting the quarter with 18.22 million paying users, down approximately 15,000 paying users on a sequential basis. Average revenue per paying user was $140.06, as compared to $139.05 in the prior quarter. The quarter's sequential growth was driven primarily by the increasing mix shift to our higher-priced Essentials individual SKU, FX tailwinds, and a slight mix shift from annual to monthly plans. 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, net gains and losses on our real estate assets, workforce reduction expenses, and net losses on equity investments. Our non-GAAP net income also includes the income tax effect of the aforementioned adjustments. Gross margin was 83.1% for the quarter. As mentioned in previous quarters, the primary driver of the year-over-year increase in gross margin was an increase in the useful life of our servers from four to five years, effective January 1 of 2024. This change resulted in approximately $4 million of benefit to gross profit in the fourth quarter. For the full year, we experienced a benefit to gross profit of approximately $30 million. Operating margin was 36.9% ahead of our guidance of 36% and up 470 basis points from the year-ago period. Compared to the year-ago period, operating margin benefited from lower operating expenses following our reduction in force and lower cost of sales from the aforementioned change in useful life of our servers. Net income for the fourth quarter was $223 million, up 30% year-over-year, driven by lower operating expenses following a reduction in force, as well as the release of certain tax reserves. Diluted EPS for the fourth quarter was $0.73, based on 307 million diluted weighted average shares outstanding compared to $0.50 in the year-ago quarter representing a 46% year-over-year increase. Moving on to our cash flow and balance sheet. We ended the quarter with cash and short-term investments of $1.6 billion. Cash flow from operations was $214 million, an increase of 7% versus the year-ago period. This includes $52 million of severance and benefits payments made related to our reduction in force. Capital expenditures in the quarter totaled $3 million. This resulted in quarterly free cash flow of $211 million, compared to $190 million in Q4 of 2023. Free cash flow per share for the quarter was $0.69, representing a 24% year-over-year increase. In the quarter, we also added $51 million to our finance leases for data center equipment as we continue to invest in refreshing our data centers. With respect to our balance sheet, as a reminder, in December, we entered into a secured five-year term loan of up to $2 billion, consisting of an initial $1 billion term loan and a delayed draw feature that provides us optionality to borrow another $1 billion in the future. This new loan bears interest at SOFR plus 3.75% on the drawn amount and a 1% interest rate on the undrawn amount. As part of this capital raise, we also terminated our $500 million revolver. In addition, and concurrent with this capital raise, our board authorized a new $1.2 billion share repurchase program. Collectively, these actions fortify our balance sheet and enable us to invest in our growth initiatives and to allocate capital towards reducing our share counts. To this effect, in the fourth quarter, we repurchased approximately 12.5 million shares, spending approximately $350 million. As of the end of the fourth quarter, we had approximately $1.4 billion remaining under our existing share repurchase authorizations. In addition to the term loan, we continue to carry $1.4 billion of 0% coupon convertible notes, split equally across two tranches maturing in March of 2026 and 2028. We are actively considering our options as we approach the 2026 maturity, but have no further news to share today. I'll now offer our updated outlook for Q1 and the full-year 2025. However, I will first offer a few updates since we shared early thinking on our 2025 expectations during our November earnings call. First, during our November earnings call, we noted that we were undergoing a strategic review of our options with respect to FormSwift, including a potential sale. This decision stemmed from the objectives underlying our risk as we are aiming to direct our company focus towards our most material and strategic initiatives. We have since completed our assessment and have concluded that the profit-maximizing outcome is to continue our ownership of FormSwift, while concurrently significantly reducing our headcount and eliminating our marketing investment in that business. We expect that this approach will thereby serve as a headwind to revenue growth over the next few years, though it will also serve as a tailwind to free cash flow. Second, the U.S. dollar has meaningfully strengthened since we shared our early thinking on 2025, impacting both our revenue and free cash flow expectations for 2025. And third, in light of our recent capital raise, we will begin to guide to unlevered free cash flow, which we define as free cash flow excluding the impact of interest payments associated with our term loans net of their associated tax benefits. While we will still report free cash flow as we have previously, we will guide to unlevered free cash flow to provide a metric that best aligns with the core operating performance of our business. Given these updates, for the first quarter of 2025, we expect revenue to be in the range