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

Thanks, Peter, and good afternoon, everyone. Welcome to our Q4 2024 earnings call. Joining me today is Tim Regan, our chief financial officer. I'll kick things off with a recap of 2024 followed by a look at our strategy for 2025. Tim will then dive into our Q4 and full-year financial results along with guidance for Q1 and 2025. Let's get started. We closed out the year on a positive note. Fourth quarter revenue and operating income came in modestly ahead of our guidance. Through our share repurchase program, we reduced our diluted share account by 12.5 million shares this quarter, resulting in 23% year-over-year growth 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 year-over-year. As a result, gross additions for Teams SKUs were up 10%…

Thank you, Drew. I'll cover our financial highlights from Q4 and then provide guidance for Q1 and the full-year 2025. Starting with our results for the fourth quarter. Total revenue for Q4 increased 1.4% year-over-year to $644 million. Foreign exchange rates contributed $2 million to revenue in the quarter. Total ARR grew to a total of $2.574 billion, up 2% year-over-year. On a constant currency basis, growth was 1.3% year-over-year. Our year-over-year growth in ARR was largely driven by relative strength in our individual plans. With respect to our Team's 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 downsell, churn, and team expansion activity. For the fourth quarter, ARR declined by approximately $5 million sequentially, due to these Teams' dynamics as well as seasonality from FormSwift. This translated to exiting the quarter with 18.22 million paying users, down approximately 15,000 paying users on a sequential basis. Average revenue per paying 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 purchased intangibles, certain acquisition-related expenses, net gains and losses on our real estate assets, workforce reduction expenses, and net losses on equity investments. Our non-GAAP net income also includes the income tax effect of the aforementioned adjustments. Gross margin was 83.1% for the quarter. As mentioned in previous quarters, the…

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

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

Sure. Great question. 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 green field 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. I mean, we have over half a million business accounts on Dropbox today. We see, you know, 100% of them has 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…

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

Sure. Maybe starting with the latter question. In light of our recent capital raise, we are going to guide to unlevered free cash flow, which we do define as free cash flow excluding the impact of interest payments associated with our term loans that have their related tax benefit. 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. And our next question comes from the line of Steve Enders with Citi.

Okay, great. Thanks for taking the questions here. I guess I just want to 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 1Q versus the back part of the year. So yes, can you just kind of help us think through the factors going in there? Is there some different timing around FormSwift, 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 this, a lot of what you're seeing is also the result of voluntary choices to cut inefficient growth and simplify and strengthen the core business and rotate towards Dash. So when you're seeing us kind of optimize the FormSwift business or cut back on some of these areas, it's less that there's like no opportunity there, it's more just that we feel like the dollars are much better spent on Dash, given the market and just green field nature, or the green field nature of that market and the size and the growth and the opportunity. But as we cut back in some of these areas or as we cut kind of inefficient marketing spend or if we cut back on some of our product or portfolio, you know, that's not costless in the near-term that shows up as headwinds or compounding the growth headwinds you're seeing and you're very mindful of the optics here. But they're the right long-term decisions for the health of the business. We think we can get better returns on those dollars by deploying them towards Dash and in other places.

Yes, and some thoughts maybe on fill-year, and then I'll shift to maybe some quarterization. So if we do normalize for FX and FormSwift, our guidance at the high end of the range implies a decline of roughly 50 basis points, and we continue to see pressure on our teams' business with respect to team expansion, down selling 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 FormSwift represents about half of that decline. And we expect most of this to occur in the first quarter coinciding with the elimination of marketing for FormSwift and so that's what does put pressure on the first-half of the year and you see that flow through with respect to the full-year guidance.

Okay, got it. That's helpful. I guess, you know, within that Team's business and the headwinds that you -- we have seen there, I guess, does it feel like that's at least stabilizing and the downward pressure is at kind of a consistent pace? And then I guess on the other side of it, good to hear, I guess, Dashes 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 have to think about those kind of moving pieces there?

Sure. I mean, I think 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 Teams 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, unlike some of our previous products, we see a lot more overlap 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 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 from Mike. Appreciate the question. Understanding you're still seeing some pricing sensitivity in Teams, I was curious, can you provide some additional color on what you're seeing out there in terms of general macro trends? Obviously there's been some relatively positive data points on SMB and just curious if you've seen any benefit from user behavior or customer behavior during the quarter?

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

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

Got it, thank you very much.

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

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

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 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 a universal search and rolling out AI and 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 doc 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 a functionality that we call Protect and 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 non-compliant. 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 a competitive space. I'm sure there will be more competition in the future. But I think that's just a 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. And our next question comes from the line of Mark Murphy with JP Morgan.

Great. Thanks for taking the question. This is Sonak Kolar from Mark Murphy. Drew, you had discussed in the past exploring adjacent opportunities around AI beyond the core Dash product? Are there any other domains that seem like natural near-term extensions for the AI product portfolio? And maybe perhaps any feedback on how you evaluate that process as it relates to building in-house risk 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. 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 and whenever you open a new tab in your browser, we give you kind of a cockpit for your day that shows you can do search from there for sure, but then also like 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 as 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, okay, I opened up 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 installed 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?

Yes, 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’ve a massive home-sealed advantage fair, 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 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 and we'll share more as we get signal.

Awesome. Thank you very much.

Thank you. Our next question comes from the line of Gilly [Indiscernible] with Goldman Sachs.

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

Sure. So yes, we see this as a really important opportunity and transition. And as I said, a little while ago in my prepared remarks, we see the opportunity to transform our core business into a launch pad for Dash. 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 SaaS 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 times 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 deep product integrations to pricing and packaging and bundling. But 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.

Yes, 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 versus full platform? Has the review of FormSwift turned up any additional changes that you might want to undertake in the organization?

Sure. And 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. Our 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, of 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 as the big opportunity where we're focused.

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

Sure, so our math, if we do normalize for FX and Forum Swift, 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-sale 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's date of that product, it will take time to build up the ARR and see it flow through to revenue. So those are some of the factors that have gone into the guide, but again, no change to our overall philosophy when it comes to guidance.

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

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

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.