Dropbox, Inc.

Good afternoon, ladies and gentlemen. Thank you for joining Dropbox's fourth quarter 2023 earnings conference call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. To ask a question during the session, you will need to press star 11 on your telephone. 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 Ishan Gupta with Dropbox's investor relations team. Thank you.

Good afternoon and welcome to Dropbox's fourth quarter 2023 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 2024, and our expectations regarding 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 those 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 will now turn the call over to Dropbox's co-founder and chief executive officer, Drew Houston.

Thanks, Ishan, and good afternoon, everyone. Welcome to our Q4 2023 earnings call. Joining me today is Tim Regan, our chief financial officer. I'll first provide a recap of 2023, share our perspective on our fourth quarter and and then close with an overview of our strategy for 2024. Tim will then go over our financial results for Q4 and fiscal year 2023, as well as provide guidance for Q1 and fiscal 2024. Let's get started. In 2023, we had two main business objectives. The first was to build AI-powered product experiences centered around organizing all your cloud content. The second was to continue evolving our core FSS offering to provide a seamless product experience for our customers' workflows. I'm proud of the work our team accomplished on both of these fronts. Starting with building AI-powered product experiences, in 2023, we introduced the first iteration of Dropbox Dash, a standalone universal search product leveraging AI and machine learning. With more of our work spread across hundreds of tabs in a browser, knowledge workers are spending far too much time just finding what they need to do their work. particularly in this new world of distributed work. Dash connects all of your apps, tools, and content in a single search bar, so it's easy to find everything you need in one place, regardless of where it lives. And because Dash is powered by machine learning, it learns about you and your priorities the more you use it. In 2023, Dash moved from closed beta to open beta and represents our first major AI-powered product experience. While still very early, we're gaining valuable insights into the types of customers that are engaging with this product and the features that are generating the most interest. For example, we're seeing that our more engaged and existing users on our Dropbox FSS paid plans tend to adopt Dash and retain at a higher rate. We also made significant progress against our second objective of evolving our core FSS offering to create a better product experience for our customers' workflows. There were several highlights on this front in 2023. including the continued optimizations we made across the platform to reduce churn on a year-over-year basis, improve top of funnel, and ultimately ensure we're delivering the best product experience to our users. Specifically, we made a number of operational enhancements, including improving the sharing experience across our mobile and web services, optimizing our payment processing to reduce churn, and leveraging Google OneTap to streamline and improve the user onboarding experience. Given the size of our registered base, These changes impact millions of users, and we believe the progress we made in 2023 will strengthen our foundation heading into 2024. Additionally, many of our customers lack awareness of our capabilities beyond storage, often asking us for features that we already have, such as e-signature or document tracking and analytics. And we took several steps in the fourth quarter to address this awareness gap and to provide more value to our customers. We introduced our new web redesign that makes it easier for our users to get the most out of the Dropbox platform, including the ability to sign and send documents and use our video products. We also introduced the first generation of our fully integrated bundled offerings for our team's customers. This included updated pricing and packaging with the goal of reflecting the added value of all of our product capabilities. I'll share more on the early results of this initiative in a moment. Along the way, we continue to grow our top line. exceeding the guidance we shared while also achieving record non-GAAP operating margins of over 32%, generating more than $750 million of free cash flow and returning $540 million back to shareholders in the form of share repurchases. Tim will speak to the financial results in more detail, but I'm proud of our focus on improving the overall profitability profile of our business while still investing in new initiatives and growth opportunities. While there was a lot to be proud of last year, Q4 was a challenging quarter. Some of these challenges were expected. For instance, we continue to see the broader economic backdrop that impacts both our teams and document workflow businesses as customers are being more cautious with their spend and exhibiting higher levels of price sensitivity. This resulted in reduced levels of gross new licenses and upsell activity alongside higher churn and downsell. As an example, certain teams' customers, particularly those in the tech sector, continue to reduce licenses due to spending cuts or headcount reductions of their own. FormSwift and DocSend also saw elevated churn in the quarter. And as we discussed on our call last quarter, we traditionally see seasonally low activity within our file sync and share business, as well as our FormSwift business in the fourth quarter of each year. We also anticipated headwinds stemming from strategic business decisions we made last year, which we believe will benefit us in the long run at the cost of some negative impact in the near term. For example, like others have done, we sunset unlimited storage in our advanced plan and transitioned to a metered model. We found that some customers weren't using the plan as intended and were taking advantage of the policy to do things like mine crypto or use a business account for personal use cases or even resell storage. While this change will ultimately translate to increased profitability in the long term, it led to refunds and incremental churn for those customer-seeking storage solutions that we no longer offer. We also de-emphasized our family plan as we found that some business users were also using it as a loophole to obtain licenses at a lower cost. As we noted last quarter, this negatively impacted the number of paying users in the quarter. We also faced a few additional challenges in Q4, which we're actively addressing. In Q4, we ran a number of tests and experiments across our individual plans with new trial flows and other initiatives, but they did not generate the uplift we were looking for. However, we still see opportunity here, and we're iterating on these experiments and incorporating the related learnings into our plans for 2024. In addition, the early results on our bundled offerings for Teams have been mixed. As a reminder, our approach was to offer multi-product bundles to new Teams customers at a higher price point to reflect the additional value we were adding to the plans, while our intention was to migrate existing customers to the new SKUs at their current price point. And for now, we've held off on migrating all our existing Teams customers because while we're seeing an uptick in multi-product adoption with new customers, as well as an ARPU lift from these plans, we're also seeing a reduction in top of funnel activity and conversion rates. As a result, we're revisiting our approach. In Q1, we'll keep iterating on our pricing and packaging, and we'll continue to improve the in-product experience for these customers. At the same time, we'll refine our marketing approach and our self-serve engine to ensure that we're properly identifying and serving customers that are interested in FSS-only SKUs versus our multi-product SKUs. Ultimately, we're still aiming to serve those who want multi-product capabilities as we continue to see that customers who engage with these capabilities convert and they retain at notably higher rates than storage-only customers. But we'll be iterating on the best path forward with our bundle strategy and we'll have more to share in the following quarter. All of which brings me to our strategy for 2024. As I've been more hands-on in the business over the last year, I've been refocusing our team and our strategy on the fundamentals of our growth drivers and the quality of our user experience. First, within our file sync and share business, we still see an opportunity to improve the collaborative experience to strengthen the funnel and drive growth. FSS is our largest business line where small improvements can lead to a meaningful financial and customer impact. And in recent years, we focused heavily on churn improvements that resulted in better performance for our individual business, and we see a similar opportunity with our team's customers. For example, many of the actions conducted by our Teams users today are predominantly solo actions, such as storing and viewing content, as opposed to sharing and commenting on shared content. We've seen in the past that as we streamline and remove friction in our sharing and collaborative workflows, like commenting, this contributes to more viral growth, faster team expansion, and higher retention. And we see similar opportunities to improve this experience for Teams as we have for individuals. In addition, we see an opportunity to improve the team admin workflow as well, as the admin approval rate for new licenses on a team account remains low. Team admins often struggle with onboarding new users, and by leveraging the admin console for permissions and controls, we're focused on making improvements to make it easier for admins to discover and leverage admin workflows so they can more easily expand their team deployments. As we mentioned earlier, we'll also invest in our team's plans by iterating on our bundles experience to ensure that our customers are aware of and leveraging our multi-product capabilities. This includes weaving advanced sharing capabilities, such as DocSend and Replay, more seamlessly into our product experience, given our proven strengths in solving sharing for our customers, as well as the viral network effects that stem from sharing content. As we improve these team experiences, we can grow through license expansion or through introducing customers to our premium functionality. Our second big opportunity is with AI-powered product experiences, most notably Dash. Dash is aimed at solving many of the same challenges that we had originally solved with FSS, but instead of the problem of files scattered across different devices, Dash is addressing the challenge with cloud-based content and URLs scattered across hundreds of apps and browser tabs. We have a long history of solving our customers' problems with organizing and searching and sharing content, and we believe our strengths of the scale of our platform, customer trust, and interoperability position us well to solve these same problems. And this is a growing market. IDC estimates the search and knowledge discovery software market to be about $7 billion today, with the potential to more than triple over the next four years. We'll continue to invest in Dash as our lead AI product, and we're taking a similar approach as when we launched Dropbox 1.0. And we're using this beta period with Dash to ensure that we're getting up to a high quality and scalability bar before driving adoption. Our primary focus in 2024 is on finding product market fit with our customers. More specifically, we're going to focus on improving the onboarding, activation, and retention of users on Dash to ensure we're providing the best experience to customers. For example, we noticed users found a lot of friction in adding and connecting Dash to all their different apps. So we're making the experience of connecting apps during onboarding smoother so that we can improve activation rates. We're also investing in experiences like stacks. Improving discoverability, improving sharing, and this is critical to creating the type of virality that was essential to Dropbox's growth in the early years. And once we get the quality of the product experience and metrics like retention to where we want them, we'll run a lot of the same playbook that made Dropbox successful in the past, including growing the product virally, making big investments in sales and marketing, and promoting Dash to our existing FSS users. As we shared earlier, we know our customers are often unaware of our capabilities beyond storage. To this end, last week we announced a partnership with the McLaren Formula One team where Dropbox is becoming an official technology partner. As part of this partnership, McLaren will rely on Dropbox to securely share files and collaborate on video review and approvals, and our branding will be featured on their cars and team assets. This is an important effort to drive awareness of our latest offerings and educate customers and partners about all the ways that Dropbox can help teams work more effectively together. We have ambitious goals in 2024, and I'm excited to work with our teams to achieve everything we've planned. We've also made several strong additions to both our leadership bench as well as our board over the past few months. In December, Eric Cox joined us as our chief customer officer overseeing our go-to-market teams. Eric comes to us from Vimeo, where he was COO, and prior to that, he spent nearly 20 years at Adobe in a variety of roles across sales, marketing, and operations. We also welcome Dr. Andrew Moore to our board of directors. Andrew is a leading expert in AI, machine learning, and robotics, and he's had a decades-long career in academic and technical leadership. He was previously VP for the AI division of Google Cloud and also served as the Dean of Carnegie Mellon University's School of Computer Science. Andrew's technical expertise building AI-powered products will offer invaluable perspective as we invest in AI internally across our product portfolio. Both Eric and Andrew will play an important role in the future of Dropbox, and I couldn't be more excited to partner with them to achieve our goals for the future. In closing, 2023 was a year marked by both successes and challenges, and looking ahead, we're confident that we have the right team in place to execute against our strategy for 2024. This year represents a unique point in our company's evolution. Many of our mature FSS products are seeing slowing growth, and newer products like Dash are still early in their life cycle. While we expect that our new products and initiatives will take time before they start to meaningfully contribute to our top line results, we're excited about the large opportunity we see in front of us. As we embark on the next phase of our company's journey, I'm personally invested in building the best products we can for our customers, delivering strong results for our shareholders, and achieving our mission of designing a more enlightened way of working for all knowledge workers who use Dropbox. And with that, I'll turn it over to Tim to share a recap of our 2023 financial performance, as well as our expectations for 2024.

