Dropbox, Inc.

Good afternoon,

ladies and gentlemen. Thank you for joining Dropbox's Fourth Quarter 2024 earnings conference call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. To ask a question during the session, you will need to press star one one 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 Peter Stabler,

head of investor relations. Thank you. Good afternoon and welcome to Dropbox's

Fourth Quarter 2024 earnings call. Before we get started, I'd like to remind you that our remarks today will include forward-looking statements, such as our financial guidance and expectations, including our long-term objectives and forecasts for our first quarter in fiscal year 2025, and our expectations regarding our revenue growth, profitability, operating margin, and unlevered free cashflow, as well as our expectations regarding our business, assets, products, strategies, technology, employees, users, demand, and the macroeconomic environment. These statements are subject to risks and uncertainties that could cause actual results to differ materially. They are also based on assumptions as of today, and we undertake no obligation to update them as a result of new information or future events. Factors and risks that could cause our actual results to differ materially from these forward-looking statements are set forth in today's earnings release and in our annual report on form 10K, filed with the SEC. We'll also discuss non-GAAP financial measures, which are not prepared in accordance with generally accepted accounting principles. Reconciliation of GAAP and non-GAAP results is provided in our earnings release and on our website at .dropbox.com. I will now turn the call over to Dropbox's co-founder and CEO, Drew Houston.

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

Thank you, Drew.

I'll cover our financial highlights from Q4 and then provide guidance for Q1 in the full year 2025, starting with our results for the fourth quarter. Total revenue for Q4 increased .4% year over year to $644 million. Foreign exchange rates contributed $2 million to revenue in the quarter. Total ARR grew to a total of $2.574 billion, up 2% year over year. On a constant currency basis, growth was .3% year over year. Our year over year growth in ARR was largely driven by relative strength in our individual plans. With respect to our teams plans, we continue to see year over year increases in sharing, signups, and user activation. However, these top of funnel improvements and the resulting growth in gross new ARR that Drew alluded to continue to be offset by pressure on down sell, turn, and team expansion activity. For the fourth quarter, ARR declined by approximately $5 million sequentially due to these teams dynamics as well as seasonality from forms with. This translated to exiting the quarter with 18.22 million paying users, down approximately 15,000 paying users on a sequential basis. Average revenue per paying users was $140.06, as compared to $139.05 in the prior quarter. The quarter's sequential growth was driven primarily by the increasing mix shift to our higher priced essentials individual SKU, FX tailwinds, and a slight mix shift from annual to monthly plans. Before we continue with further discussion of our P&L, I would like to note that unless otherwise indicated, all income statement figures mentioned are non-GAAP and exclude stock-based compensation, amortization of purchase intangibles, certain acquisition related expenses, net gains and losses on our real estate assets, workforce reduction expenses, and net losses on equity investments. Our non-GAAP net income also includes the income tax effect of the aforementioned adjustments. Gross margin was .1% for the quarter. As mentioned in previous quarters, the primary driver of the -over-year increase in gross margin was an increase in the useful life of our servers from four to five years, effective January 1st of 2024. This change resulted in approximately $4 million of benefit to gross profit in the fourth quarter. For the full year, we experienced the benefit to gross profit of approximately $30 million. Operating margin was .9%

