Good afternoon, ladies and gentlemen, thank you for joining Dropbox Third 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. [Operator Instructions] 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 third 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 forecast for our fourth quarter, fiscal year 2024, fiscal year 2025 and our expectations regarding our revenue growth, profitability, operating margin and free cash flow, as well as our expectations regarding our business, assets, products, strategies, technology, employees, users, demand and the macroeconomic environment. These statements are subject to risks and uncertainties that could cause actual results to differ materially. They are also based on assumptions as of today, and we undertake no obligation to update them as a result of new information or future events. Factors and risks that could cause our actual results to differ materially from these forward-looking statements are set forth in today's earnings release and in our quarterly report on Form 10-Q filed with the SEC. We'll also discuss non-GAAP financial measures, which are not prepared in accordance with generally accepted accounting principles. A reconciliation of GAAP and non-GAAP results is provided in our earnings release and on our website at investors.dropbox.com. I will now turn the call over to Dropbox's Co-Founder and CEO, Drew Houston.

Thanks, Peter, and good afternoon, everyone. Welcome to our Q3 2024 earnings call, and I'm here with Tim Regan, our CFO. I'll cover our recent business updates and strategy, and then Tim will walk through our Q3 results and our outlook. Last week, we announced a 20% reduction in our workforce. This was an incredibly difficult decision, and I want to acknowledge all the folks at Dropbox who were impacted, but it was a necessary step to position for our next chapter. As we've discussed over the last year, we're at an inflection point as a company. Our core FSS business has matured and we've been investing in new products to solve new problems and drive growth. But given the challenging environment for our core business, we needed to better align our investments with the opportunities ahead. Beyond the headcount reduction, we also simplified our org structure. We've become too complex and layered over time, which was slowing us down and hurting our execution. So, we designed a flatter and more balanced organization, reducing the number of layers while better aligning our teams around our key priorities. Now, let's talk about where we're headed. Over our first 17 years, we built a large and profitable business, helping hundreds of millions of users secure, organize and share their files, but today's workplace has evolved dramatically. Content is now scattered across dozens of cloud tools and browser tabs, not just files and folders. We're all struggling with the same core problem I started Dropbox to solve, which is spending too much time searching for stuff and trying to stay on top of our work. And the challenges go beyond just finding things. There's no persistent way to organize your cloud content, because when you close your browser, your workspace and all your…

Thank you, Drew. I'll cover our financial highlights from Q3, provide guidance for Q4, and offer some initial thoughts on our outlook for 2025. Starting with our results for the third quarter. Total revenue for Q3 increased 0.9% year-over-year to $639 million, including approximately $800,000 of contribution from our Nira and Reclaim acquisitions. As expected, foreign exchange rates did not materially impact our revenue for the quarter. Total ARR grew to a total of $2.579 billion, up 2.1% year-over-year. On a constant currency basis, growth was 1.4% year-over-year. Our growth in ARR was largely driven by our individual plans across both our Plus and Essentials SKUs. While we continue to strategically prioritize our Teams SKUs and we are seeing progress on Teams engagement, activation and top of funnel metrics, we also continue to face headwinds, including pricing sensitivity that are pressuring our team expansion and down-sell trends. We exited the quarter with 18.24 million paying users, adding approximately 19,000 net new paying users on a sequential basis. I'd note that our paying user count for the quarter includes approximately 23,000 paying users we added in the quarter through our acquisition of Reclaim, which we closed in late July. Nira, a data access governance platform we acquired in May, did not have a material impact on our paying user count for either Q2 or Q3 as we sell just one license per company. Across our FSS and document workflow businesses, we saw sequential additions of paying users for our individual plans led by our Plus and Essentials SKUs. However, these gains were more than offset by down-sell pressure across our Teams plans and FormSwift, consistent with the commentary we offered on last quarter's call. Average revenue per paying user was $139.05 comparing to $138.71 in the year-ago period. On a year-over-year…

Thank you. [Operator Instructions] And our first question comes from Brent Thill of Jefferies. Your line is open.