Thank you, Drew.

I'll cover our financial highlights from Q4 and share guidance for Q1 and fiscal 2024. I'll then offer some context on the considerations underlying our guidance. Starting with the fourth quarter of 2023, total revenue for the fourth quarter increased 6% year over year to $635 million, beating our guidance range of $629 million to $632 million. Foreign exchange rates provided an approximate $1 million headwind to growth. On a constant currency basis, revenue grew 6.2% year over year. Total ARR grew to a total of $2.523 billion, up 3.8% year over year on a constant currency basis. However, on a constant currency basis, ARR declined by $2 million sequentially. As Drew mentioned, the sequential decline in ARR was driven by a few factors, including business decisions we intentionally made, such as eliminating unlimited storage for advanced plant users, which resulted in incremental churn and softness in our top of funnel, a continued challenging macro economy, and the typical seasonality we see in our business in Q4. We exited the quarter with 18.12 million paying users, which reflects a sequential decline of roughly 50,000 paying users. A number of factors led to this decline, including our decision to reduce the prominence of the family plan on our plans page, macro headwinds facing our team SKUs, Experiments that underperformed impacting our individual SKUs. And finally, Q4 tends to be a seasonally low quarter for file sync and share, and FormSwift in particular. Collectively, these factors served as headwinds to paying user growth in Q4, where I'll speak to our paying user expectations for 2024 shortly. Finally, average revenue per paying user for Q4 was $138.83, up slightly compared to Q3. 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 purchase intangibles, certain acquisition-related expenses, net gains and losses on our real estate assets, and our workforce reduction expenses. 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 effects of the aforementioned adjustments. Moving to our real estate strategy, where we have been actively seeking subleases and buyouts of our vacant real estate space, the majority of which is in San Francisco. As I mentioned during our last earnings call, in Q4, we executed a buyout with our landlord of approximately 40% of our remaining sublease space in San Francisco for $79 million to be paid over three years, beginning with an approximate $28 million payment in the fourth quarter of 2023. The remaining payments resulting from the buyout will occur in Q2 of 2024 and Q1 of 2025. Overall, we expect this buyout to drive significant savings in the long term, as we will be avoiding over $220 million in aggregate rent payments and common area maintenance fees over the remaining 10-year lease duration. The result of this buyout was a $159 million gain in Q4 2023. The gain represents the reduction to our future lease payments in excess of the sublease income we previously anticipated collecting for this space. And as I previously mentioned, we will continue to actively seek subleases and pursue additional buyouts where we see favorable returns.

With that, let's continue with the fourth quarter P&L.

Gross margin was 82.3% for the quarter, up 20 basis points on a year-over-year basis. Operating margin was 32.2%, up 200 basis points year over year. We beat our Q4 operating margin guidance by nearly a point, driven by our continued focus on being efficient with our spend across the business. I'd note that in Q4, we held both our in-person user conference and we invested in product and brand awareness marketing campaigns, which resulted in a sequential decrease in operating margins. Net income for the fourth quarter was $171 million, which is a 21% increase versus the fourth quarter of 2022, driven by operating income growth. Diluted EPS was 50 cents per share based on 344 million diluted weighted average shares outstanding, which increased compared to 40 cents per share based on 354 million diluted weighted average shares outstanding,

by the fourth quarter of 2022. Moving on to our cash balance and cash flow.

We ended the quarter with cash and short-term investments of $1.4 billion.

Cash flow from operations was 200 million in the fourth quarter. Capital expenditures were $10 billion during the quarter.

This resulted in quarterly free cash flow of $190 million compared to $182 million in Q4 of 2022. I note that free cash flow for 2023 came in lower than our guidance range of $775 to $785 million due to a reduced level of billings as well as the timing of payments and collections. In the quarter, we also added $51 million to our finance leases for data center equipment. As we mentioned on our last call, we expected this sequential increase in our finance lease lines, given the higher storage costs we are seeing with users on our advanced plan as we wait for grandfathering periods to expire for customers maintaining elevated storage levels. As related to our share repurchase program, in Q4, we repurchased nearly 4 million shares, spending approximately $106 million. As of the end of the fourth quarter, we had approximately $1.4 billion remaining under our current repurchase authorizations. Our philosophy on share repurchases has not changed. We remain committed to returning a significant portion of our free cash flow to shareholders in the form of share repurchases with the intention of reducing our share count. I'd now like to share our 2024 first quarter and full year guidance where I will also provide some context on the thinking behind this guidance. For the first quarter of 2024, we expect revenue to be in the range of $627 to $630 million. We expect a minimal impact from FX this quarter. I will note that Q1 2024 has one less day versus Q4 2023. And thus, we recognize one less day of subscription revenue in Q1 relative to the prior quarter. We expect non-GAAP operating margin to be approximately 33%. Finally, we expect diluted weighted average shares outstanding to be in the range of 342 million to 347 million shares based on our trailing 30-day average share price.

For the full year 2024, we expect revenue to be in the range of $2.535 to $2.550 billion.

On a constant currency revenue basis, we expect revenue to be in the range of $2.532 to $2.547 billion, equating to a full year currency tailwind of approximately $3 million. We expect gross margin to be in the range of 83 to 83.5%. We expect non-GAAP operating margin to be in the range of 32 to 32.5%. We expect free cash flow to be in the range of 910 to $950 million. I note that this free cash flow guidance range is inclusive of several one-time items totaling $47 million. The first is an approximate $30 million headwind as a result of R&D tax legislation, slightly lower than the $36 million estimate that we shared last quarter. The second is a $15 million payment for the second tranche of the buyout related to our San Francisco headquarters. And the third is $2 million in cash outflows for the 2024 installments of acquisition-related deal consideration holdbacks for Command E. Moving on to capital expenditures, we expect our addition to finance lease lines to be approximately 7% of revenue. And we expect cash cutbacks to be in the range of $20 million to $30 million in 2024. Finally, we expect 2024 diluted-weighted average shares outstanding to be in the range of 336 to 341 million shares, based on our trailing 30-day average share price.

I'll now share some additional context on the thinking behind our guidance.

Starting with revenue, as a reminder, we are lapping the benefits of our team's price increase and our acquisition of ForumSwift. and thus we expected a slowing revenue growth rate. Also consistent with our historical approach, our guidance reflects what we have a high degree of visibility into today. This includes our current business trends and trajectory, as well as the product and growth related initiatives we have launched to date. Notably, our guidance does not include any benefit from DASH in 2024. As Drew mentioned, our primary focus in 2024 is centered on finding product market fit, driving usage of the product, and closely following Dash's adoption, engagement, and retention trends. Once we have increased certainty that Dash is meeting our customers' needs, we will then pursue our monetization strategies. However, this may not be until the latter portion of this year or early next year. Similarly, our guidance does not include any benefit from our bundled SKUs, as our teams continue to iterate on the optimal product experience and go-to-market motion for these plans. As we gain more clarity on how we are approaching our bundles rollout to new and existing customers, along with signals on the customer response to our approach, we will update our guidance accordingly. As related to paying users, our guidance contemplates a reduced level of paying user growth. relative to 2023, and there may be some quarters where our paying user additions trend negative. This is due to the continued headwinds we are facing as well as the de-emphasis of the family plan and the nascent state of our growth initiatives. Ultimately, we do expect to add paying users in 2024, however, at lower levels than prior years. As related to gross margins, we are guiding to 83 to 83.5%, which is above our long-term target. I want to highlight that from the beginning of 2024, we are increasing the useful life of our servers from four to five years, which will apply to asset balances on our balance sheet as of December 31st, 2023, as well as future asset purchases. As a result, we expect a benefit to our full-year gross margins of approximately $30 million. For Key 1, we expect a benefit of approximately $10 million. As related to operating margins, we are guiding to 32 to 32.5%. This level of operating margins is above our long-term target and is roughly consistent with our operating margins in 2023. This range includes continued investment in our longer-term AI and growth-related investments, such as Dash. Additionally, we are planning for increased levels of marketing investments, including our new partnership with McLaren Formula One Racing, as we aim to drive market awareness of our platform's capabilities. Lastly, this guidance preserves some optionality to make strategic investments across the business over the duration of the year. We also expect our additions to finance lease lines to increase in 2024 versus prior years. This is primarily due to two factors. The first is the one-time storage quota grants we are providing to a portion of our customers on the advance plan as we deprecate our previous as much space as you need policy. While this requires incremental storage capacity in the near term, our revised plan around storage usage will enable us to have a more profitable skew once the one-time extension for these customers has expired. The second factor is an anticipated refresh of some of our data center equipment consistent with past practices. As related to full-year free cash flow, we are guiding to a range of $910 to $950 million. This guidance falls short of our long-term free cash flow target, which we adjusted during a previous earnings call to be roughly $970 million, after taking into account headwinds from R&D tax legislation-related payments. And while our guidance range is below this figure, I'd note that we have more than doubled our annual free cash flow since we initially set the target, where I'm proud of the progress we've made. There are several factors driving the shortfall between our guidance and our target. The most prominent being a reduced level of billings associated with our revenue guidance, the incremental FX headwinds we are facing relative to when we first introduced our target, as well as the investments we are making to fuel our future growth in products such as Dash. While we could scale back our investments in Dash to meet our free cash flow target, we do not believe this would be the right long-term decision for the business. These investments in Nathan product initiatives, along with decisions such as our San Francisco lease buyout, And the changes we made to our advance plan are putting a short-term strain on our financial trajectory, however, are in line with our primary focus on strengthening the company's long-term position. And while our current level of visibility does fall short of our long-term target, there is still time to draw closer to our free cash flow target through improved product experiences or through identifying additional efficiencies within our operations during the year. In conclusion, we are mindful that we are in a unique period where our core file, sync, and share business is maturing and our new products are in their early stages. However, our core file, sync, and share business is still generating growth in revenue and free cash flow while we also reduce our share count. Concurrently, we are in an exciting new phase in the evolution of our business as we invest in our future in AI-powered areas such as Dash to drive long-term growth. We will make progress on both dimensions in 2024, and we will continue to maintain a disciplined mindset around how we are operating the company to ensure we're not only providing innovative solutions for our customers, but creating value for our shareholders.