ahead

of our guidance of 36% and up 470 basis points from the year ago period. Compared to the year ago period, operating margin benefited from lower operating expenses following our reduction in force and lower cost of sales from the aforementioned change in useful life of our servers. Net income for the fourth quarter was $223 million of 30% -over-year driven by lower operating expenses following our reduction in force as well as the release of certain tax reserves. Deluded EPS for the fourth quarter was 73 cents based on 307 million diluted weighted average shares outstanding compared to 50 cents in the year ago quarter representing a 46% -over-year increase. Moving on to our cash flow and balance sheet. We ended the quarter with cash and short-term investments of $1.6 billion. Cash flow from operations was $214 million, an increase of 7% versus the year ago period. This includes $52 million of severance and benefits payments made related to our reduction in force. Capital expenditures in the quarter totaled $3 million. This resulted in quarterly free cash flow of $211 million compared to $190 billion in Q4 of 2023. Free cash flow per share for the quarter was 69 cents representing a 24% -over-year increase. In the quarter, we also added $51 million to our finance leases for data center equipment as we continue to invest in refreshing our data centers. With respect to our balance sheet, as a reminder, in December, we entered into a secured five-year term loan of up to $2 billion consisting of an initial $1 billion term loan and a delayed drop feature that provides us optionality to borrow another $1 billion in the future. This new loan bears interest at SOFR plus .75% on the drawn amount and a 1% interest rate on the undrawn amount. As part of this capital raise, we also terminated our $500 million revolver. In addition and concurrent with this capital raise, our board authorized a new $1.2 billion share repurchase program. Collectively, these actions fortify our balance sheet and enable us to invest in our growth initiatives and to allocate capital towards reducing our share accounts. To this effect, in the fourth quarter, we repurchased approximately 12.5 million shares, spending approximately $350 million. As of the end of the fourth quarter, we had approximately $1.4 billion remaining under our existing share repurchase authorizations. In addition to the term loan, we continue to carry $1.4 billion of 0% coupon convertible notes, split equally across two tranches maturing in March of 2026 and 2028. We are actively considering our options as we approach the 2026 maturity, but have no further news to share today. I'll now offer our updated outlook for Q1 and the full year 2025. However, I will first offer a few updates since we shared early thinking on our 2025 expectations during our November earnings call. First, during our November earnings call, we noted that we were undergoing a strategic review of our options with respect to FormSwift, including a potential sale. This decision stemmed from the objectives underlying our RIF as we were aiming to direct our company focus towards our most material and strategic initiatives. We have since completed our assessment and have concluded that the profit maximizing outcome is to continue our ownership of FormSwift while concurrently significantly reducing our headcount and eliminating our marketing investment in that business. We expect that this approach will thereby serve as a headwind to revenue growth over the next few years, though it will also serve as a tailwind to free cash flow. Second, the US dollar has meaningfully strengthened since we shared our early thinking on 2025, impacting both our revenue and free cash flow expectations for 2025. And third, in light of our recent capital raise, we will begin to guide to unlevered free cash flow, which we define as free cash flow excluding the impact of interest payments associated with our term loan, net of their associated tax benefit. While we will still report free cash flow as we have previously, we will guide to unlevered free cash flow to provide a metric that best aligns with the core operating performance of our business. Given these updates for the first quarter of 2025, we expect revenue to be in the range of $618 to $621 million. We are expecting a currency headwind of approximately $3 million. On a constant currency revenue basis, we expect revenue to be in the range of $621 to $624 million. We expect Form Swift to serve as a roughly 80 basis point headwind to revenue as a result of the shift in our strategic direction. I'd also note that Q1 2025 has one less day versus Q1 2024. And consequently, we recognize one less day of revenue this Q1 relative to the year ago quarter. We expect our non-GAAP operating margin to be approximately 38.5%. The shift in strategic