Earnings Call Transcript
Dropbox, Inc. (DBX)
Earnings Call Transcript - DBX Q4 2022
Operator, Operator
Good afternoon, ladies and gentlemen. Thank you for joining Dropbox' Fourth Quarter 2022 Earnings Conference Call. As a reminder, this conference call is being recorded and will be available for replay from the Investor Relations section of Dropbox' website following this call. 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' Fourth 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 forecast for our first quarter and fiscal year 2023 and our expectations regarding our revenue growth, profitability, operating margin and free cash flow as well as our expectations regarding our business, assets, products, strategies, technology, employees, users, demand and the macroeconomic environment. These statements are subject to risks and uncertainties that could cause actual results to differ materially. They are also based on assumptions as of today, and we undertake no obligation to update them as a result of new information or future events. Factors and risks that could cause our actual results to differ materially from these forward-looking statements are set forth in today's earnings release and in our quarterly report on Form 10-Q filed with the SEC. We'll also discuss non-GAAP financial measures, which are not prepared in accordance with generally accepted accounting principles. A reconciliation of GAAP and non-GAAP results is provided in our earnings release and on our website at investors.dropbox.com. I would now like to turn the call over to Dropbox' Co-Founder and Chief Executive Officer, Drew Houston. Drew?
Drew Houston, CEO
Thanks, Karan, and good afternoon, everyone. Welcome to our Q4 2022 earnings call. Joining me today is Tim Regan, our Chief Financial Officer. I'll start with a recap of 2022 and provide an overview of our strategy for 2023, then Tim will go over our financials for Q4 and fiscal year 2022, give guidance for Q1 and full year 2023 and provide an update on our long-term targets. So let's get started. While 2022 saw a more challenging macroeconomic backdrop, and we saw some elevated headwinds in Q4, of which Tim will discuss in more detail, I'm pleased with how our business performed for the year. We ended the year with over $2.5 billion in ARR. We once again increased profitability and free cash flow, and repurchased nearly $800 million of our stock. We also rolled out new plans for our Teams customers with expanded security and data protection capabilities, made progress improving revenue retention and closed acquisitions such as FormSwift and Boxcryptor, which I'll touch on shortly. Before we dive in, as you know, last month, we shared that Timothy Young is stepping down from his role as President. I really appreciate everything that Tim has done for Dropbox over the past few years and wish him all the best. I'd also like to work closely with our senior leaders to continue leveling up our execution and pursue all the opportunities ahead of us. Over the last year, we've been focused on three strategic objectives to help us realize our long-term vision. Our first objective has been to evolve our core FSS product, driving retention gains and monetization efforts through better conversion of our free users and through pricing and packaging. Our second objective has been to expand workflows beyond core FSS around documents and videos. Our third objective has been to drive operational excellence and improve efficiency. This year, we've added a fourth strategic objective, which is to move beyond files and organize all cloud content for our customers. This has been a critical step in our product vision for some time, and recent advancements in AI and machine learning have a huge role to play in accelerating our plans, particularly in building out our universal search and other capabilities. I'll discuss this opportunity in more detail shortly. We are already executing against these strategic objectives with a strong sense of urgency. Q4 showed us that we're not immune to a slowing economy, and that's why I'm focused on our speed of execution in 2023 and on areas where we can improve efficiency. I'll offer more details on how we plan to do that, but first, let me discuss some observations from 2022. Starting with our first strategic objective around evolving our core FSS business. Our focus over the last few years has been on improving user experience, particularly on mobile. This is where a growing number of basic users sign up for Dropbox. We've also been focused on adding more capabilities to better serve small businesses and freelancers who represent a passionate user base for Dropbox. Regarding mobile, we observed that the uptick in churn from Plus individuals that we witnessed in Q3 continued in Q4 largely due to recent mobile operating system changes, which increased transparency around subscriptions. To mitigate some of the macro pressures impacting consumer behavior, we've identified areas where we can make the mobile workflow more seamless and reliable. To drive higher basic user activity, we're focused on improving the onboarding experience. This quarter, we're rolling out Google One Tap, which will help streamline the sign-up flow for mobile