And with that, I'll turn it over to the operator for questions.

Thank you. As a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by while we compile the Q&A roster. And our first question will come from Rishi Jaluria from RBC Capital Markets. Your line is open.

Oh, wonderful. Thanks, guys, for taking my questions. I wanted to start out, Drew, in the past you've talked about there is maybe some appetite for M&A, especially transformational M&A. Given this kind of roadmap of wanting to develop new products and capabilities, especially around generative AI, how are you viewing the potential for M&A to just accelerate your roadmap in kind of broadening the platform And, you know, going from the EFSS to kind of a more Gen AI-enabled company, and then I've got a quick follow-up.

Sure. So still see big opportunity for M&A to accelerate our roadmap. And actually Dash, Dropbox Dash, is a great example. It was seeded by an acquisition of a company called Command-E we did. And another benefit is that unlike EFSS, the first few years after we were public when valuations were really frothy as the external environment has moderated. We've certainly seen that moderation happen in public company SaaS, and I think we've been slowly seeing that translate to private company valuations too. So we think it's a door that keeps opening, but our philosophy is – and so I think we are certainly opportunistic and on the lookout for good companies to buy – But at the same time, our philosophy is pretty consistent. We want to be disciplined because, I mean, another thing is even in the AI realm, there's a little bit of a bubble around AI startup funding. And I don't think it's everywhere, but I think you have to be careful. But yeah, M&A certainly continues to be a big opportunity for us.

All right, wonderful. That's really helpful. And then turning to Dash, I know it's still early and this year is going to be kind of the big proof point of the year before we can start talking about monetization. But how are you internally measuring the success of Dash, both from a technology perspective as well as customer adoption, right? Because it sounds like it's solving a real problem that customers have, but I think a lot of times over the years we've learned customers may not use it even if they should be. So what, what, how are you measuring that success and what can you do to drive user adoption of dash to begin with? Thanks.

Yeah. Yeah. So, uh, measuring it qualitatively and quantitatively. So, um, really great news and something to pay a lot of attention to. Um, is when we watch customers or talk to customers, everybody's got this problem. Everybody struggles with information overload, fragmentation of using all these different apps. And so when we explain the value prop, the most common response is, yeah, yeah, I totally have this problem. And then the question is more like, can you really solve it for me? So we start with like, is there a real job to be done in market here? And we are seeing really encouraging validation here. from our customers on that. And then when we look at in terms of success or leading indicators are how's the quality of the Dash experience? And so we've spent a lot of time and effort and made a lot of progress in improving things like search ranking and quality. We look at how do we, I mean, this is a new category, so Similarly to Dropbox 1.0, we spent a lot of time focusing on what's the onboarding experience look like. Do people understand the concepts? There's a lot of new things like connecting Dash to your different apps. And so how do we make that as seamless and streamlined of an experience as possible? And so we still minimize time to value, things like that. So product quality, onboarding success, engagement generally, retention, and then monetization. and these kind of go, we work on all of them in parallel, but I think you kind of clear, you go through them a little bit in sequence. So first you have a great product, you get the product experience to great, then you sand down rough edges in the onboarding, then you drive engagement, then monetization or engagement retention, then monetization and virality. So we're still in the early innings of that. So I think making progress on all fronts and, and yeah, this year we'll, continue to open the doors wider and wider to Dash as we scale it up.

Really helpful. Thank you so much.

Thank you. Our next question will come from Steve Enders from Citi. Your line is open. Thanks for taking the questions here.

I guess maybe just to start, I think it'd be good to get a little more clarity on the, you know, packaging and pricing changes that you have been working on and trying to convert over the base, I guess. What were the learnings coming out of that? And I guess if you think about changes moving forward and, you know, trying to build on those learnings, like, what does that, I guess, kind of look like through Calendar 24 here? Sure.

So some of the lessons from last year, or we did a big launch in October where we wanted to address one of the biggest gaps in our funnel, which is that we have all these products, it's just that customers, the majority of our customers are not aware that we do more than storage. And we believe a big reason for that is that in many cases we haven't promoted the products to our users or integrated those experiences as seamlessly as as we could, and because when you look at Sign and DocSend, those started as separate companies, and we brought them in via acquisition, and we're doing the rest of the work to integrate them. So in October, we launched a redesigned website where we could start a lot of these document workflows from the new experience. We launched new bundles that include the workflow products as well as FSS, And then what we found is we made a lot of changes and then a lot of metrics changed. And it was a little difficult to isolate some of the variables. And a lot of the changes were favorable. So, for example, we saw more or like significantly elevated attachment to multiple products. But some changes were negative. So, for example, as the default SKUs were more expensive, we saw more a decrease in new subscriptions on our team's SKUs. And then there were some other optimizations we were doing around onboarding where we, for example, we stopped promoting the desktop client as heavily to reduce the number of steps, but then that had a negative impact on engagement as customers were going into their second through sixth months or things like that. So it was affecting the retention curves. So part of what we're doing is backing up a little bit and testing and iterating our way back into making a lot of the same changes, but making sure that we know exactly where the deltas are coming from. So we're stepping back and taking a more iterative approach to preserve as many of the good changes as we can and edit out the ones that were less promising. But for sure, we continue to focus on building awareness and driving adoption of multiple products, whether that's our document workflow products or newer products like Dropbox Replay, which is around video collaboration, and Dropbox Dash, which is around AI-powered universal search.

Okay, perfect.

Appreciate the context around some of those changes. And then maybe just on the macro side of it, it seems like most of the challenges were more related to the business and the team side. I just want to clarify if there was kind of any impact more On the consumer front as well. And then, you know, for the public funnel activity, it seemed like that slowed down a little bit. How has that kind of trended so far in 24 in the first half of the quarter here?

Sure. I mean, I'd say overall it's been pretty stable. I think – I don't think the headwinds we saw in Q4 are of a different kind than we were seeing in prior quarters here. It's broadly things, you know, when you look at the Teams business, it's mostly driven by customers becoming more price sensitive in general. Or, you know, something we see often is, or we saw a lot last year, was as companies or, you know, especially tech companies made headcount reductions of their own, then that means fewer SaaS licenses. And so Dropbox is affected by that. And then we've seen more broadly with our document workflow businesses, you look at like the e-signature category, or things like DocSend. There's a big acceleration during COVID and then a bit of a pullback. So things like e-signature were sector-wide. And then DocSend focuses on the fundraising and kind of startup part of the ecosystem. And in a world where VCs are doing a lot less investing or there's less IPO activity, things like that, then DocSend's business has been impacted by that. So there's a lot we're doing in response. Again, like integrating the experiences to make it a lot easier to get up and running on these other products via Dropbox or via the Dropbox UI and through things like the redesign we did in October help and then with DocSend expanding to new audiences and use cases. So for example, we've been working towards, we've had a lot of good early signal on a virtual data room offering in DocSend, and we'll be rolling that out to GA later this year. So I'd say there wasn't a lot of change in the shape of the curves. It was more the carrying forward of similar trends. And then we also see in Q4 that there tends to be seasonality in both, or it tends to be a lighter quarter for both FSS and Doc workflow products, especially FormSwift, for different reasons.

Then Steve real quick this is TIM, I believe you asked about top of funnel activity in the first part of this year so far have not seen any material changes so that's that's all in line with our guidance so that's been factored in and we see less of the seasonality effect in Q1.

Thank you.

Our next question will come from Michael Funk from Bank of America. Your line is open.

Thank you for the questions. A couple if I could. On the call, you mentioned seat rationalization is one of the factors that you've been seeing the last 12 months or so, specifically software companies. We did see a notable increase in reps across software since the beginning of the year. Can you comment on How much the most recent reductions are factored into your forecast for the year? And if we don't draw a direct correlation between those reductions that customers and the seek rationalization.

Sure.

So we do factor in what we're seeing across the industry, particularly in that tech vertical as far as layoffs that we're seeing there into our guidance. So that's certainly been contemplated and maybe just to provide a bit more color. We don't formally guide to paying users, but I do expect that we will still add paying users in 2024. I do expect our total additions this year to be less than last year. Again, largely due to the de-emphasis of our family plan. And there may be some quarters where we lose paying users, depending on things like the state of the economy, potential turn of larger customers and the timing of our initiatives. But again, we still expect to add paying users this year.