of $618 million to $621 million. We are expecting a currency headwind of approximately $3 million. On a constant currency revenue basis, we expect revenue to be in the range of $621 million to $624 million. We expect FormSwift to serve as a roughly 80 basis point headwind to revenue as a result of the shift in our strategic direction. I'd also note that Q1 2025 has one less day versus Q1 2024. Consequently, we recognize one less day of revenue this Q1 relative to the year-ago quarter. We expect our non-GAAP operating margin to be approximately 38.5%. The shift in strategic direction for FormSwift is factoring into the strong margins for Q1, given that we will be eliminating marketing funding for FormSwift, which was historically weighted towards the first quarter. Finally, we expect diluted weighted average shares outstanding to be in the range of 299 million to 304 million shares based on our 30-day trailing average share price. For the full-year 2025 we expect revenue to be in the range of $2.465 billion to $2.480 billion. We are expecting a currency headwind of approximately $18 million, or roughly 70 basis points. On a constant currency revenue basis, we expect revenue to be in the range of $2.483 billion to $2.498 billion. We expect FormSwift to serve as a roughly 150 basis point headwind to revenue for the full year. We expect gross margin to be approximately 82%. We expect non-GAAP operating margin to be in the range of 37.5% to 38%. We expect unlevered free cash flow to be at or above $940 million. This unlevered free cash flow guidance is inclusive of a few one-time items totaling $47 million. The first is a $36 million payment that we made in January for the third and final tranche of our San Francisco lease buyout that we executed in 2023. The second is $11 million for severance, employee benefits, and related costs associated with our Q4 reduction in force. We expect CapEx to be between $25 million to $30 million for the full year, and additions to finance lease lines to be approximately 6% of revenue. As related to the aforementioned term loans, we expect cash interest expense, net of tax benefits of approximately $90 million. Finally, we expect diluted weighted average shares outstanding to be in the range of 283 million to 288 million shares. I'll now share some additional perspectives on this guidance for 2025. Starting with revenue as mentioned, our guidance factors in headwinds from reducing our headcount and marketing investments in FormSwift, as well as FX headwinds. This guidance also contemplates the ongoing dynamics of our teams business that I mentioned earlier. Consistent with our historical approach, our guidance reflects what we have a high degree of visibility into today, where we have not yet seen a meaningful change in these Teams strength. In addition, while we are excited about the long-term opportunities for Dash and are encouraged by the early progress on our sales efforts, our guidance does not include a material contribution from Dash given the nascent state of this product. With respect to paying users, we expect paying users in 2025 to decline by roughly 1.5% to 300,000 users, with our reduced investment in FormSwift driving about half of this decline. We expect the remaining half of paying user pressure to stem from a reduced outbound sales force subsequent to our reduction in force, as well as, to a lesser extent, some continued pressure on self-serve teams. We expect roughly half of the full year's decline to occur in Q1, coinciding with the elimination of our marketing investment in FormSwift. Moving on to operating margins, where we are guiding to a range of 37.5% to 38% this year. The driver of this year-over-year margin expansion is our reduction in force. This benefit, however, will be partially offset by two main factors. First, 2024 gross margin benefited from a $30 million tailwind through the extension of the useful life of our data center hardware, where we will not see this tailwind in 2025. Second, we will also be investing across both R&D and sales and marketing to scale Dash and backfilling select positions impacted by our RIF. For free cash flow, we expect unlevered free cash flow to be at or above $940 million. This is slightly below the early thinking we shared in November, given that FX has deteriorated by more than $30 million since that time as a result of the strengthening of the U.S. dollar. However, this is partly offset by gains from our decision to reduce our investments in FormSwift. Lastly, we expect our weighted average shares outstanding to decrease to approximately 283 million to 288 million shares as we remain committed to reducing our share count over time via our share repurchase program. In closing, we are positioning our core file, sync and share and document workflow business lines for increased efficiency as we continue to drive higher levels of operating margins and free cash flow from these areas. We are then leveraging this profitability and the strength of our balance sheet to reduce our share count, thereby driving meaningful growth in free cash flow per share. Concurrently, we are investing in our future vectors of growth, most notably Dash, where we see a large long-term opportunity. While it will take time for these efforts to translate to revenue growth, we believe that these decisions will culminate in creating long-term value for our shareholders.