and web users. Many of our customers, such as small business teams and freelancers, rely on Dropbox to store and share videos and other rich media. To better serve them, we've made improvements to the sharing experience of large files, particularly reducing the time in uploading large files, which we do expect to drive improvements in customer satisfaction and reduced churn. As we continue to see the growth in video-related content stored and shared on Dropbox, particularly among creative professionals, we've made progress with our video preview capabilities by increasing sizes and limits and adding editing functionality. By improving this lightweight but valuable functionality, we're seeing increases in active video users and time spent per user. Last quarter, we discussed our first full quarter's progress in rolling out new plans for our standard and advanced Teams customers with a focus on security and data protection. While we can see a net benefit to ARR from these changes, we saw incremental headwinds in Q4 from some of our larger Teams customers reducing licenses. We recognize that as our customers experienced challenges in their businesses and evaluate their budgets, there's added pressure to reduce software spending. However, we see an opportunity to mitigate some of this pressure through more high-touch account management for these customers, traditionally conducted through the self-serve channel. We're actively working to strengthen the alignment between our business units and our go-to-market teams and see opportunities to improve renewal activity as we increase customer awareness of the added functionality we're providing for Teams. We're also continuing to invest in our security roadmap to strengthen our offering for business users. In Q4, we acquired assets from Boxcryptor, a provider of end-to-end zero-knowledge encryption for cloud storage services. Over time, we plan to embed these encryption capabilities natively within Dropbox for our business users, providing them with an additional layer of security by encrypting files locally on their devices before taking their content to Dropbox. We know that security is a top priority for our customers. In this time of consolidating spend, we'll continue to identify opportunities to bundle more value for our paying users. As we think about funding additional value into our different paid plans, we'll continue to evaluate the best pricing and packaging strategy that best serves our customers. Moving on to our second objective, which is to expand our workflows beyond FSS, particularly around documents and videos. I'll first share an update on DocSend and Sign in 2022 and where we see opportunities to scale these businesses in 2023. As we've noted throughout the last year, we've seen both DocSend and Sign growth moderate as headwinds in their respective markets continue. DocSend's core market, which is venture-backed fundraising, has seen activity pull back materially from 2021 levels, resulting in customers being more price sensitive. This year, we're focused on diversifying DocSend's customer base, introducing it to new geographies and extending beyond venture capital and other professional services such as consulting. Sign has also faced challenges amidst an overall slowdown in the eSignature market and increasing competition. While we saw strength in our Sign API offering, there's an opportunity to stabilize Sign's overall growth as we leverage it under the Dropbox brand and drive more sales-led growth targeting small businesses. For both Sign and DocSend, our focus in 2023 is around deeper integration with the core Dropbox experience. While we've made progress integrating certain capabilities into the core Dropbox experience, such as DocSend's analytics within an individual user sharing flow and Sign's native send for signature entry point and PDF in Dropbox, there are still challenges for the end user experience due to multiple systems that need to be unified. For example, customers have been required to re-log in to different applications, access multiple terms of service, checkout flows, and different user interfaces overall. We are quickly working to remove the friction in the user experience to make it easier for customers to try, buy, and use these products, which is a critical step in unlocking our platform strategy. Up until now, we've mostly talked about DocSend and Dropbox Sign as key pillars of our document workflow strategy, and today, I'm excited to discuss an important new piece to this business with our acquisition of FormSwift. FormSwift is a cloud-based service that helps customers create, complete, edit, and save critical business forms and agreements. With FormSwift's vast library of templates, individuals and small businesses can access hundreds of forms rather than spending resources drafting them from scratch. Whether it's a lease agreement or an employment contract, FormSwift's cloud-based offering simplifies customers' agreement workflows. Additionally, it's complementary to Dropbox with a similar target customer, a robust self-serve go-to-market engine, and capabilities that allow customers to do more with their digital content. We plan to integrate FormSwift under the Dropbox brand this