Okay. And then just on the share repurchase plan and the guidance for the share count for the year, trying to run some back-and-forth math here, does that roughly imply a similar cadence to share repurchase in 24 to what we saw in 2023 absolute dollars?

Yeah, I'd say no changes in our philosophy. As far as share repurchase programs, still remain very dedicated to that. We continue to expect to allocate a significant portion of our annual free cash flow to share repurchases with the intention of reducing our share count and maybe to provide some color on how it is structured. Our Buy Back program buys more shares at lower price points and less shares at higher price points. Again, all reflected in our full year share count guidance.

Great. Thank you so much for the questions.

Thank you. And our next question will come from Pat Walravens from Citizens JMP. Your line is open.

Oh, great. Thank you. I mean, Drew, very big picture. How happy were you with how this business executed in Q4?

So, I mean, I was... happy to get things like Dash to open beta and I was happy with the improvement to a lot of the customer experience and product quality with things like our web redesign. And I was unhappy with the overall results and the fact that some of the upside we had been projecting didn't fully materialize and we have to kind of go back and take a more iterative approach to making sure all the new ingredients or changes we're making um uh that were doubling down on the additive ones and filtering out the ones that aren't working and i think there were there were so many variables that got kind of conflated with making so many changes at once i think that was a lesson um and then some of the lessons around yeah in a more difficult macro environment a lot of our customers are more price sensitive and so when i say we're iterating on pricing and packaging we want to make sure that um as our customers used to be able to, many SaaS companies would just be on a regular clip of price increases and customers are fine with that. Now in a world where things are more difficult or there's more budget pressure, different value props are more compelling. So the idea of like, well, I can consolidate spend by, in addition, if I can have not just files I can share, but also be able to have e-signature with Dropbox, or I can do video collaboration, or I can do AI-powered universal search and get that all as part of one subscription, so bundling, things like that. So this is the kind of iteration that we need to do. So overall, I mean, I'm not happy with the headline result, but I think we took away some clear lessons, and we'll be making targeted improvements in response. Okay, thank you. And then...

Tim, did I miss it? Is there sort of a new billion-dollar free cash flow target?

Yeah, let me walk you through that, Pat. So, as a reminder, last quarter we did adjust our free cash flow target by the amount of the R&D tax legislation, which we now estimate to be $30 million, effectively taking our billion-dollar target to a revised target of $970 million. Our guidance of 910 to 950 falls below that target, and that's primarily driven by slower billings growth, incremental FX since we first set the target, and our investments in Dash. Now, while we could withhold investments in our long-term initiatives to meet the target, that would be a short-sighted approach. So that's where this guidance reflects our continued investment in the long-term health of the business. And again, we still have time to outperform that guidance throughout the year and via product execution or identifying efficiencies within the business.

Okay, thank you. Thank you. And as a reminder, to ask a question, please press star 1 1. One moment for our next question. And our next question will come from Richard Hilliker from UBS. Your line is open.

Hi, guys. Thanks for taking my question. My question is on the R&D line. So I appreciate the exciting opportunity ahead, particularly with Dash and AI. But I guess what I'm wondering is, can you help me understand why we couldn't potentially see more leverage on this R&D line while still investing in AI and these other exciting opportunities? And then I have a follow-up. Thanks.

Sure, I'll start to obviously feel free to jump in.

So R&D increased slightly to 25% of revenue. That's primarily due to hiring for our longer term growth initiatives such as Dash. On that side, these engineers with an AI background typically do command premium compensation and are located in higher cost locations such as the Bay Area and Seattle. So certainly want to make sure that we're focused on investing in these long term initiatives. and that we're funding them at a proper rate, so certainly contemplates an investment on that front. And then maybe just to provide some more color on our overall operating margins, that's between 32% and 32.5%. At the highest level, what we're doing across the business, we will be driving increased efficiencies within our core file sync and share and document workflow businesses. Again, while concurrently investing in long-term growth initiatives such as DASH, We're also going to be investing in marketing to drive product and brand awareness, including our partnership with McLaren Formula One Racing that Drew alluded to. And the guidance does preserve some flexibility to invest across the business to drive long-term growth.

Yep. And I would just add that it's a balancing act. I mean, we certainly care about margins. We certainly care about efficiency. And we also don't want to miss these like once a decade or once a generation platform shifts. I mean, you look at The move to mobile and cloud made Dropbox 1.0 possible to begin with. And all the emergence of AI is going to make Dropbox 2.0 possible. And ultimately, I think it's going to be a much larger opportunity, so we don't want to miss that. But that's like the tension we're navigating. I mean, fortunately, we're able to do a lot of these investments within the general envelope that we've provided So I don't expect there to be like massively different shaped curves. And I think another thing is we've also been reallocating our resources away from less efficient or less promising areas and more towards things like AI and Dash. So that's a little bit harder to see. It was just the aggregate R&D line.

Okay, thanks. And then Tim, maybe one last one for you here. I was curious, I think you mentioned that um finance lease would would jump up to about seven percent of revenue and i think that's from right around five percent seems like kind of a big jump maybe wondering if you could give us any other color to help us understand that change thanks so much yep sure good question so we are seeing an increase in our finance lease additions this year that's due to two reasons first we are nearing a hardware refresh cycle for equipment that's reaching the end of its life

TAB, Where we did have a similar refresh in 2019 2020 and then additionally we are supporting one time quota grants to customers on our advanced plan. TAB, Who are using an excess amount of storage so we've grandfathered some of these customers customers in, and so we need to support those customers so that's partly what's driving that additions.

Thank you.

Our next question will come from Mark Murphy from JP Morgan. Your line is open.

Thank you. Do you notice much of a difference in the signals you're seeing from the very, very smallest businesses, which are more sensitive to interest rates and banks extending credit, if you compare that to your relatively mid-sized and larger customers within the mix?

Yeah. Hey, Mark.

I think this is all part of what we're seeing on the macro side, where, as you know, most of our team's plans are in the SMB space, where we do continue to see a challenging demand environment there. Again, as Drew has talked about, some of that is due to heightened price sensitivity, and we've seen that since our price increase in 2022. And again, as Drew's also touched on, some of that also pertinent to SMBs. seeing downsell pressure as teams trim their license counts, following whether that's layoffs or budget cuts, those sorts of things. So our guidance factors in a continuation of these trends.

And I wanted to ask as well, you know, you described this as a unique period. What do you think has to happen through the course of the year if we're going to look back on it as kind of a troughing out period for growth. There's no real price increase as a driver. You're taking some intentional actions, which are minor headwinds. And you had foreshadowed a lot of this coming off the Q3 call. The new products haven't ramped yet. We still have tech companies that are out there doing incremental layoffs. Is it a bit of a perfect storm this year where you know, that kind of alignment of all these factors might be, might be marking a troughing out period.

Yeah. So with last year, we had to make some difficult decisions with layoff, a layoff of our own and, and then kind of weaning ourself off of things that I didn't find sustainable, like, like price increases or inefficient sources of, growth or inefficient marketing spend or sort of overinvestment in areas that weren't going to bear as much fruit. And then reallocating a lot of resources towards the future and things like AI and Dash. So I'm hopeful that a lot of the more difficult decisions are behind us and winning this year would look like finishing the swing on that, rotating away from things like price and monetization experiments to areas of the funnel, especially on our team's business, where that have been overlooked. So I mentioned a few of them in my prepared remarks, but things like we see a lot of opportunity to improve the team onboarding experience. There's a lot of friction. A lot of friction I would see as unnecessary, like too many steps or things that are confusing to customers when you actually sit down with customers and watch them go through that process. We've identified plenty. of things that we can do to make that better and make similar improvements to the ones we've made on the individual side of the business where over the years we've been able to really chip away at churn. And as we've improved the user experience on things like sharing, we see more engagement, more sharing, more viral signups, and just focusing more on the fundamental levers of engagement and virality more so than monetization. So I think stabilizing the core business and getting after some of those levers where we've been under-investing around team onboarding, team expansion, sharing in general. And then the other main goal is getting Dash to true product market fit, so getting it to be great product experience, great retention, smooth onboarding, and bridging from individual use cases like search and organizing your stuff to sharing. And a lot of this is the playbook that made Dropbox 1.0 successful, and we're doubling down on a lot of those things. Thank you.

Thank you. And our last question will come from Brent Phil from Jefferies. Your line is now open.

This is Alon Leone on for Brent Phil. Thanks for taking my question. My first question is just at a high level. Was the demand environment better, worse, or in line with what you saw in 3Q? And I have a follow-up after.

Yeah, great question.

I'd say it was in line. I have not seen an improvement in macro trends. We've talked a bit about what we saw in our Teams business, which stayed rather consistent. We talked about FormSwift, which sees a seasonal low point. in the fourth quarter and then tends to rebound in the first quarter as we enter tax season. And then we saw consistent pressure across DocSend in our e-signature categories. DocSend in particular continues to see headwinds in the fundraising space. So a lot of consistency in what we have been seeing, and that has all been extrapolated into our guidance for next year as far as a continuation of those trends.

Super helpful. And then the second part of my question is just in terms of the monetization of Dropbox Dash. I know it's still early days, but should we expect it to be embedded in the more premium SKUs of the platform, or would it be priced as a separate SKU? Just like high level, how should we think about it?

Yeah, it'll be both. So Dash will be available as a standalone subscription, and then there will also be different add-on and bundle options over time. And we're still pretty early in terms of signal on monetization. We're focusing on driving adoption right now.

Thanks. Super helpful.