Thank you. This is Luv Sodha on for Brent Thill. Thank you, Drew, and thank you, Tim, for taking my question. Maybe, Drew, to start out with you, I just wanted to ask, it's great to see the Dash for Business announcement. Could you maybe talk a little bit about how Dash is differentiated from some of the other offerings in the market? I know you noted that it's a competitive market out there. So, just talk a little bit about how Dash is different?

Sure. So, versus other folks in the space, a bunch of advantages. So, one is just product differentiation and we're seeing that with IT in particular, the Protect and Control capability that Dash has is unique and addresses a major pain point that we see most of our customers and prospects experiencing as they want to roll out not just things like Dash or Search, but just AI in general. A lot of admins recognize there's a lot of improperly shared stuff in any given company and there's no good way to have visibility into what's shared across multiple content platforms and there's no way to have universal governance across platforms. And so, Dash gives -- Dash for Business gives admins that capability for the first time and that was ceded from an acquisition of a company called Nira that identified that opportunity. More broadly, beyond -- and there are a number of other dimensions of product differentiation and more you'll see next year, but we have a number of structural advantages too. So, our scale and our distribution are a big advantage. So, we have over 500,000 business accounts and a better part of 20 million subscribers on Dropbox. And so, we have a big home field advantage with our FSS customers who view Dash and organizing your cloud content as a natural extension of taking care of your files. And then, versus some of the other folks like Microsoft or Google or some of the incumbents, Dash is platform-agnostic, designed from the ground up to work across every ecosystem where to date when you look at some of the copilot type offerings, they're often limited to within their own ecosystem. So for example, you don't really see like great Google Slide support in office, for example, but Dash…

Got it. That's super helpful. I just wanted to quickly follow-up on that. So, just it would be helpful if you could frame the monetization opportunity on Dash. And given the Teams customer seems to be a little bit more price sensitive, could you talk a little bit about how much you think this could translate into ARPU monetization? I know it's super early, but any indication would be super helpful. Thank you.

Yeah. So, I mean a couple of things. I mean, the Dash market has some pretty different dynamics than the FSS market. I mean, first is maturity. So, in the competitive landscape and category maturity in FSS, it contributes to some of that price sensitivity and the fact that we're -- in many cases, we're competing against an offering that's bundled for free or at no added cost for the office suite, where you don't have those dynamics with Dash. And then second, we are very excited about the size of this potential market. I mean, it's very rare you meet a customer that doesn't have these challenges around fragmentation and information overload and having trouble finding their stuff at work or the security and governance challenges I talked about with IT. And so, we see, even though we're very proud of the scale that we've built with our FSS business, a couple of billion in revenue, 0.5 million -- more than 0.5 million business accounts. We think the opportunity is even larger with the kinds of unmet needs that Dash addresses. And there's a billion knowledge workers out there none of them have -- virtually none of them have any solution to these problems. And so, it's a greenfield opportunity for us.

Got it. Thank you so much. I'll get back into queue.

Yeah. Sorry, just one more thing. Just on pricing in general, I mean it's pretty early. I mean, we're still iterating, but early signs we expect it to be accretive to ARPU.

Got it. Thank you.

Thank you. Our next question comes from Rishi Jaluria of RBC Capital Markets.

Wonderful. Thanks so much for taking my questions. Maybe I want to ask a dual-pronged one still sticking with Dash. The first part -- and these are both related, but the first part is, maybe help us understand this is a competitive space. You've got well-funded venture-backed companies that are achieving real scale in this. What do you feel uniquely gives Dropbox a right to win, especially at the enterprise level, which is where arguably the biggest TAM in this is? And then the second part to that is, Drew, you're making a really big bet on the future of the company and understand that, right? I mean that's what the history of entrepreneurship is rife with. What -- I guess, number one, what gives you confidence that this opportunity can materialize? And number two, what's kind of the contingency plan or thought process if just the demand for Dash and for these new growth drivers don't materialize the way that you think they will? Thank you.