year, and over time, combine its content library with our Sign and DocSend capabilities, providing a comprehensive end-to-end agreement workflow. With millions visiting FormSwift's website, we see a natural opportunity to drive more top-of-funnel activity to Dropbox and its suite of products. Outside of documents, the other adjacent workflow beyond FSS is around video, where we see significant usage on our platform. This year, we plan to continue our focus on video workflows, building on the recent public launch of Dropbox Capture, a video communication tool for distributed teams, as well as our continued progress with Replay, which allows teams to collaborate and edit videos all within Dropbox. Since launching Capture to all Dropbox users in October, we've seen significant usage growth. We see an opportunity for Replay to follow a similar path for general availability as its adoption and retention continue to improve with the creative community. By continuously iterating on these experiences, we're excited to build a best-in-class platform for creatives to manage their video content. As mentioned earlier, our newest strategic pillar in 2023 is to organize all cloud content centered around AI and machine learning. We're entering a new era of augmented knowledge work where human and machine intelligence combined unlock unprecedented levels of productivity. We've been working towards a mission of designing a more lightweight way of working for years as the proliferation of cloud tools and the shift to remote work have left people with a chaotic working environment. Instead of one search box, we all have a dozen search boxes across our productivity tools and apps, and there's never been a better time to help our customers organize and simplify their working lives. With the recent developments in natural language processing and large language models, teams can now take on more complex tasks than ever, providing us the building blocks needed to augment knowledge work as we first envisioned. AI and machine learning is an area where we've been investing for a long time. We view machine learning as a means to improve content suggestions and retrieval, helping users better search and organize their video content, but there's a lot more we can achieve. The biggest opportunities we see are in tackling content fragmentation and universal search, and I'm looking forward to sharing more about what we'll be launching in the coming quarters. I believe we're operating from a position of strength given our scale, our platform neutrality, and the millions of people and businesses that already use Dropbox for work and trust us to store their most valuable content. I'm working very closely with our product teams on our roadmap, and I couldn't be more excited about what Dropbox can do with all these new technologies to unlock significant productivity for millions of our customers and ultimately design a more enlightened way of working. In closing, 2022 was a solid year despite increasing challenges from the macro environment. We're making important changes within our business to better position us for the long term and continue focusing on improving our execution as we navigate what is likely to be another difficult year for our customers. However, challenging times can be transformative for any business. We launched Dropbox during the great financial crisis, and I've learned that operating in more difficult environments can produce our best work. While we're not immune to a worsening economy, we're well positioned given our scale, our trusted brand, our healthy financial profile, and our strong balance sheet. We remain focused on operational excellence, identifying areas of efficiency, and capitalizing on emerging growth opportunities to invest in our future. With that, I'll hand it over to Tim to walk through our financial results.
Tim Regan, CFO
Thank you, Drew. Before turning to our quarterly results, I'd like to start with a reminder of our financial strategy. We continue to pursue sustained growth and profitability in a disciplined and thoughtful manner while remaining committed to our longer-term financial targets. We also remain focused on allocating capital to growth initiatives that we believe will drive future revenue, both organically and through acquisitions, while also returning a significant portion of our free cash flow to shareholders in the form of share repurchases. As Drew highlighted, we are seeing more signs of macro-related weakness impacting our business. Today, I'll walk through our guidance for 2023, which takes the current environment into consideration. I'll also provide an update on our financial targets for 2024. But first, let me discuss our fourth quarter and full year 2022 results. Total revenue for the fourth quarter increased 5.9% year-over-year to $599 million, beating our guidance range of $592 million to $595 million. Foreign exchange rates provided an approximate $19 million headwind to growth, in line with our previous guidance. On a constant currency basis, revenue grew 9.2% year-over-year. Our Q4 revenue was inclusive of a partial month of revenue from our acquisition of FormSwift, which we closed on December 15. Total ARR for the quarter grew 