direction for Form Swift is factoring into the strong margins for Q1, given that we will be eliminating marketing funding for Form Swift, which was historically weighted towards the first quarter. Finally, we expect diluted weighted average shares outstanding to be in the range of 299 to 304 million shares based on our 30-day trailing average share price. For the full year 2025, we expect revenue to be in the range of 2.465 to $2.480 billion. We are expecting a currency headwind of approximately $18 million or roughly 70 basis points. On a constant currency revenue basis, we expect revenue to be in the range of 2.483 to $2.498 billion. We expect Form Swift to serve as a roughly 150 basis point headwind to revenue for the full year. We expect gross margin to be approximately 82%. We expect non-GAAP operating margin to be in the range of 37.5 to 38%. We expect unlevered free cashflow to be at or above $940 million. This unlevered free cashflow guidance is inclusive of a few one-time items totaling $47 million. The first is a $36 million payment that we made in January for the third and final tranche of our San Francisco lease buyout that we executed in 2023. The second is $11 million for severance, employee benefits, and related costs associated with our Q4 reduction in force. We expect CapEx to be between $25 to $30 million for the full year and additions to finance lease lines to be approximately 6% of revenue. As related to the aforementioned term loans, we expect cash interest expenses to be $1.5 million for severance net of tax benefits of approximately $90 million. Finally, we expect diluted weighted average shares outstanding to be in the range of 283 to 288 million shares. I'll now share some additional perspectives on this guidance for 2025. Starting with revenue, as mentioned, our guidance factors in headwinds from reducing our headcount and marketing investments in FormSwift as well as FX headwinds. This guidance also contemplates the ongoing dynamics of our teams business that I mentioned earlier. Consistent with our historical approach, our guidance reflects what we have a high degree of visibility into today, where we have not yet seen a meaningful change in these teams trends. In addition, while we are excited about the long-term opportunities for Dash and are encouraged by the early progress on our sales efforts, our guidance does not include a material contribution from Dash given the nation state of this product. With respect to paying users, we expect paying users in 2025 to decline by roughly .5% to 300,000 users with our reduced investment in FormSwift driving about half of this decline. We expect the remaining half of paying user pressure to stem from a reduced outbound sales force subsequent to our risk, as well as to a lesser extent, some continued pressure on self-serve teams. We expect roughly half of the full year's decline to occur in Q1 coinciding with the elimination of our marketing investment in FormSwift. Moving on to operating margins, where we are guiding to a range of 37.5 to 38% this year. The driver of this -over-year margin expansion is our reduction in force. This benefit, however, will be partially offset by two main factors. First, 2024 gross margin benefited from a $30 million tailwind due to the extension of the useful life of our data center hardware, where we will not see this tailwind in 2025. Second, we will also be investing across both R&D and sales and marketing to scale Dash and backfilling select positions impacted by our risk. For free cash flow, we expect unlevered free cash flow to be at or above $940 million. This is slightly below the early thinking we shared in November, given that FX has deteriorated by more than $30 million since that time as a result of the strengthening of the US dollar. However, this is partly offset by gains from our decision to reduce our investments in FormSwift. Lastly, we expect our weighted average shares outstanding to decrease to approximately 283 to 288 million shares as we remain committed to reducing our share count over time via our share repurchase program. In closing, we are positioning our core file-sickage share and document workflow business lines for increased efficiency as we continue to drive higher levels of operating margins and free cash flow from these areas. We are then leveraging this profitability and the strength of our balance sheet to reduce our share count, thereby driving meaningful growth in free cash flow per share. Concurrently, we are investing in our future vectors of growth, most notably Dash, where we see a large long-term opportunity. While it will take time for these efforts to translate to revenue growth, we believe that these decisions will culminate in creating long-term value for our shareholders. With that, operator, please open the line for questions.