Thank you. And this does conclude today's conference call. Thank you for your participation. You may now disconnect. Everyone, have a wonderful day. you Thank you. Thank you. Good afternoon, ladies and gentlemen. Thank you for joining Dropbox's fourth quarter 2023 earnings conference call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. To ask a question during the session, you will need to press star 11 on your telephone. 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 Ishan Gupta with Dropbox's investor relations team.

Thank you.

Good afternoon, and welcome to Dropbox's fourth quarter 2023 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 first quarter and fiscal year 2024, and our expectations regarding 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 those 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 will now turn the call over to Dropbox's co-founder and chief executive officer, Drew Houston. Thanks, Ishan, and good afternoon, everyone.

Welcome to our Q4 2023 earnings call. Joining me today is Tim Regan, our chief financial officer. I'll first provide a recap of 2023, share our perspective on our fourth quarter and and then close with an overview of our strategy for 2024. Tim will then go over our financial results for Q4 and fiscal year 2023, as well as provide guidance for Q1 and fiscal 2024. Let's get started. In 2023, we had two main business objectives. The first was to build AI-powered product experiences centered around organizing all your cloud content. The second was to continue evolving our core FSS offering to provide a seamless product experience for our customers' workflows. I'm proud of the work our team accomplished on both of these fronts. Starting with building AI-powered product experiences, in 2023, we introduced the first iteration of Dropbox Dash, a standalone universal search product leveraging AI and machine learning. With more of our work spread across hundreds of tabs in a browser, knowledge workers are spending far too much time just finding what they need to do their work. particularly in this new world of distributed work. Dash connects all of your apps, tools, and content in a single search bar, so it's easy to find everything you need in one place, regardless of where it lives. And because Dash is powered by machine learning, it learns about you and your priorities the more you use it. In 2023, Dash moved from closed beta to open beta and represents our first major AI-powered product experience. While still very early, we're gaining valuable insights into the types of customers that are engaging with this product and the features that are generating the most interest. For example, we're seeing that our more engaged and existing users on our Dropbox FSS paid plans tend to adopt Dash and retain at a higher rate. We also made significant progress against our second objective of evolving our core FSS offering to create a better product experience for our customers' workflows. There were several highlights on this front in 2023. including the continued optimizations we made across the platform to reduce churn on a year-over-year basis, improve top of funnel, and ultimately ensure we're delivering the best product experience to our users. Specifically, we made a number of operational enhancements, including improving the sharing experience across our mobile and web services, optimizing our payment processing to reduce churn, and leveraging Google OneTap to streamline and improve the user onboarding experience. Given the size of our registered base, These changes impact millions of users, and we believe the progress we made in 2023 will strengthen our foundation heading into 2024. Additionally, many of our customers lack awareness of our capabilities beyond storage, often asking us for features that we already have, such as e-signature or document tracking and analytics. And we took several steps in the fourth quarter to address this awareness gap and to provide more value to our customers. We introduced our new web redesign that makes it easier for our users to get the most out of the Dropbox platform, including the ability to sign and send documents and use our video products. We also introduced the first generation of our fully integrated bundled offerings for our Teams customers. This included updated pricing and packaging with the goal of reflecting the added value of all of our product capabilities. I'll share more on the early results of this initiative in a moment. Along the way, we continue to grow our top line. exceeding the guidance we shared while also achieving record non-GAAP operating margins of over 32%, generating more than $750 million of free cash flow and returning $540 million back to shareholders in the form of share repurchases. Tim will speak to the financial results in more detail, but I'm proud of our focus on improving the overall profitability profile of our business while still investing in new initiatives and growth opportunities. While there was a lot to be proud of last year, Q4 was a challenging quarter. Some of these challenges were expected. For instance, we continue to see the broader economic backdrop that impacts both our teams and document workflow businesses as customers are being more cautious with their spend and exhibiting higher levels of price sensitivity. This resulted in reduced levels of gross new licenses and upsell activity alongside higher churn and downsell. As an example, certain teams' customers, particularly those in the tech sector, continue to reduce licenses due to spending cuts or headcount reductions of their own. FormSwift and DocSend also saw elevated churn in the quarter. And as we discussed on our call last quarter, we traditionally see seasonally low activity within our file sync and share business, as well as our FormSwift business in the fourth quarter of each year. We also anticipated headwinds stemming from strategic business decisions we made last year, which we believe will benefit us in the long run at the cost of some negative impact in the near term. For example, like others have done, we sunset unlimited storage in our advanced plan and transitioned to a metered model. We found that some customers weren't using the plan as intended and were taking advantage of the policy to do things like mine crypto or use a business account for personal use cases or even resell storage. While this change will ultimately translate to increased profitability in the long term, it led to refunds and incremental churn for those customer-seeking storage solutions that we no longer offer. We also de-emphasized our family plan as we found that some business users were also using it as a loophole to obtain licenses at a lower cost. As we noted last quarter, this negatively impacted the number of paying users in the quarter. We also faced a few additional challenges in Q4, which we're actively addressing. In Q4, we ran a number of tests and experiments across our individual plans with new trial flows and other initiatives, but they did not generate the uplift we were looking for. However, we still see opportunity here, and we're iterating on these experiments and incorporating the related learnings into our plans for 2024. In addition, the early results on our bundled offerings for Teams have been mixed. As a reminder, our approach was to offer multi-product bundles to new Teams customers at a higher price point to reflect the additional value we were adding to the plans, while our intention was to migrate existing customers to the new SKUs at their current price point. And for now, we've held off on migrating all our existing Teams customers because while we're seeing an uptick in multi-product adoption with new customers, as well as an ARPU lift from these plans, we're also seeing a reduction in top of funnel activity and conversion rates. As a result, we're revisiting our approach. In Q1, we'll keep iterating on our pricing and packaging, and we'll continue to improve the in-product experience for these customers. At the same time, we'll refine our marketing approach and our self-serve engine to ensure that we're properly identifying and serving customers that are interested in FSS-only SKUs versus our multi-product SKUs. Ultimately, we're still aiming to serve those who want multi-product capabilities, as we continue to see that customers who engage with these capabilities convert and they retain at notably higher rates than storage-only customers. But we'll be iterating on the best path forward with our bundle strategy and we'll have more to share in the following quarter. All of which brings me to our strategy for 2024. As I've been more hands-on in the business over the last year, I've been refocusing our team and our strategy on the fundamentals of our growth drivers and the quality of our user experience. First, within our file sync and share business, we still see an opportunity to improve the collaborative experience to strengthen the funnel and drive growth. FSS is our largest business line where small improvements can lead to a meaningful financial and customer impact. And in recent years, we focused heavily on churn improvements that resulted in better performance for our individual business, and we see a similar opportunity with our team's customers. For example, many of the actions conducted by our Teams users today are predominantly solo actions, such as storing and viewing content, as opposed to sharing and commenting on shared content. We've seen in the past that as we streamline and remove friction in our sharing and collaborative workflows, like commenting, this contributes to more viral growth, faster team expansion, and higher retention. And we see similar opportunities to improve this experience for Teams as we have for individuals. In addition, we see an opportunity to improve the team admin workflow as well, as the admin approval rate for new licenses on a team account remains low. Team admins often struggle with onboarding new users, and by leveraging the admin console for permissions and controls, we're focused on making improvements to make it easier for admins to discover and leverage admin workflows so they can more easily expand their team deployments. As we mentioned earlier, we'll also invest in our team's plans by iterating on our bundles experience to ensure that our customers are aware of and leveraging our multi-product capabilities. This includes weaving advanced sharing capabilities, such as DocSend and Replay, more seamlessly into our product experience, given our proven strengths in solving sharing for our customers, as well as the viral network effects that stem from sharing content. As we improve these team experiences, we can grow through license expansion or through introducing customers to our premium functionality. Our second big opportunity is with AI-powered product experiences, most notably Dash. Dash is aimed at solving many of the same challenges that we had originally solved with FSS, but instead of the problem of files scattered across different devices, Dash is addressing the challenge with cloud-based content and URLs scattered across hundreds of apps and browser tabs. We have a long history of solving our customers' problems with organizing and searching and sharing content, and we believe our strengths of the scale of our platform, customer trust, and interoperability position us well to solve these same problems. And this is a growing market. IDC estimates the search and knowledge discovery software market to be about $7 billion today, with a potential to more than triple over the next four years. We'll continue to invest in Dash as our lead AI product, and we're taking a similar approach as when we launched Dropbox 1.0. And we're using this beta period with Dash to ensure that we're getting up to a high quality and scalability bar before driving adoption. Our primary focus in 2024 is on finding product market fit with our customers. More specifically, we're going to focus on improving the onboarding, activation, and retention of users on Dash to ensure we're providing the best experience to customers. For example, we noticed users found a lot of friction in adding and connecting Dash to all their different apps. So we're making the experience of connecting apps during onboarding smoother so that we can improve activation rates. We're also investing in experiences like stacks. Improving discoverability, improving sharing, and this is critical to creating the type of virality that was essential to Dropbox's growth in the early years. And once we get the quality of the product experience and metrics like retention to where we want them, we'll run a lot of the same playbook that made Dropbox successful in the past, including growing the product virally, making big investments in sales and marketing, and promoting Dash to our existing FSS users. As we shared earlier, we know our customers are often unaware of our capabilities beyond storage. To this end, last week we announced a partnership with the McLaren Formula One team where Dropbox is becoming an official technology partner. As part of this partnership, McLaren will rely on Dropbox to securely share files and collaborate on video review and approvals, and our branding will be featured on their cars and team assets. This is an important effort to drive awareness of our latest offerings and educate customers and partners about all the ways that Dropbox can help teams work more effectively together. We have ambitious goals in 2024, and I'm excited to work with our teams to achieve everything we've planned. We've also made several strong additions to both our leadership bench as well as our board over the past few months. In December, Eric Cox joined us as our chief customer officer overseeing our go-to-market teams. Eric comes to us from Vimeo, where he was COO, and prior to that, he spent nearly 20 years at Adobe in a variety of roles across sales, marketing, and operations. We also welcome Dr. Andrew Moore to our board of directors. Andrew's a leading expert in AI, machine learning, and robotics, and he's had a decades-long career in academic and technical leadership. He was previously VP for the AI division of Google Cloud and also served as the Dean of Carnegie Mellon University's School of Computer Science. Andrew's technical expertise building AI-powered products will offer invaluable perspective as we invest in AI internally across our product portfolio. Both Eric and Andrew will play an important role in the future of Dropbox, and I couldn't be more excited to partner with them to achieve our goals for the future. In closing, 2023 was a year marked by both successes and challenges, and looking ahead, we're confident that we have the right team in place to execute against our strategy for 2024. This year represents a unique point in our company's evolution. Many of our mature FSS products are seeing slowing growth, and newer products like Dash are still early in their life cycle. While we expect that our new products and initiatives will take time before they start to meaningfully contribute to our top line results, we're excited about the large opportunity we see in front of us. As we embark on the next phase of our company's journey, I'm personally invested in building the best products we can for our customers, delivering strong results for our shareholders, and achieving our mission of designing a more enlightened way of working for all knowledge workers who use Dropbox. And with that, I'll turn it over to Tim to share a recap of our 2023 financial performance, as well as our expectations for 2024.