11.2% year-over-year for a total of $2.514 billion. On a constant currency basis, ARR grew by $83 million sequentially and 11.8% year-over-year. More than $50 million of this ARR was driven by the acquisition of FormSwift, with additional contributions from our pricing and packaging changes to our Team plans announced in June. As a reminder, we include the ARR related to acquired companies in our total ARR in the period of acquisition. We exited the quarter with 17.77 million paying users and added approximately 230,000 net new paying users in the fourth quarter, with over 200,000 of these new users stemming from our acquisition of FormSwift. As with ARR, we include all paying users of an acquired company within our total paying users for the period of acquisition. Excluding FormSwift, additions to paying users fell below our expectations, driven by two main factors. The first was the churn of a large education customer, which has a very low ARPU and, hence, an immaterial impact on our total ARR base. The second factor was softness around our Plus and Teams plans as we continue to see increasing macroeconomic headwinds, as Drew mentioned. Specifically, we continue to see softness in our Plus SKU, particularly on mobile, and began to see increased price sensitivity in Teams plans. Average revenue per paying user for Q4 was $134.53, up slightly compared to Q3, with the benefit from our Teams pricing initiative, partially offset by FX headwinds and the continued mix shift towards Family plan, which is comprised of six seats and, therefore, carries a lower ARPU profile. We also saw an ARPU headwind from the acquisition of FormSwift, as we recognized the entire paying user count but only half a month of revenue. 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 excludes the income tax benefit from the release of a valuation allowance on deferred tax assets and includes the income tax effect of the aforementioned adjustments. I'll now provide a brief update on our real estate strategy, where we have been taking steps to de-cost our portfolio as a result of our transition to a virtual-first model. We made progress against our subleasing goals in 2022, and a vast majority of our space outside of San Francisco headquarters has now been subleased. However, we are no longer assuming that we will enter additional subleases in San Francisco in the next few years. As a result, we have revised our subleasing assumptions, resulting in an additional write-down of our facilities and other related assets of $162 million in the fourth quarter. This brings our cumulative impairment charge to $604 million. This revised assumption also reduces our expected cash flow benefit over the next few years. Additionally, in Q4, our GAAP net income was favorably impacted by a $420 million one-time income tax benefit from the release of a valuation allowance on our U.S. deferred tax assets due to our improved profitability in the U.S., leading us to conclude that our valuation allowance on these deferred tax assets is no longer necessary. There is no cash impact associated with this one-time benefit, and it is excluded from our non-GAAP net income. With that, let's continue with the fourth quarter P&L. Gross margin was 82% for the quarter, representing an increase of 1 percentage point on a year-over-year basis. The improvement in gross margin was primarily driven by ongoing efficiencies in our data center infrastructure. Fourth quarter R&D expense was $174 million, or 29% of revenue, which increased compared to 26% of revenue in Q4 of 2021. We have seen our R&D expense as a percent of revenue rise as we invest in key initiatives across our core file sync and share, Dropbox In, and DocSend businesses while also investing in our universal search and AI roadmap that Drew discussed. This has coincided with attrition rates falling to record lows, which has resulted in increased levels of R&D spend relative to 2021. Fourth quarter sales and marketing expense was $96 million, or 16% of revenue, which decreased compared to 17% of revenue in Q4 of 2021. Fourth quarter G&A expense was $43 million, or 7% of revenue, which decreased compared to 8% of revenue in Q4 of 2021. In total, we earned an operating profit of $179 million in Q4, representing an operating margin of 30%, in line with Q4 of 2021. Net income for the fourth quarter was $141 million, which is a 12% decrease versus Q4 of 2021. This decrease in net income is driven by the substantial increase in our tax expense in 2022 due to the impact of the R&D capitalization tax legislation effective in 2022. Diluted EPS was $0.40 per share based on 354 million diluted weighted average shares outstanding, in line with $0.41 per share based on 386 million diluted weighted average shares outstanding for Q4 of 2021. Moving on to our cash balance and cash flow, we ended the quarter with cash and short-term investments of $1.3 billion. Cash flow from operations was $195 million in Q4. Notably, as part of our acquisitions of FormSwift and Boxcryptor in Q4, we paid a total of $33 million of key employee retention holdback to escrow, which decreased our cash flow from operations. Capital expenditures were $13 million during the quarter. This resulted in quarterly free cash flow