Certainly, as a reminder, to ask a question, please press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. And we ask that participants limit themselves to one question and one follow-up. Our first question comes from the line of Rishi Jalluriya with RBC Capital Markets.

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

Sure, great question. So as far as first, what gives us confidence that so far in uptake and usage and just as far as what makes us confident that it can drive growth over the next few years? I mean, first it starts with the market. I mean, the more we've been in the space, the more it's clear that this is a universal knowledge worker problem, like everybody struggles with having too much stuff on too many apps and too many tabs open, and then that translates to a big market pretty much any way you look at it. I mean, IDC says it's an $8 billion market today doubling over the next few years, and it's a big market, it's a greenfield market, so there's not really great solutions to this for a lot of customers, or most customers are not aware that this is a solvable problem, so we're in the first inning. And then with respect to Dropbox and the right to win, our customers and prospects understand that this is a natural evolution of what we do, and we have a lot of advantages. So we have over half a million business accounts on Dropbox today, we see 100% of them as good prospects for Dash, and it's a natural evolution to go from organizing people's files to organizing their cloud content. And so the progression makes a lot of sense, and we believe that in theory, and then we've been validating that, that's become a lot clearer and more validated since launch. And so the signals we've been paying attention to since launch are first, we exceeded our internal sales targets in Q4, we're growing pipeline, and have a lot of positive customer reception so far, it's very early, but then we're seeing the key value props around universal search, and a lot of the security and content governance features with our protecting control functionality really resonate with customers. We also mentioned about competition generally, and the way we see it is there are gonna be, there's certainly startups in the space, and our advantages there are pretty clear, like our distribution and technical scale and infrastructure and the investments we're able to make and leverage, a lot of which we built in the first chapter of Dropbox are also relevant to this problem. And again, like not starting from scratch, having over half a million business accounts, and then also having a lot of advantages in the product experience itself with protecting control and a number of other things that are coming this year. And then the future, I'm sure we'll compete with the incumbents or the platform companies, but compared to them, the fact that Dropbox and Dash are platform agnostic is really important. So most incumbents today are focusing, if you look at their AI products in the office suites, I mean, most of them revolve around integrating the stuff within their own ecosystem, but not across ecosystems. So we think that's a big opportunity. And then lastly, I think for all of our customers and prospects, our trust and privacy posture and brand is a big advantage. And certainly when you look at some of the bigger companies, I think our users are apprehensive about some of the conflicts there. Like you're entrusting all of your most important data to a company, but if they're also selling you ads, or if they're also training their next foundation model, that's something that all customers are naturally apprehensive about. And so we don't have those kinds of conflicts. We're just here to provide a good service, and we're not doing anything else with your data other than providing you the service. So these are all really important points, and we're really excited about the early progress.

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

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

Got it, thank you so much. Thank you.

Our next question comes from the line of Steve Enders with Citi.

Okay, great, thanks for taking the questions here. I guess I just wanna ask a little bit more on kind of the growth outlook, and I know you gave a good breakdown for the puts and takes there, but just thinking through kind of the pace of business through the year and some of the incremental growth headwinds that seem like that they're building throughout the year, at least going from the, I think a little bit better growth rate in one queue versus the back part of the year. So yeah, can you just kind of help us like think through the factors going in there? Is there some different timing around form Swift, or is it just kind of like the build of the user decline kind of throughout the year that's impacting that?

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

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

Okay, gotcha. That's helpful. So I guess, you know, within that team's business and the headwinds that you have seen there, I guess, does it feel like that's at least, you know, stabilizing and the downward pressure is that kind of a consistent pace? And then I guess on the other side of it, you know, good to hear, I guess, Dash is at least kind of exceeding expectations there for Q4, but, you know, how should we think about, like, when that maybe, you know, becomes a bigger piece of the business where maybe it's starting to offset some of the declines, is there kind of a good framework that we should should have to think about those kind of moving pieces there?

Sure, I mean, I think, you know, all this is netted out in our guidance, I'd say, but directionally we see, we continue to see, I think it's a few different parts of how we reaccelerate growth. So there's continued optimization opportunity in the team's business. As I was sharing earlier, there's a number of areas across the funnel ranging from onboarding success to team expansion to pricing optimizations to just turn improvements where we can continue to, or where we can offset some of the headwinds we've been seeing. We're obviously very excited about Dash's potential and growth, and as we have more signal there, we'll share it, but it's a little too early to give kind of timing as far as when exactly this will all net out. And the third opportunity is turning our core business into a launch pad for Dash. So we see, you know, unlike some of our previous products, we see a lot more overlap in between our core business and Dash in terms of this being a natural evolution of what we already do for our customers. And so we see, you know, the vast majority of our FSS subscribers as being good prospects for Dash, and we also see Dash as being relevant to a whole new generation of knowledge workers whose workflows maybe don't revolve around files as much as they used to. So those are the major parts of how we'll drive growth, and we'll continue to refresh how these all net out in our guidance and provide more signal on the different parts through the year.