Certainly. Our first question comes from the line of Rishi Jaluria with RBC Capital Markets.

Oh, wonderful. Thanks so much for taking my question. I wanted to first start with Dash. Look, I understand that it's early, and too early, obviously, to disclose. But if we think about maybe two pieces there, number one, what have you seen so far in uptake and usage that gives you confidence this can be a successful kind of pivot or growth driver over the next call it three to five years? And maybe number two, if we think about competition in the space with pure plays that are doing the universal search and other platforms adding these advanced semantic search capabilities, what gives you the right to win within that space and gives you confidence again that you can actually get meaningful revenue out of that? And I've got a quick follow-up. Thanks.

Sure. Great question. Our confidence in uptake and usage, and our belief that it can drive growth over the next few years, begins with the market itself. The longer we've been in this space, the more we recognize it as a universal issue for knowledge workers. Everyone struggles with managing too much information across multiple apps and open tabs, which indicates a significant market opportunity. IDC estimates it to be an $8 billion market today, expected to double in the coming years, and there aren't many effective solutions available, with many customers unaware that this problem can be solved. We're just at the beginning of this journey. Regarding Dropbox's position, our customers see this as a natural evolution of our services, and we have numerous advantages. Currently, we have over half a million business accounts on Dropbox, with all of them representing strong potential for Dash. Transitioning from organizing files to managing cloud content feels like a logical progression, and we have been validating this belief since our launch. The indicators we've focused on since the launch include exceeding our internal sales targets in Q4, growing our pipeline, and positive early customer feedback. Although it's just the beginning, we're noting that key features such as universal search and our security and content governance functionalities are resonating well with customers. In terms of competition, there are certainly startups in the space, but our advantages are evident in our distribution, technical scale, infrastructure, and the investments we've made, many of which are relevant to this challenge. We don't start from scratch, and our extensive business accounts give us a strong product experience with features like Protect and Control. Looking ahead, while we will compete with established platform companies, our capability to be platform agnostic is critical. Many incumbents are focusing their AI products on their own ecosystems rather than across different ecosystems, which represents a significant opportunity for us. Finally, our commitment to trust, privacy, and our brand is a major advantage for our customers. Many users are concerned about potential conflicts in larger companies where their data might also be used for advertising or training models. Unlike them, we focus solely on providing excellent service without using customer data for anything beyond the service itself. All of these points are pivotal, and we are genuinely excited about the early progress we are making.

All right, that's really helpful, Drew. Thank you. And then Tim, just a quick point or two of clarification. So look, I appreciate that you're providing the guidance in the deck now. That's great to see and definitely saves us a lot of time and anxiety. I noticed in the deck you're highlighting two different, you know, new metrics in terms of profitability. Number one, I see you highlighting adjusted EBITDA in kind of the deck to my knowledge, at least since IPO that has not been a metric you focus on. Is that something that we should be paying closer attention to? And then in your guide, you actually talk about unlevered free cash flow. And I apologize if I missed a bridge there, but if you could maybe help us understand why now the focus on unlevered free cash flow versus the kind of prior operating cash flow less CapEx that you typically guided to and why the change over there, that would be helpful. Thank you.

Sure. Maybe starting with the latter question. In light of our recent capital raise, we are going to guide to unlevered free cash flow, which we do define as free cash flow excluding the impact of interest payments associated with our term loans that have their related tax benefit. We just believe that this metric best aligns with the core operating performance of our business. So consistent with how other companies have treated this metric with similar term loans, that's what we're aiming to do here. And as far as adjusted EBITDA, this is just another metric we're offering to help understand our business and the debt-to-EBITDA ratios of our business. So additional line of sight to provide to analysts and investors.

Thank you. And our next question comes from the line of Steve Enders with Citi.

Thank you for taking the questions. I would like to inquire further about the growth outlook. You provided a good breakdown of the influencing factors, but I’m curious about the business pace throughout the year and the growing incremental growth headwinds. It seems that there might be a difference in growth rates between the first quarter and the latter part of the year. Could you help clarify the factors affecting this? Is there a change in the timing related to FormSwift, or is it simply the gradual user decline throughout the year that’s contributing to this situation?