of $182 million compared to $161 million in Q4 of 2021. In the quarter, we also added $53 million to our finance leases for data center equipment. As we had guided on our last call, we planned for this significant step-up in Q4 leases as part of the build-out of a new data center going into service in Q1 of 2023. Let's turn to our share repurchase activity. In Q4, we continued executing against the $1.2 billion authorization approved earlier in 2022 by repurchasing 8 million shares, spending approximately $174 million. As of the end of Q4, we have approximately $748 million remaining under the current authorization. Now let's turn to our full year 2022 results. Total revenue for 2022 was $2.325 billion, representing 7.7% year-over-year growth, beating our guidance range of $2.318 billion to $2.321 billion. On a constant currency basis, relative to the average rates across 2021, year-over-year growth was 9.4%. Gross margin was 82% for the year, up 1.5 percentage points from 2021. Operating margin was 31% for 2022, which was up 1 percentage point from 2021. Net income was $574 million for the year, a 6% decrease from 2021, driven by the substantial increase in tax expense in 2022 that I've mentioned. Diluted EPS was $1.58 per share based on 363 million diluted weighted average shares outstanding, up from $1.54 per share for the full year 2021 based on 396 million diluted weighted average shares outstanding. Cash flow from operations for 2022 was $797 million. Capital expenditures for the full year totaled $34 million, resulting in free cash flow of $764 million, or 33% of revenue. Our free cash flow for 2022 came in slightly below our guidance of $770 million to $790 million due to the $33 million in FormSwift and Boxcryptor acquisition-related holdbacks that we paid to escrow in Q4. We do not anticipate additional payments related to these holdbacks for FormSwift and Boxcryptor. These amounts will be expensed over time as they're earned by the respective key employees. In 2022, we also added $106 million to our finance lease lines for data center equipment or nearly 5% of revenue. Net of repayments, our finance lease balance decreased by $22 million. Finally, we repurchased approximately 36 million shares, spending $795 million in 2022. This leads us to our 2023 first quarter and full year guidance, where I will also provide some context on the thinking behind this guidance. For Q1 2023, we expect revenue to be in the range of $600 million to $603 million. On a constant currency revenue basis, we expect revenue to be in the range of $616 million to $619 million. We are assuming a currency headwind of approximately $16 million in Q1, translating to nearly a 300 basis point headwind to growth. There are two fewer subscription days in Q1 2023 compared to Q4 2022. We expect non-GAAP operating margin to be approximately 26.5%. As a reminder, there is some seasonality with first quarter operating margins as payroll taxes reset at the start of each year. This also includes roughly 100 basis points of headwind from FX and 60 basis points of headwind from FormSwift. Lastly, we expect diluted weighted average shares outstanding to be in the range of 351 million to 356 million shares based on our trailing 30-day average share price. For the full year 2023, we expect revenue to be in the range of $2.475 billion to $2.490 billion. On a constant currency revenue basis, we expect revenue to be in the range of $2.510 billion to $2.525 billion. We now estimate a full year 2023 currency headwind of approximately $35 million, representing about 150 basis points headwind to growth, with the FX headwinds moderating each quarter as we lap last year’s headwinds. We expect FormSwift to contribute approximately 2.5 points of growth. We expect gross margin to be approximately 81% to 82%. We made infrastructure investments related to a new data center, which just went live this quarter, resulting in slightly lower full year gross margin than 2022. We expect non-GAAP operating margin to be approximately 30%. This is inclusive of an approximately 50 basis point headwind from FX as well as a 50 basis point headwind from our FormSwift acquisition. We expect free cash flow to be in the range of $825 million to $855 million. This includes approximately $23 million in cash outflows for the 2023 installments of acquisition-related deal consideration holdbacks for DocSend and Command E, alongside an approximate $50 million headwind from the R&D tax legislation. Regarding our capital expenditures, we expect our addition to finance leases to be approximately 5% of revenue, and we expect cash CapEx to be in the range of $25 million to $35 million in 2023. We expect 2023 diluted weighted average shares outstanding to be in the range of 346 million to 351 million shares. In relation to revenue, we saw incremental headwinds from the deteriorating macro environment across all lines of our business in Q4. We saw our mobile Plus users turning at higher levels, and our Teams users carefully evaluating their license counts. While we continue to see a net positive impact from our pricing and packaging changes to our standard and advanced Teams plans, we saw elevated churn in relation to Q3. While the majority of Teams