Thank you, Drew.

I'll cover our financial highlights from Q4 and share guidance for Q1 and fiscal 2024. I'll then offer some context on the considerations underlying our guidance. Starting with the fourth quarter of 2023, total revenue for the fourth quarter increased 6% year over year to $635 million, beating our guidance range of $629 to $632 million. Foreign exchange rates provided an approximate $1 million headwind to growth. On a constant currency basis, revenue grew 6.2% year over year. Total ARR grew to a total of $2.523 billion, up 3.8% year over year on a constant currency basis. However, on a constant currency basis, ARR declined by $2 million sequentially. As Drew mentioned, the sequential decline in ARR was driven by a few factors, including business decisions we intentionally made, such as eliminating unlimited storage for advanced plant users, which resulted in incremental churn and softness in our top of funnel, a continued challenging macro economy, and the typical seasonality we see in our business in Q4. We exited the quarter with 18.12 million paying users, which reflects a sequential decline of roughly 50,000 paying users. A number of factors led to this decline, including our decision to reduce the prominence of the family plan on our plans page, macro headwinds facing our team SKUs, Experiments that underperformed impacting our individual SKUs. And finally, Q4 tends to be a seasonally low quarter for file sync and share, and FormSwift in particular. Collectively, these factors served as headwinds to paying user growth in Q4, where I'll speak to our paying user expectations for 2024 shortly. Finally, average revenue per paying user for Q4 was $138.83, up slightly compared to Q3. 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 purchase intangibles, certain acquisition-related expenses, net gains and losses on our real estate assets, and our workforce reduction expenses. 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 effects of the aforementioned adjustments. Moving to our real estate strategy, where we have been actively seeking subleases and buyouts of our vacant real estate space, the majority of which is in San Francisco. As I mentioned during our last earnings call, in Q4, we executed a buyout with our landlord of approximately 40% of our remaining sublease space in San Francisco for $79 million to be paid over three years, beginning with an approximate $28 million payment in the fourth quarter of 2023. The remaining payments resulting from the buyout will occur in Q2 of 2024 and Q1 of 2025. Overall, we expect this buyout to drive significant savings in the long term, as we will be avoiding over $220 million in aggregate rent payments and common area maintenance fees over the remaining 10-year lease duration. The result of this buyout was a $159 million gain in Q4 2023. The gain represents the reduction to our future lease payments in excess of the sublease income we previously anticipated collecting for this space. And as I previously mentioned, we will continue to actively seek subleases and pursue additional buyouts where we see favorable returns.

With that, let's continue with the fourth quarter P&L.

Gross margin was 82.3% for the quarter, up 20 basis points on a year-over-year basis. Operating margin was 32.2%, up 200 basis points year over year. We beat our Q4 operating margin guidance by nearly a point, driven by our continued focus on being efficient with our spend across the business. I'd note that in Q4, we held both our in-person user conference and we invested in product and brand awareness marketing campaigns, which resulted in a sequential decrease in operating margins. Net income for the fourth quarter was $171 million, which is a 21% increase versus the fourth quarter of 2022, driven by operating income growth. Diluted EPS was 50 cents per share based on 344 million diluted weighted average shares outstanding, which increased compared to 40 cents per share based on 354 million diluted weighted average shares outstanding,

by the fourth quarter of 2022.

Moving on to our cash balance and cash flow. We ended the quarter with cash and short-term investments of $1.4 billion.

Cash flow from operations was 200 million in the fourth quarter.

Capital expenditures were $10 billion during the quarter. This resulted in quarterly free cash flow of $190 million compared to $182 million in Q4 of 2022. I note that free cash flow for 2023 came in lower than our guidance range of $775 to $785 million due to a reduced level of billings as well as the timing of payments and collections. In the quarter, we also added $51 million to our finance leases for data center equipment. As we mentioned on our last call, we expected this sequential increase in our finance lease lines, given the higher storage costs we are seeing with users on our advanced plan as we wait for grandfathering periods to expire for customers maintaining elevated storage levels. As related to our share repurchase program, in Q4, we repurchased nearly 4 million shares, spending approximately $106 million. As of the end of the fourth quarter, we had approximately $1.4 billion remaining under our current repurchase authorizations. Our philosophy on share repurchases has not changed. We remain committed to returning a significant portion of our free cash flow to shareholders in the form of share repurchases with the intention of reducing our share count. I'd now like to share our 2024 first quarter and full year guidance where I will also provide some context on the thinking behind this guidance. For the first quarter of 2024, we expect revenue to be in the range of $627 to $630 million. We expect a minimal impact from FX this quarter. I will note that Q1 2024 has one less day versus Q4 2023. And thus, we recognize one less day of subscription revenue in Q1 relative to the prior quarter.

We expect non-GAAP operating margin to be approximately 33%.

Finally, we expect diluted weighted average shares outstanding to be in the range of 342 million to 347 million shares based on our trailing 30-day average share price.

For the full year 2024, we expect revenue to be in the range of $2.535 to $2.550 billion.

On a constant currency revenue basis, we expect revenue to be in the range of $2.532 to $2.547 billion, equating to a full year currency tailwind of approximately $3 million. We expect gross margin to be in the range of 83 to 83.5%. We expect non-GAAP operating margin to be in the range of 32 to 32.5%. We expect free cash flow to be in the range of 910 to $950 million. I note that this free cash flow guidance range is inclusive of several one-time items totaling $47 million. The first is an approximate $30 million headwind as a result of R&D tax legislation, slightly lower than the $36 million estimate that we shared last quarter. The second is a $15 million payment for the second tranche of the buyout related to our San Francisco headquarters. And the third is $2 million in cash outflows for the 2024 installments of acquisition-related deal consideration holdbacks for Command E. Moving on to capital expenditures, we expect our addition to finance lease lines to be approximately 7% of revenue. And we expect cash cutbacks to be in the range of $20 million to $30 million in 2024. Finally, we expect 2024 diluted-weighted average shares outstanding to be in the range of 336 to 341 million shares, based on our trailing 30-day average share price. I'll now share some additional context on the thinking behind our guidance. Starting with revenue, as a reminder, we are lapping the benefits of our team's price increase and our acquisition of ForumSwift. and thus we expected a slowing revenue growth rate. Also consistent with our historical approach, our guidance reflects what we have a high degree of visibility into today. This includes our current business trends and trajectory, as well as the product and growth related initiatives we have launched to date. Notably, our guidance does not include any benefit from DASH in 2024. As Drew mentioned, our primary focus in 2024 is centered on finding product market fit, driving usage of the product, and closely following Dash's adoption, engagement, and retention trends. Once we have increased certainty that Dash is meeting our customers' needs, we will then pursue our monetization strategies. However, this may not be until the latter portion of this year or early next year. Similarly, our guidance does not include any benefit from our bundled SKUs, as our teams continue to iterate on the optimal product experience and go-to-market motion for these plans. As we gain more clarity on how we are approaching our bundles rollout to new and existing customers, along with signals on the customer response to our approach, we will update our guidance accordingly. As related to paying users, our guidance contemplates a reduced level of paying user growth. relative to 2023, and there may be some quarters where our paying user additions trend negative. This is due to the continued headwinds we are facing as well as the de-emphasis of the family plan and the nascent state of our growth initiatives. Ultimately, we do expect to add paying users in 2024, however, at lower levels than prior years. As related to gross margins, we are guiding to 83 to 83.5%, which is above our long-term target. I want to highlight that from the beginning of 2024, we are increasing the useful life of our servers from four to five years, which will apply to asset balances on our balance sheet as of December 31st, 2023, as well as future asset purchases. As a result, we expect a benefit to our full-year gross margins of approximately $30 million. For Q1, we expect a benefit of approximately $10 million. As related to operating margins, we are guiding to 32 to 32.5%. This level of operating margins is above our long-term target and is roughly consistent with our operating margins in 2023. This range includes continued investment in our longer-term AI and growth-related investments, such as Dash. Additionally, we are planning for increased levels of marketing investments, including our new partnership with McLaren Formula One Racing, as we aim to drive market awareness of our platform's capabilities. Lastly, this guidance preserves some optionality to make strategic investments across the business over the duration of the year. We also expect our additions to finance lease lines to increase in 2024 versus prior years. This is primarily due to two factors. The first is the one-time storage quota grants we are providing to a portion of our customers on the advance plan as we deprecate our previous as much space as you need policy. While this requires incremental storage capacity in the near term, our revised plan around storage usage will enable us to have a more profitable SKU once the one-time extension for these customers has expired. The second factor is an anticipated refresh of some of our data center equipment consistent with past practices. As related to full-year free cash flow, we are guiding to a range of $910 to $950 million. This guidance falls short of our long-term free cash flow target, which we adjusted during a previous earnings call to be roughly $970 million, after taking into account headwinds from R&D tax legislation-related payments. And while our guidance range is below this figure, I'd note that we have more than doubled our annual free cash flow since we initially set the target, where I'm proud of the progress we've made. There are several factors driving the shortfall between our guidance and our target. The most prominent being a reduced level of billings associated with our revenue guidance, the incremental FX headwinds we are facing relative to when we first introduced our target, as well as the investments we are making to fuel our future growth in products such as Dash. While we could scale back our investments in Dash to meet our free cash flow target, we do not believe this would be the right long-term decision for the business. These investments in Nathan product initiatives, along with decisions such as our San Francisco lease buyout, And the changes we made to our advance plan are putting a short-term strain on our financial trajectory, however, are in line with our primary focus on strengthening the company's long-term position. And while our current level of visibility does fall short of our long-term target, there is still time to draw closer to our free cash flow target through improved product experiences or through identifying additional efficiencies within our operations during the year. In conclusion, we are mindful that we are in a unique period where our core file, sync, and share business is maturing and our new products are in their early stages. However, our core file, sync, and share business is still generating growth in revenue and free cash flow while we also reduce our share count. Concurrently, we are in an exciting new phase in the evolution of our business as we invest in our future in AI-powered areas such as Dash to drive long-term growth. We will make progress on both dimensions in 2024, and we will continue to maintain a disciplined mindset around how we are operating the company to ensure we're not only providing innovative solutions for our customers, but creating value for our shareholders.