I'll let Tim speak to the specific timing and ins and outs, but just from a higher level, a lot of this, so at a high level, one, there's a lot of the headwinds that we've talked about over the last handful of quarters. I think those are pretty stable. So, there's some like market aspects. But then a lot of this, a lot of what you're seeing is also the result of voluntary choices to cut inefficient growth and simplify and strengthen the core business and rotate towards Dash. So when you're seeing us kind of optimize the FormSwift business or cut back on some of these areas, it's less that there's like no opportunity there, it's more just that we feel like the dollars are much better spent on Dash, given the market and just green field nature, or the green field nature of that market and the size and the growth and the opportunity. But as we cut back in some of these areas or as we cut kind of inefficient marketing spend or if we cut back on some of our product or portfolio, you know, that's not costless in the near-term that shows up as headwinds or compounding the growth headwinds you're seeing, and you're very mindful of the optics here. But they're the right long-term decisions for the health of the business. We think we can get better returns on those dollars by deploying them towards Dash and in other places.

Yes, and some thoughts maybe on full-year, and then I'll shift to maybe some quarterization. So if we do normalize for FX and FormSwift, our guidance at the high end of the range implies a decline of roughly 50 basis points, and we continue to see pressure on our teams' business with respect to team expansion, down-selling churn trends in part due to the pricing sensitivity we've been talking about. We've also scaled back our managed sales team as part of the RIF, which is pressuring our outbound sales expectations. And then while we're excited about Dash and its long-term potential, we're still very much in the early innings here and don't expect a material contribution to revenue from Dash this year. And then maybe with respect to how it should translate for the quarters. So for this year, if I think about paying users, we do expect paying users to decline by about 300,000 users, and that reduced investment in FormSwift represents about half of that decline. And we expect most of this to occur in the first quarter coinciding with the elimination of marketing for FormSwift and so that's what does put pressure on the first-half of the year, and you see that flow through with respect to the full-year guidance.

Okay, got it. That's helpful. In relation to the Team's business and the challenges we've observed, does it seem like those challenges are at least stabilizing and that the downward pressure is consistent? Additionally, it's good to hear that Dash is exceeding expectations for Q4, but how should we view the timeline for when it might become a more significant part of the business and start to offset some of the declines? Is there a useful framework for understanding those moving pieces?

Sure, I think all of this is reflected in our guidance. Directionally, we continue to see several opportunities for reaccelerating growth. There is ongoing optimization potential in the Teams business, as I mentioned earlier, with various areas throughout the funnel, such as onboarding success, team expansion, pricing optimizations, and improvements in churn that can help us counter some of the challenges we've been facing. We are very enthusiastic about Dash's potential and growth, and as we gather more insights, we will share them, but it is still too early to provide specific timing on when everything will come together. Another opportunity lies in leveraging our core business as a launchpad for Dash. Unlike some of our previous products, there is significantly more overlap between our core business and Dash, making it a natural evolution of our existing services for our customers. We believe that most of our FSS subscribers are promising prospects for Dash, and we also see Dash being relevant to a new generation of knowledge workers whose workflows may not center around files as they used to. Those are the key elements of how we plan to drive growth, and we will keep updating our guidance and offer more insights throughout the year.

Thank you. And our next question comes from the line of Michael Funk with Bank of America.

Great. Hi, thanks. This is Matt on from Mike. Appreciate the question. Understanding you're still seeing some pricing sensitivity in Teams, I was curious, can you provide some additional color on what you're seeing out there in terms of general macro trends? Obviously there's been some relatively positive data points on SMB and just curious if you've seen any benefit from user behavior or customer behavior during the quarter?

I wouldn't say anything to call a major new trend. I think a lot of the dynamics that we've been talking about in terms of, you know, macro headwinds and so are pretty stable. I think there's a lot of positive trends too or just consistency where, and the reason we're focused on Teams, just as a reminder, is like it has higher retention rates, higher ARPU, and strong expansion opportunity for Dash. And we've also been able to show that we can improve a lot of the elements in the Teams business through these optimizations across the funnel that I mentioned and these rebounds where a bunch of those funnel metrics are up double-digit percent over the last year. So I'd say it's pretty stable. We haven't seen any major new dynamics in SMBs, but we're monitoring it closely.