Okay, perfect. Thanks for taking the questions.

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

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

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

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

Got it. Thank you very much. Thank you. Our next question comes from the line of Patrick Walreivans with Citizens Bank.

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

Sure. So we certainly track glean closely, as you'd imagine. We believe we have a number of advantages. I mean, first is just our existing customer base. Since as I've been saying, we've got more than half a million business accounts, so we're not starting from scratch here. And we're going to be able to leverage a lot of the assets that we've built in our first chapter from our technical infrastructure, our privacy and trust brand and many other things. When we look at the product, we see a lot of customers are apprehensive about security and apprehensive about security in the context of a startup, giving all that information to a startup. And then at a more basic level, one challenge that every company has when adopting AI is rolling it out safely. And we find that a lot of customers understand quite well that if you give universal search and rolling out AI in your company can have a lot of productivity benefits. But it can also these tools can also surface a lot of improperly shared content. And so, you know, before giving everybody all this X-ray vision to find that compensation dock that should never have been shared, a lot of customers and prospects want an opportunity to really identify all that content and remediate it. And a linchpin part of the Dash offering is functionality that we call protecting control, which was seeded by an acquisition we made last year of a company called Nira that lets you, it's the only product that lets you identify have global visibility into what's being shared across every major content platform. And then two, identify content that's improperly shared or dangerous or noncompliant, and then three, be able to master mediate and unshare all that content across every platform. And that's been a very manual process for most companies. And Dash gives you the opportunity to bring automation there at a much greater scale than Glean or anyone else. So we see security as a big advantage. And then I'm also really excited about our product roadmap for 2025. We think we're going to be able to push the experience forward beyond anyone in a lot of ways. And I think our customers also recognize and broader than our customers recognize again, this is a natural evolution for Dropbox. We started by organizing your files and now we're expanding from files to organizing all your cloud content and providing an intelligence layer on top of that. So we're really excited about the early signal we're seeing. Obviously, it's going to be it's a competitive space. I'm sure there'll be more competition in the future, but I think that's just validation of what we've believed for a long time that this is a universal problem and that it plays well to our strength. Thank you,

Drew. Thank you. Our next question comes from the line of Mark Murphy with JP Morgan.

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

Sure. So there are a number of adjacencies that are natural adjacencies from Dash. I mean, one benefit of Dash is it allows you or companies then link up all the different apps so that we can have this pretty unprecedented 360 degree view of the state of work in your company. And then there's a lot with that foundation. There's a lot you can build on top of that. And this is an area where we'll have more specifics to share over time. But I can say we bought a good example as we bought a company called Reclaim last year that does AI time analytics and optimization. And a lot of what people do or one key feature in Dash in addition to search is we give you a start page where whenever you open a new tab in your browser, we give you kind of a cockpit for your day that shows you here you can do search from there for sure. But then also like here are all the different here's all the content and projects I'm working on. Here's my day. Here's my agenda. And we see that as a very extensible starting point for that surface area is being really valuable to be able to build additional experiences on top of that. And so, for example, a lot of customers when they see their agenda and their day all lined up next to everything else they're working on, they have a lot of requests and interests in deepening that functionality or bringing in other things like what are my tasks or my priorities. So and Reclaim is an example of an acquisition, but we've also for years dating back to 2020, we decided to turn Dropbox into a lab for distributed work where we think a lot about, OK, I open my laptop in 2030. What do I see? What's the same? What's going to be different? And we think there's going to be a lot of new categories that emerge and a lot of things that have become possible. Now that work is so much more distributed, we're mostly working out of screens instead of offices, even when you're in the office. And then, of course, there's a lot that changes after the large language model. So that's some early indications of where we're headed. There's a lot of optionality and kind of neighboring spaces and adjacencies with Dash and we'll have a lot more to share this year.