customers have renewed under the higher price point, we now anticipate a lower incremental contribution from the pricing change over the next two quarters for those who have not yet seen the pricing change in light of recent trends. In addition to the softness within our file sync and share core business, we also continue to see incremental macro headwinds across our Sign and DocSend businesses. We factor all these latest trends into our revenue guidance for the year. Regarding operating margin, we expect operating margins of approximately 30%, slightly below our 2022 margins. We anticipate Q1 to represent the trough of the year due to various factors, including the resetting of payroll taxes and the FX and FormSwift acquisitions impacting operating margins below our recent trend. For the full year, we expect FX and FormSwift acquisition to collectively represent roughly a 100 basis point headwind to margins, and our guidance factors in the annualization of the hiring we did in H2 2022, particularly within R&D. We're monitoring the efficiency of the spend to ensure we are prudent in our decisions. Expect our R&D as a percentage of revenue to trend lower through the year following Q1. Our guidance includes a $50 million cash tax headwind due to the law that now requires R&D costs to be capitalized. While the current legislation may be amended or repealed, we are considering this impact in our guidance. Our long-term financial targets are to deliver gross margins of 80% to 82%, operating margins of 30% to 32%, and $1 billion of annual free cash flow by 2024. We operate within our long-term margin range, having made significant progress growing free cash flow since introducing our target three years ago. However, changes in R&D tax legislation and deteriorating FX rates compared to our projected free cash flow target by 2024 present a combined headwind of over $75 million. While these and other factors present challenges to our ability to meet our $1 billion free cash flow target for 2024, we have multiple ways to achieve this target. While the path has become more challenging, it is still too early to make any changes to our long-term financial targets at this time. In conclusion, despite the macro headwinds observed in Q4, we remain optimistic about our strategy and the opportunities available to us, including our multiproduct efforts, recent acquisitions, and our plans to organize our users' cloud content. We will remain focused on our customers, operating the business efficiently, and driving long-term value for our shareholders. With that, I'll now turn it over to the operator for Q&A.
Operator, Operator
Our first question comes from Rishi Jaluria of RBC Capital Markets.
Rishi Jaluria, Analyst
First, I want to maybe think about FormSwift. What does the customer overlap within that customer base look like? In other words, not only what is the cross-sell potential for you to sell FormSwift to the existing Dropbox customer base and integrate the asset, but also are there net new customers that you have the ability to sell Dropbox into and expand your reach? And then I've got a quick follow-up.
Drew Houston, CEO
Sure. Thanks for the question. The short answer is yes to all the above. There is a lot of overlap and complementary fit between FormSwift and Dropbox in terms of a similar target customer, similar self-serve go-to-market, and addressing the content life cycle. Every contract that you send out for signature often originates in the form of a template, so if you think about getting an NDA done or an office lease, it might start with a Google search where you find a template on FormSwift. There are a lot of synergies in all directions.
Rishi Jaluria, Analyst
Wonderful. That's really helpful. And then, Tim, when you're talking about the elevated churn, can you give us a bit of color on what you're seeing? Are these customers just going out of business or shutting down at the low end? Are they moving to larger platforms where they're consolidating their spend with companies like Microsoft or Google? Also, what's happening on the consumer side of the business, which you previously noted comprises about 20% of total paying customers?
Tim Regan, CFO
Sure. We did see our churn rate increase this past quarter largely due to the deterioration in the macro economy, and we continue to see churn from our Plus customers, particularly on mobile devices. We also observed heightened price sensitivity among our Team customers as we experienced increased churn from customers subject to our Teams pricing and packaging changes compared to Q3. Our overall churn rate is currently in the low teens, which is an improvement from a couple of years ago. Improving retention continues to be a focus for us, and our revenue guidance factors in these latest trends. I wouldn’t say there have been material deviations on the consumer side of the business regarding that 80-20 split you referred to.
Operator, Operator
Our next question comes from the line of Michael Funk of Bank of America.
Michael Funk, Analyst
I have a couple of questions, if I may. Regarding the ARPU change, you mentioned a few different factors, including family plans. Can you deconstruct the change in ARPU for us based on those factors?