And then briefly, Matt, our guidance largely factors in similar trends to what we saw last year. Still expecting a challenging demand environment in the SMB space, as many of our customers are looking for ways to reduce costs as we are doing ourselves.

Thank you. Our next question comes from the line of Patrick Walravens with Citizens Bank.

Oh, great. Thank you. Can we talk a little bit about the sort of the competitive dynamics for Dash? And I realize that it's largely greenfield, but you have one neighbor in San Francisco Glean and raised $260 million and almost a $5 billion valuation at the end of last year. So how are you differentiated from them? Where do you see yourselves fitting in better and where do you see competitors like that fit in better?

We keep a close eye on Glean as you would expect. We believe we have several advantages. First, our existing customer base is significant, with over half a million business accounts, which allows us to leverage the assets we've developed, such as our technical infrastructure and our trusted brand. Many customers are concerned about security when it comes to providing information to a startup. Additionally, a common challenge companies face when implementing AI is ensuring it’s done safely. While customers recognize the productivity boosts from universal search and AI, many want to identify and address any improperly shared content before granting visibility to everyone. Our Dash offering includes a feature called Protect and Control, which helps identify and manage shared content across various platforms, addressing the previously manual process with automation at a scale that Glean or others can't match. We see security as a significant advantage. I'm also enthusiastic about our product roadmap for 2025, which will enhance the user experience in unique ways. Our customers and even the broader market recognize this shift as a natural evolution for Dropbox, moving from organizing files to managing all cloud content with an intelligent layer added. We’re encouraged by the early signals we're seeing, knowing the space will be competitive in the future. However, this competitive landscape only reinforces our belief that these are common challenges that align with our strengths.

Thank you. And our next question comes from the line of Mark Murphy with JP Morgan.

Great. Thanks for taking the question. This is Sonak Kolar from Mark Murphy. Drew, you had discussed in the past exploring adjacent opportunities around AI beyond the core Dash product? Are there any other domains that seem like natural near-term extensions for the AI product portfolio? And maybe perhaps any feedback on how you evaluate that process as it relates to building in-house versus acquisitions?

Sure. So there are a number of adjacencies that are natural extensions from Dash. One benefit of Dash is it allows you or companies to link up all the different apps, so that we can have this unprecedented 360-degree view of the state of work in your company. And then there's a lot you can build on top of that. We bought a company called Reclaim last year that does AI time analytics and optimization. A key feature in Dash, in addition to search, is we give you a start page where whenever you open a new tab in your browser, we show you everything you can do, but also what are your tasks or priorities. We see that as a very extensible starting point for that surface area as being really valuable to build additional experiences on top of that. This is an area where we'll have more specifics to share over time, but I can say we see a lot of interest in deepening that functionality and we think there's a lot of optionality and kind of neighboring spaces and adjacencies with Dash.

Very helpful, thank you. And then as a quick follow-up on Dash, so far it seems like a lot of the focus is on upselling or retaining some of the existing installed base of the core FSS business. So while understanding it's early days, any rough sense of customers you've seen traction for so far, the split of those between existing users versus entirely net new to Dropbox?

Both tracks are really important: reaching existing FSS users and unlocking a much larger total addressable market of potential FSS users from Dropbox. They will have slightly different trajectories and ceilings. We have a significant advantage with existing FSS customers due to shorter sales cycles and established relationships, which allows us to compress timelines effectively. We've already seen that this approach is working. Additionally, we're putting considerable effort into acquiring new and larger customers, as these companies often face bigger challenges related to content, search, and AI. We will pursue both strategies, recognizing that while new customers may have longer sales cycles, they could also yield higher annual contract values and average revenue per user. Both tracks are crucial, and we will provide more updates as we gather insights.

Thank you. Our next question comes from Gilly with Goldman Sachs.

Hey, everyone. Thanks for taking my question, Gilly, on for Kash. I had a question that kind of extends on Sonak's question from before. There seems to be a renewed, somewhat of a renewed focus on FSS and how that can support future Dash growth? Can you maybe layer down further as to how you're investing or addressing the cross-sell opportunity you see in this business? And I have a follow-up after, please.