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

Yeah, so we're both both tracks are really important, both reaching existing FSS users and then unlocking a much larger TAM of folks who may not be using FSS from Dropbox today. And I'd say, to your point, they're going to have slightly different trajectories and different ceilings. We certainly observe that existing FSS customers, we have massive home field adventures there, pretty short sales cycles. We already have an existing relationship. I think we're able to compress a lot of that timeline. And so that's what we've already observed, is that piece is working. And then we're also standing up a big effort to reach net new customers and larger customers because we see that often the larger the company, the bigger pain points around content and search and AI. So we'll be pursuing both, again, they'll have slightly different trajectories. The newer customers may have a longer sales cycle, but they might also be higher ACVs and higher ARPU. So this, but both tracks are important. We'll share more as we get signal.

Awesome.

Thank you very much. Thank you. Our next question comes from the line of Gilly Neftavillage with Goldman Sachs.

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

Sure. So yeah, we see this as a really important opportunity and transition. And as I said, a little while ago in my prepared remarks, we see big opportunity to transform our core business into a launch pad for dash. And we think there are a lot of parallels between what we're doing and a lot of the successful kind of generational transitions that you've seen in SAS and consumer internet. So I think things like Creative Cloud and Adobe are a good example. I mean, I think one generation of users downloaded Photoshop onto their computers and bought it as package software. And then as they shifted to the cloud, they modernized the product and then it continued to be relevant to the next generation. And these platform transitions are difficult, but pretty common. I think Netflix is another example we think about a lot where, you know, I think you could have looked at their DVD mailing business and drawn conclusions about kind of its limits. But that audience ended up being really it went from what one might have seen as a liability to an asset as having that initial audience helped them bootstrap a victory in the streaming wars. And I think there are many great things about that transition, but certainly one of them was that by modernizing the product and shifting to streaming, they're both able to bring their existing their initial user base along. But then they unlocked a tam that was 10 or 100 times larger than DVD mailing could have ever been. And so we're looking at all the mechanics or we're working on all the mechanics of how you do that, ranging from the product integrations to pricing and packaging and bundling. But we see there's a lot we already see there's a lot of synergy and opportunity to bring a lot of the benefits of Dash to our FSS customers, which both improves that experience and then most importantly, it creates a more retentive experience and extends their lifetimes. So this is an area we'll again have more to share in the coming quarters.

Yeah, thank you. It sounds like maybe it's more of like a migration as opposed to that. So maybe that also is impacting the way you might be able to disclose a little bit of Dash contribution. I don't know if that might be the right way of thinking about it. But the second question I actually had was a bit more on the selling motion. How many of your sales reps are single product focused for full platform? Has the review of FormSwift turned up any additional changes that you might want to undertake in the organization?

Sure, just on the migration point, I think it's less coming back to I think it's less I mean, I think with Netflix, you really had people kind of leaving, you know, just like stopped using DVD players are an important nuance here is that files are not going anywhere, certainly for a lot of creative industries and a lot of areas where we're strongest, you know, construction, media, architecture. These are all customers who have big files like files are not going away. So it's more of an additive. It's more of an expansion of the value we provide more than a migration, which I think is just a bit of an important nuance and Dash is something that can build on top of what the value we already provide with FSS. And then the selling motion, I'd say our primary focus is selling Dash. I mean, certainly there's a broader portfolio of products, too, but we see Dash is the big opportunity where we're focused.

Right. Thank you.

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

Hi, thank you for taking my questions. If I listen correctly to your initial remark, you mentioned that Farmswift will contribute 1.5 percentage point to revenue headwind this year. Your full year revenue guy, .3% decline on constant currency basis. So if I were to normalize for Farmswift, that would imply .8% decline in constant currency in terms of revenue. And that is a little bit softer than what you have before back in the previous quarter. So I guess I'm just trying to get a sense of, are you being more conservative on the guidance this time around? Is that a function of incrementally weaker end demand or is that just more for being conservative? Thank you.

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

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

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

That's helpful. Thank you.

Thank you. I'll now hand the call back over to head of investor relations, Peter Stabler, for any closing remarks.

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

This does conclude today's program, and you may now disconnect.