And with that, I'll turn it over to the operator for questions.

Thank you. As a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by while we compile the Q&A roster. And our first question will come from Rishi Jaluria from RBC Capital Markets. Your line is open.

Oh, wonderful. Thanks, guys, for taking my questions. I wanted to start out, Drew, in the past you've talked about there is maybe some appetite for M&A, especially transformational M&A. Given this kind of roadmap of wanting to develop new products and capabilities, especially around generative AI, how are you viewing the potential for M&A to just accelerate your roadmap in kind of broadening the platform and going from the EFSS to kind of a more gen AI approach? enabled company, and then I've got a quick follow-up.

Sure. So still see big opportunity for M&A to accelerate our roadmap. And actually Dash, Dropbox Dash is a great example of a, it was seeded by an acquisition of a company called Command-E we did. And another benefit is that unlike the first few years after we were public when valuations were really frothy, as the external environment has moderated. We've certainly seen that moderation happen in public company SaaS, and I think we've been slowly seeing that translate to private company valuations too. So we think it's a door that keeps opening, but our philosophy is – and so I think we are certainly opportunistic and on the lookout for good companies to buy. But at the same time, our philosophy is pretty consistent. We want to be disciplined because – I mean, another thing is even in the AI realm, there's a little bit of a bubble around AI startup funding. And I don't think it's everywhere, but I think you have to be careful. But yeah, M&A certainly continues to be a big opportunity for us.

All right, wonderful. That's really helpful. And then turning to Dash, I know it's still early and this year is going to be kind of the big proof point of the year before we can start talking about monetization. But how are you internally measuring the success of Dash, both from a technology perspective as well as customer adoption, right? Because it sounds like it's solving a real problem that customers have, but I think a lot of times over the years we've learned customers may not use it even if they should be. So what, what, how are you measuring that success and what can you do to drive user adoption of dash to begin with? Thanks.

Yeah. Yeah. So, uh, measuring it qualitatively and quantitatively. So, um, really great news and something to pay a lot of attention to. Um, is when we watch customers or talk to customers, everybody's got this problem. Everybody struggles with information overload, fragmentation of using all these different apps. And so when we explain the value prop, the most common response is, yeah, yeah, I totally have this problem. And then the question is more like, can you really solve it for me? So we start with like, is there a real job to be done in market here? And we are seeing really encouraging validation here. from our customers on that. And then when we look at in terms of success or leading indicators are how's the quality of the Dash experience? And so we've spent a lot of time and effort and made a lot of progress in improving things like search ranking and quality. We look at how do we, I mean, this is a new category, so Similarly to Dropbox 1.0, we spent a lot of time focusing on what's the onboarding experience look like. Do people understand the concepts? There's a lot of new things like connecting Dash to your different apps. And so how do we make that as seamless and streamlined of an experience as possible? And so we still minimize time to value, things like that. So product quality, onboarding success, engagement generally, retention, and then monetization. and these kind of go, we work on all of them in parallel, but I think you kind of clear, you go through them a little bit in sequence. So first you have a great product, you get the product experience to great, then you sand down rough edges in the onboarding, then you drive engagement, then monetization or engagement retention, then monetization and virality. So we're still in the early innings of that. So I think making progress on all fronts and, and yeah, this year we'll, continue to open the doors wider and wider to Dash as we scale it up.

Really helpful. Thank you so much.

Thank you. Our next question will come from Steve Enders from Citi. Your line is open.

Thanks for taking the questions here. I guess maybe just to start, I think it'd be good to get a little more clarity on the, you know, packaging and pricing changes that you have been working on and trying to convert over the base. I guess, what were the learnings coming out of that? And I guess if you think about changes moving forward and, you know, trying to build on those learnings, like, what does that, I guess, kind of look like through Calendar 24 here? Sure.

So some of the lessons from last year, or we did a big launch in October where we wanted to address one of the biggest gaps in our funnel, which is that we have all these products, it's just that customers, the majority of our customers are not aware that we do more than storage. And we believe a big reason for that is that in many cases we haven't promoted the products to our users or integrated those experiences as seamlessly as as we could, and when you look at Sign and DocSend, those started as separate companies, and we brought them in via acquisition, and we're doing the rest of the work to integrate them. So in October, we launched a redesigned website where we could start a lot of these document workflows from the new experience. We launched new bundles that include the workflow products as well as FSS, And then what we found is we made a lot of changes and then a lot of metrics changed. And it was a little difficult to isolate some of the variables. And a lot of the changes were favorable. So, for example, we saw more or like significantly elevated attachment to multiple products. But some changes were negative. So, for example, as the default SKUs were more expensive, we saw more a decrease in new subscriptions on our team's SKUs. And then there were some other optimizations we were doing around onboarding where we, for example, we stopped promoting the desktop client as heavily to reduce the number of steps, but then that had a negative impact on engagement as customers were going into their second through sixth months or things like that. So it was affecting the retention curves. So part of what we're doing is backing up a little bit and testing and iterating our way back into making a lot of the same changes, but making sure that we know exactly where the deltas are coming from. So we're stepping back and taking a more iterative approach to preserve as many of the good changes as we can and edit out the ones that were less promising. But for sure, we continue to focus on building awareness and driving adoption of multiple products, whether that's our document workflow products or newer products like Dropbox Replay, which is around video collaboration, and Dropbox Dash, which is around AI-powered universal search.

Okay, perfect.

Appreciate the context around some of those changes. And then maybe just on the macro side of it, it seems like most of the challenges were more related to the business and the team side. I just want to clarify if there was kind of any impact more on the consumer front as well. And then, you know, for the public funnel activity, it seemed like that slowed down a little bit. How has that kind of trended so far in 24 in the first half of the quarter here?

Sure. I mean, I'd say overall it's been pretty stable. I think – I don't think the headwinds we saw in Q4 are of a different kind than we were seeing in prior quarters here. It's broadly things, you know, when you look at the Teams business, it's mostly driven by customers becoming more price sensitive in general. Or, you know, something we see often is, we saw a lot last year, was as companies or, you know, especially tech companies made headcount reductions of their own, then that means fewer SaaS licenses. And so Dropbox is affected by that. And then we've seen more broadly with our document workflow businesses, you look at like the e-signature category, or things like DocSend. There's a big acceleration during COVID and then a bit of a pullback. So things like e-signature were sector-wide. And then DocSend focuses on the fundraising and kind of startup part of the ecosystem. And in a world where VCs are doing a lot less investing or there's less IPO activity, things like that, then DocSend's business has been impacted by that. So there's a lot we're doing in response. Again, like integrating the experiences to make it a lot easier to get up and running on these other products via Dropbox or via the Dropbox UI and through things like the redesign we did in October help and then with DocSend expanding to new audiences and use cases. So for example, we've been working towards, we've had a lot of good early signal on a virtual data room offering in DocSend, and we'll be rolling that out to GA later this year. So I'd say there wasn't a lot of change in the shape of the curves. It was more the carrying forward of similar trends. And then we also see in Q4 that there tends to be seasonality in both, or it tends to be a lighter quarter for both FSS and Doc workflow products, especially FormSwift, for different reasons.

Then Steve real quick this is TIM, I believe you asked about top of funnel activity in the first part of this year so far have not seen any material changes so that's that's all in line with our guidance so that's been factored in and we see less of the seasonality effect in Q1.

Thank you.

Our next question will come from Michael Funk from Bank of America. Your line is open.

Thank you for the questions. A couple if I could. On the call, you mentioned seat rationalization is one of the factors that you've been seeing the last 12 months or so, specifically software companies. We did see a notable increase in reps across software since the beginning of the year. Can you comment on How much of the most recent reductions are factored into your forecast for the year? And if we don't draw a direct correlation between those reductions that customers and the seek rationalization.

Sure.

So we do factor in what we're seeing across the industry, particularly in that tech vertical as far as layoffs that we're seeing there into our guidance. So that's certainly been contemplated and maybe just to provide a bit more color. We don't formally guide to paying users, but I do expect that we will still add paying users in 2024. I do expect our total additions this year to be less than last year. Again, largely due to the de-emphasis of our family plan. And there may be some quarters where we lose paying users, depending on things like the state of the economy, potential turn of larger customers and the timing of our initiatives. But again, we still expect to add paying users this year.