Tim Regan, CFO
We ended Q4 with ARPU at $134.53, which was down about $0.25 year-over-year. Key factors include FX headwinds of approximately $4.20. Continuing pressure from the shift towards Family plans also played a role. This was offset by benefits from our Teams pricing initiatives launched in June, while FormSwift represented a small headwind of roughly $0.25 due to recognizing all of FormSwift users but only half a month of revenue. While we can't officially guide to ARPU, we expect some factors to impact trends next year.
Michael Funk, Analyst
You also mentioned some incremental revenue headwinds baked into the 2023 guidance. Could you break this down in terms of gross set expectations versus churn expectations contributing to these headwinds?
Tim Regan, CFO
Regarding net new paying user additions, we added 230,000 net new paying users in Q4, a majority from FormSwift. Excluding FormSwift, the addition to paying users fell below expectations due to a large education customer, contributing to low ARPU, and softness across Plus and Teams plans. Our future net new paying user expectations going forward are expected to be lower than the run rate experienced in the first half of 2022, roughly around 100,000 net new paying users per quarter.
Michael Funk, Analyst
That's really helpful. On the impairment related to real estate, specifically in San Francisco, did you explore other options like early lease exit or negotiating from a stronger position with landlords?
Tim Regan, CFO
We've been actively exploring all options here. We've executed a few subleases in the past in San Francisco and were quick to market with our subleasing plans. However, the real estate market has deteriorated, with companies reducing their real estate footprint, increasing supply for sublease, which has pushed out our anticipated leasing timeline from mid-2023 to mid-2025. We've also lowered our expected rates.
Operator, Operator
Our next question comes from the line of Steve Enders of Citi.
Steve Enders, Analyst
I would love to get more detail on how you're thinking about pricing and packaging levers to potentially pull moving forward.
Drew Houston, CEO
FormSwift is a good example of complementarity. We're building support for document workflows end-to-end throughout the lifecycle. For instance, a contract starting as a template can then be sent out for review or signature using DocSend and then archived on Dropbox once finalized. Our philosophy has been to add value and new features to core products and to increase prices as we reach that value threshold. However, we must also be mindful of what customers want during these macroeconomic conditions, thus leaning towards bundling rather than increasing prices outright.
Steve Enders, Analyst
Could you talk about the long-term growth potential, key levers to drive both organic and inorganic growth?
Drew Houston, CEO
Our organic growth levers include optimizing our core business, expanding our portfolio of growth-stage businesses like Sign and DocSend, and innovating with products like Capture and Replay. M&A has been important for us too, and we're focused on organizing our customers' cloud content to enhance their experience better. We're well positioned given our scale and the recent advances in AI and machine learning, and we're excited about addressing customer pain points in this area.
Tim Regan, CFO
We're factoring in an appropriate level of conservatism in our guidance, considering the evolving macro landscape. We haven't assumed a turnaround in the economy in our guidance for 2023, factoring in the latest indicators of price sensitivity that we noticed in Q4.
Operator, Operator
Our last question comes from the line of Mark Murphy of JPMorgan.
Unidentified Analyst, Analyst
Could you address any changes in the competitive landscape for Dropbox? Given Dropbox' scale and reputation, is there an opportunity to gain share due to macro pressures on smaller vendors?
Drew Houston, CEO
Our competitive dynamics have been stable. Despite macro headwinds in Q4, retention has remained stable, and margins have held steady too. We haven't seen significant changes in the environment, though individual products like Sign and DocSend can experience different factors impacting their performance. Looking ahead to organizing cloud content with advancements in AI and machine learning, we feel well positioned to capitalize on these opportunities.
Unidentified Analyst, Analyst
Regarding the document workflow enhancements, are there any early indications on attach rates or proof points for the new features?
Drew Houston, CEO
I don't have additional stats to share right now, but we've seen increased progress in cross-selling Sign and DocSend into our customer base. The rebranding of HelloSign to Dropbox Sign has been beneficial. We are continuing to work on building tighter integrations between file sync and share and the broader portfolio.
Operator, Operator
Thank you. This concludes today's conference call. Please disconnect your lines at this time, and have a wonderful day.