Sure. So yes, we see this as a really important opportunity and transition. And as I said, a little while ago in my prepared remarks, we see the opportunity to transform our core business into a launch pad for Dash. We think there are a lot of parallels between what we're doing and a lot of the successful generational transitions that you've seen in SaaS and consumer internet. Things like Creative Cloud and Adobe are a good example. One generation of users downloaded Photoshop onto their computers and bought it as package software. Then as they shifted to the cloud, they modernized the product, and then it continued to be relevant to the next generation. Netflix is another example we think about a lot where you could have looked at their DVD mailing business and drawn conclusions about kind of its limits, but that audience ended up being really valuable as having that initial audience helped them bootstrap a victory in the streaming wars. We're looking at all the mechanics of how you do that, ranging from deep product integrations, pricing and packaging, and bundling. We already see there's a lot of synergy and opportunity to bring a lot of the benefits of Dash to our FSS customers, which both improves that experience and creates a more retentive experience.

Thank you. And our next question comes from the line of Alex Nguyen with Jefferies.

Hi, thank you for taking my questions. If I listen correctly to your initial remarks, you mentioned that FormSwift will contribute 1.5 percentage points to revenue headwind this year. Your full-year revenue guide implied 2.3% decline on constant currency basis. So if I were to normalize for FormSwift, that would imply 0.8% decline in constant currency in terms of revenue? And that is a little bit softer than what you have before back in the previous quarter. So I guess I'm just trying to get a sense of are you being more conservative on the guidance this time around? Is that a function of incrementally weaker end demand or is that just more for being conservative? Thank you.

Sure, so our math, if we do normalize for FX and FormSwift, at the high end of our guidance range does imply a decline of roughly 50 basis points. So, relatively in line with the commentary we gave last earnings call in November. From a philosophy perspective, I'd say we're being consistent with our historical approach where our guidance largely reflects what we have visibility into today. And as far as what else is embedded into the ‘25 guide, it’s an extension of the pressure that we have been seeing on our Teams business with respect to team expansion and down sell trends, in part due to pricing sensitivity, which is offsetting the lift that we're seeing in gross new that Drew mentioned in his remarks. And then we also have scaled back our sales team as part of the RIF, and so that's pressuring some of our outbound sales expectations. And then we've talked a lot about Dash, where we're very optimistic about the long-term opportunity, but just given the nascent state of that product, it will take time to build up the ARR and see it flow through to revenue. So those are some of the factors that have gone into the guide, but again, no change to our overall philosophy when it comes to guidance.

Got it. Thank you. And then can I just follow-up on the guidance on the free cash flow as well? Can I just check with you roughly what is your cash tax rate? What I'm trying to guess here is that has there been any change in terms of your guided free cash flow? Like if you translate that above $900 million, sorry, $940 million of unlevered free cash flow to levered free cash flow, like which you have at or above $950 million, how would that figure compare?

Sure. So I think we clarified our definition of levered versus unlevered free cash flow, which contemplates the interest that we're spending on our term loan, which we do expect to spend roughly $90 million in interest payments related to our debt net of the associated tax benefit. But if you think about the thoughts that have gone into the call at $940 million of unlevered free cash flow for this year. This does account for a few factors and that accounts for the latest thinking that we have on our revenue, as well as changes in FX, which did deteriorate by more than $30 million since the remarks that we gave last November. So that's certainly a new headwind that we've baked in. We're seeing reinvestments into the business to fund Dash as well as critical backfills for certain roles. So that's baked in. Higher cash taxes and merit increases are included, and then we do have a few one-time items including the $36 million payment for the final installment of our San Francisco lease and $11 million of severance from our RIF. That's all factored in. But if you're thinking about the $950 million we said back in November relative to the $940 million, the major change is there. The FX headwind of $30 million, but that's offset by some of the benefits that we're getting from our decision on FormSwift. You also asked about our cash tax rate. No major changes from what we saw in 2024. So that's not a major delta. Though, of course, as we get more profitable, we do have to pay higher cash taxes, and that's another headwind that will be incurring as we get more profitable.

Thank you. I'll now hand the call back over to Head of Investor Relations, Peter Stabler, for any closing remarks.

Thank you, everyone, for joining us today. We look forward to speaking with you next quarter. Hope you all have a good day. Thank you.

Ladies and gentlemen, thank you for participating. This does conclude today's program, and you may now disconnect.