Okay. And then just on the share repurchase plan and the guidance for the share count for the year, trying to run some back-and-forth math here, does that roughly imply a similar cadence to share repurchase in 24 to what we saw in 2023 absolute dollars?

Yeah, I'd say no changes in our philosophy. As far as share repurchase programs, still remain very dedicated to that. We continue to expect to allocate a significant portion of our annual free cash flow to share repurchases with the intention of reducing our share count and maybe to provide some color on how it is structured. Our buyback program buys more shares at lower price points and less shares at higher price points. Again, all reflected in our full year share count guidance.

Great. Thank you so much for the questions.

Thank you. And our next question will come from Pat Walravens from Citizens JMP. Your line is open.

Oh, great. Thank you. I mean, Drew, very big picture. How happy were you with how this business executed in Q4?

So, I mean, I was... happy to get things like Dash to open beta and I was happy with the improvement to a lot of the customer experience and product quality with things like our web redesign. And I was unhappy with the overall results and the fact that some of the upside we had been projecting didn't fully materialize and we have to kind of go back and take a more iterative approach to making sure all the new ingredients or changes we're making um uh that were doubling down on the additive ones and filtering out the ones that aren't working and i think there were there were so many variables that got kind of conflated with making so many changes at once i think that was a lesson um and then some of the lessons around yeah in a more difficult macro environment a lot of our customers are more price sensitive and so when i say we're iterating on pricing and packaging we want to make sure that um as our customers, you used to be able to, many SaaS companies would just be on a regular clip of price increases and customers are fine with that. Now in a world where things are more difficult or there's more budget pressure, different value props are more compelling. So the idea of like, well, I can consolidate spend by, in addition, if I can have not just files I can share, but also be able to have e-signature with Dropbox, or I can do video collaboration, or I can do AI-powered universal search and get that all as part of one subscription, so bundling, things like that. So this is the kind of iteration that we need to do. So overall, I mean, I'm not happy with the headline result, but I think we took away some clear lessons, and we'll be making targeted improvements in response. Okay, thank you. And then...

Tim, did I miss it? Is there sort of a new billion-dollar free cash flow target?

Yeah, let me walk you through that, Pat. So, as a reminder, last quarter we did adjust our free cash flow target by the amount of the R&D tax legislation, which we now estimate to be $30 million, effectively taking our billion-dollar target to a revised target of $970 million. Our guidance of 910 to 950 falls below that target. And that's primarily driven by slower billings growth, incremental effects since we first set the target, and our investments in Dash. Now, while we could withhold investments in our long-term initiatives to meet the target, that would be a short-sighted approach. So that's where this guidance reflects our continued investment in the long-term health of the business. And again, we still have time to outperform that guidance throughout the year and via product execution or identifying efficiencies within the business.

Okay, thank you. Thank you. And as a reminder, to ask a question, please press star 1 1. One moment for our next question. And our next question will come from Richard Hilliker from UBS. Your line is open.

Hi, guys.

Thanks for taking my question. My question is on the R&D line. So I appreciate the exciting opportunity ahead, particularly with Dash and AI. But I guess what I'm wondering is, can you help me understand why we couldn't potentially see more leverage on this R&D line while still investing in AI and these other exciting opportunities? And then I have a follow-up. Thanks.

Sure, I'll start to obviously feel free to jump in.

So R&D increased slightly to 25% of revenue. That's primarily due to hiring for our longer term growth initiatives such as Dash. On that side, these engineers with an AI background typically do command premium compensation and are located in higher cost locations such as the Bay Area and Seattle. So certainly want to make sure that we're focused on investing in these long term initiatives. And that we're funding them at a proper rate, so certainly contemplates an investment on that front. And then maybe just to provide some more color on our overall operating margins, that's between 32 and 32.5%. At the highest level, what we're doing across the business, we will be driving increased efficiencies within our core file sync and share and document workflow businesses. Again, while concurrently investing in long-term growth initiatives such as DASH, We're also going to be investing in marketing to drive product and brand awareness, including our partnership with McLaren Formula One Racing that Drew alluded to. And the guidance does preserve some flexibility to invest across the business to drive long-term growth.

Yep. And I would just add that it's a balancing act. I mean, we certainly care about margins. We certainly care about efficiency. And we also don't want to miss these like once a decade or once a generation platform shifts. I mean, you look at The move to mobile and cloud made Dropbox 1.0 possible to begin with. And all the emergence of AI is going to make Dropbox 2.0 possible. And ultimately, I think it's going to be a much larger opportunity, so we don't want to miss that. But that's like the tension we're navigating. I mean, fortunately, we're able to do a lot of these investments within the general envelope that we've provided So I don't expect there to be like massively different shaped curves. And I think another thing is we've also been reallocating our resources away from less efficient or less promising areas and more towards things like AI and Dash. So that's a little bit harder to see. It was just the aggregate R&D line.

Okay, thanks. And then Tim, maybe one last one for you here. I was curious, I think you mentioned that um finance lease would would jump up to about seven percent of revenue and i think that's from right around five percent seems like kind of a big jump maybe wondering if you could give us any other color to help us understand that change thanks so much yep sure good question so we are seeing an increase in our finance lease additions this year that's due to two reasons first we are nearing a hardware refresh cycle for equipment that's reaching the end of its life

Where we did have a similar refresh in 2019 2020 and then additionally we are supporting one time quota grants to customers on our advanced plan. who are using an excess amount of storage so we've grandfathered some of these customers customers in, and so we need to support those customers so that's partly what's driving that additions.

Thank you.

Our next question will come from Mark Murphy from JP Morgan. Your line is open.

Thank you. Do you notice much of a difference in the signals you're seeing from the very, very smallest businesses, which are more sensitive to interest rates and banks extending credit, if you compare that to your relatively mid-sized and larger customers within the mix?

Yeah. Hey, Mark.

I think this is all part of what we're seeing on the macro side, where, as you know, most of our team's plans are in the SMB space, where we do continue to see a challenging demand environment there. Again, as Drew has talked about, some of that is due to heightened price sensitivity, and we've seen that since our price increase in 2022. And again, as Drew's also touched on, some of that also pertinent to SMBs. seeing downsell pressure as teams trim their license counts, following whether that's layoffs or budget cuts, those sorts of things. So our guidance factors in a continuation of these trends.

And I wanted to ask as well, you described this as a unique period. What do you think has to happen through the course of the year if we're going to look back on it as kind of a troughing out period for growth. There's no real price increase as a driver. You're taking some intentional actions, which are minor headwinds. And you had foreshadowed a lot of this coming off the Q3 call. The new products haven't ramped yet. We still have tech companies that are out there doing incremental layoffs. Is it a bit of a perfect storm this year where you know, that kind of alignment of all these factors might be, might be marking a troughing out period.

Yeah. So with last year, we had to make some difficult decisions with layoff, a layoff of our own and, and then kind of weaning ourself off of things that I didn't find sustainable, like, like price increases or inefficient sources of, growth or inefficient marketing spend or sort of overinvestment in areas that weren't going to bear as much fruit and then reallocating a lot of resources towards the future and things like AI and Dash. So I'm hopeful that a lot of the more difficult decisions are behind us and winning this year would look like finishing the swing on that, rotating away from things like price and monetization experiments to areas of the funnel, especially on our team's business, where that have been overlooked. So I mentioned a few of them in my prepared remarks, but things like we see a lot of opportunity to improve the team onboarding experience. There's a lot of friction. A lot of friction I would see as unnecessary, like too many steps or things that are confusing to customers when you actually sit down with customers and watch them go through that process. We've identified plenty. of things that we can do to make that better and make similar improvements to the ones we've made on the individual side of the business where over the years we've been able to really chip away at churn. And as we've improved the user experience on things like sharing, we see more engagement, more sharing, more viral signups, and just focusing more on the fundamental levers of engagement and virality more so than monetization. So I think stabilizing the core business and getting after some of those levers where we've been under-investing around team onboarding, team expansion, sharing in general. And then the other main goal is getting Dash to true product market fit, so getting it to be great product experience, great retention, smooth onboarding, and bridging from individual use cases like search and organizing your stuff to sharing. And a lot of this is the playbook that made Dropbox 1.0 successful, and we're doubling down on a lot of those things. Thank you.

Thank you. And our last question will come from Brent Phil from Jefferies. Your line is now open.

This is Alon Leone on for Brent Phil. Thanks for taking my question. My first question is just at a high level. Was the demand environment better, worse, or in line with what you saw in 3Q? And I have a follow-up after.

Yeah, great question. I'd say it was in line. I have not seen an improvement in macro trends. We've talked a bit about what we saw in our Teams business, which stayed rather consistent. We talked about FormSwift, which sees a seasonal low point. in the fourth quarter and then tends to rebound in the first quarter as we enter tax season. And then we saw consistent pressure across DocSend in our e-signature categories. DocSend in particular continues to see headwinds in the fundraising space. So a lot of consistency in what we have been seeing, and that has all been extrapolated into our guidance for next year as far as a continuation of those trends.

Super helpful. And then the second part of my question is just in terms of the monetization of Dropbox Dash. I know it's still early days, but should we expect it to be embedded in the more premium SKUs of the platform, or would it be priced as a separate SKU? Just like high level, how should we think about it?

Yeah, it'll be both. So Dash will be available as a standalone subscription, and then there will also be different add-on and bundle options over time. And we're still pretty early in terms of signal on monetization. We're focusing on driving adoption right now.

Thanks. Super helpful.

Thank you. And this does conclude today's conference call. Thank you for your participation. You may now disconnect. Everyone, have a wonderful day.