Sure. So, I think one thing that's different about Dash is its proximity to our core business and then the magnitude of the opportunity. So, I talked a little bit about the magnitude. I mean, we see these challenges around information overload as being universal and we see that a lot of what you do to kind of organize all your cloud content, builds on a strong foundation of first organizing many millions of peoples and companies' files. And so, certainly with our existing FSS customers, when I talk to them, they're all, look -- they are apprehensive about AI for some of the reasons I covered, like what happens to my data, and there's a lot of hype, and there's a lot of concern that which of these products are going to work as advertised or what happens to my data, all these kinds of considerations. And so, there's a lot of enthusiasm or I see when I talk to our customers that there's a lot of enthusiasm about extending the value we provide and they see it as a natural extension. They see Dash as a natural extension of what Dropbox already does, and I think we're all looking for services that we can trust as we adopt all these new AI tools. And then, more broadly, this is -- I mean, the other difference is, I really think about Dash as kind of solving a lot of the same problems I started Dropbox to solve. So, I mean, in the beginning, I started the company because I kept forgetting my thumb drive. But the question I was really asking is like why is it so difficult to find and organize and share and secure my stuff. And in a lot of ways, we're sort of solving the 2024 versions of those same problems, lots of challenges finding, organizing and sharing your cloud content in a world where a lot of your work happens in the browser and there's a lot of new value you can provide that wasn't possible before GenAI came along. So, we see both confirmation and validation from our existing customers. You see the market developing and other folks in this space. Of course, you'd expect that. You see revenues starting to scale. You see lots of investment heading into the space. And so, we think we're arriving right at the right time to capitalize on this. And if things don't work, we'll continue iterating, but we see this as generally a pretty linear evolution of what we do and that builds on our existing strengths.

All right. Really helpful. Thanks, Drew.

Thank you. Our next question comes from Mark Murphy of JPMorgan. Your line is open.

Hi, this is Josefina Ruggieri on for Mark Murphy. Thank you for taking my question. Just with the recent announcement of the headcount reduction, so could you guys talk a little bit more about how you're approaching hiring going forward and kind of team restructuring and how are you -- what steps are you taking to ensure that Dropbox remains agile and efficient while pursuing these long-term initiatives? Thank you.

Sure. Well, I mean, it's a really difficult decision to reduce headcount and do the kind of restructuring we did. And as you would imagine, that's in service of -- or a difficult decision like that is both in service of not having to make this kind of adjustment again and then also to set -- to best position Dropbox for its next act and getting Dash to win. So, some of the more specific differences or changes are as far as how we're approaching hiring. So, I mentioned that this wasn't just a headcount reduction or a cost optimization. This is really a redesigning our organization to be flatter and leaner and more balanced. And it's not just a one-time effort. These are now kind of a permanent way that we operate and having a lot of controls to make sure that the organization's shape and layers and everything stay within bounds as we hire. Now, part of this is also we'll reinvest some of the costs that we cut in Dash, and in particular, as you'd imagine, there's a lot of specialized talent that we need for Dash and for our future products around ML engineers, around deep search expertise, that kind of thing, but I think it's also an indication that we're going to balance all these considerations. We are focused on in growth and investing for growth and capitalizing on the opportunity in front of us, but we'll also be disciplined with our spending in areas of business where we're seeing more category maturity or growth headwinds, then we'll focus more on efficiency and cash generation. So, we'll always be balancing all three factors.

And maybe just to briefly elaborate from a numbers perspective, we're not offering precise guidance at this time, but we do expect '25 non-GAAP operating margin expansion of about 150 basis points compared to 2024. That includes some of the offsets that Drew talked about as far as both annual merit increases as well as the investments we'll be making across both R&D and sales and marketing to scale Dash and some backfilling we'll be doing relative to select positions subsequent to the RIF. And then, a quick reminder, '24 also benefited from a $30 million tailwind due to the extension of the useful life of our data center hardware, where we won't see that tailwind again next year.

Thanks, guys. That's all from me.

Thank you. [Operator Instructions] I'm showing no further questions. I would now like to turn it back to Peter Stabler for closing remarks.

Thank you everyone for joining us today. We look forward to speaking with you next quarter. Have a good day.

This concludes today's conference call. Thank you for participating, and you may now disconnect.