Q4 2023 Dropbox Inc Earnings Call
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Operator: Good afternoon, ladies and gentlemen. Thank you for joining Dropbox's fourth quarter 2023 earnings conference call. All participants will be in listen-only mode.
Good afternoon, ladies and gentlemen, thank you for joining Dropbox as fourth quarter 2023 earnings conference call.
All participants will be able will be in listen only mode. After the presentation. There will be an opportunity to ask questions to ask a question. During the session you will need to press star one on your telephone.
Operator: After the presentation, there will be an opportunity to ask questions. To ask a question during this 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 would now turn it over to Ishan Gupta of Dropbox's Investor Relations team. Thank you.
As a reminder, this conference call is being recorded and will be available for replay from the Investor Relations section of Dropbox as website. Following this call.
Asia group: I will now turn it over to Asia group, the with Dropbox as Investor Relations team.
Asia group: Okay.
Asia group: Thank you good afternoon, and welcome to Dropbox in fourth quarter 2023 earnings call.
Ishan Gupta: Good afternoon, and welcome to Dropbox's fourth quarter 2023 earnings. 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 the first quarter and fiscal year 2024 and our expectations regarding revenue growth, profitability, operating margin, and free cash flow, as well as our expectations regarding our business, assets, products, strategies, technology, employees, users, demand, and the macroeconomic environment. These statements are subject to risks and uncertainties that could cause actual results to differ materially.
Asia group: Before we get started I would 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, our forecast for the first quarter and fiscal year 2024, and our expectations regarding revenue growth profitability operating margin and free cash flow.
Asia group: Well as our expectations regarding our business asset product strategy technology employees user demand and the macroeconomic environment.
Asia group: These statements are subject to risks and uncertainties that could cause actual results to differ materially.
Ishan Gupta: They are also based on assumptions as of today, and we undertake no obligation to update them as a result of new information or future events. Factors and risks that could cause our actual results to differ materially from those forward-looking statements are set forth in today's earnings release and in our quarterly report on Form 10-Q filed with the SEC. We'll also discuss non-GAAP financial statements, which are not prepared in accordance with generally accepted accounting principles.
Asia group: They're also based on assumptions as of today and we undertake no obligation to update them as a result of new information or future events.
Asia group: Factors and risks that could cause our actual results to differ materially from those forward looking statements are set forth in todays earnings release and in our quarterly report on Form 10-Q filed with the SEC.
Asia group: We will also discuss non-GAAP financial measures, which are not prepared in accordance with generally accepted accounting principles.
Ishan Gupta: A reconciliation of GAAP and non-GAAP results is provided in our earnings release and on our website at investors.dropbox.com. I will now turn the call over to Dropbox's co-founder and chief executive officer, Drew Houston. Thanks, Ishan, and good afternoon, everyone.
Asia group: A reconciliation of GAAP and non-GAAP results is provided in our earnings release and on our website at investors Dropbox Dotcom.
Asia group: I will now turn the call over to Dropbox as co founder and Chief Executive Officer Drew Houston.
Drew Houston: Thank you Sean and good afternoon, everyone welcome to our Q4 2023 earnings call.
Drew Houston: Welcome to our Q4 2023 earnings call. Joining me today is Tim Regan, our Chief Financial Officer. I'll first provide a recap of 2023, share a perspective on our fourth quarter, and then close with an overview of our strategy for 2020. Tim will then go over our financial results for Q4 and fiscal year 2023, as well as provide guidance for Q1 and fiscal 2020. Let's get started.
Drew Houston: Joining me today is Tim <unk>, our Chief Financial Officer.
Drew Houston: I'll first provide a recap of 2023 share perspective on our fourth quarter, and then close with an overview of our strategy for 2024.
Drew Houston: Tim will then go over our financial results for Q4 and fiscal year 2023, as well as provide guidance for Q1 and fiscal 2024.
Speaker Change: Let's get started and.
Drew Houston: In 2023, we had two main business lines. The first was to build AI-powered product experiences centered around organizing all your cloud. And the second was to continue evolving our core FSS offering to provide a seamless product experience for our customers' work. I'm proud of the work our team accomplished.
Speaker Change: In 2023, we had two main business objectives.
Speaker Change: The first was to build AI powered product experiences centered around organizing all your cloud content.
Speaker Change: The second was to continue evolving our core FSS offering to provide a seamless product experience for our customers workflows.
Speaker Change: I'm proud of the work our team accomplished on both of these fronts.
Drew Houston: Starting with building AI-powered product experiences, in 2023, we introduced the first iteration of Dropbox Dash, a standalone universal search product leveraging AI. With more of their work spread across hundreds of tabs in a browser, knowledge workers are spending far too much time just finding what they need to do their work, particularly in this new world of distributed work. DASH connects all of your apps, tools, and content in a single search bar, so it's easy to find everything you need in one place, regardless of where it lives.
Starting with building AI powered product experiences in 2023, we introduced the first iteration of Dropbox Dash Standalone Universal search products, leveraging AI and machine learning.
With more of our work spread across hundreds of tabs in the browser knowledge workers are spending far too much time, just finding what they needed to do their work, particularly in this new world of distributed work.
Speaker Change: That's connects all of your apps tools and content in a single search bar. So it's easy to find everything you need in one place regardless of where it lives.
Drew Houston: And because Dash is powered by machine learning, it learns about you and your priorities the more you use it. In 2023, Dash moved from closed beta to open beta and represents our first major AI-powered product. While still very early, we're gaining valuable insights into the types of customers that are engaging with this product and the features that are generating, For example, we're seeing that our more engaged and existing users on our Dropbox FSS paid plans tend to adopt Dash and retain at a higher. We also made significant progress against our second objective of evolving our core FSS offering to create a better product experience for our customers' work. There were several highlights on this front in 2023, including the continued optimizations we made across the platform to reduce churn on a year over year basis, improve top of funnel, and ultimately ensure we're delivering the best product experience to our, Specifically, we made a number of operational enhancements, including improving the sharing experience across our mobile and web services, optimizing our payment processing to reduce share, and leveraging Google OneTap to streamline and improve the user onboarding.
Speaker Change: And because gas is powered by machine learning and learns about you and your priorities the more you use it.
Speaker Change: In 2023 Dash move from closed beta to open beta and represents our first major AI powered product experience.
Speaker Change: While still very early we're gaining valuable insights into the types of customers that are engaging with this product and the features that are generating the most interest.
Speaker Change: For example, we're seeing that are more engaged in existing users on our Dropbox FSS paid plans tend to adopt dash and retain at a higher rate.
Speaker Change: We also made significant progress against our second objective of evolving our core FSS offering to create a better product experience for our customers workflows.
Speaker Change: There were several highlights on this front in 2023, including the continued optimizations, we made across the platform to reduce churn on a year over year basis improved top of funnel and ultimately ensure we are delivering the best product experience to our users.
Speaker Change: Specifically, we made a number of operational enhancements, including improving the sharing experience across our mobile and web services optimizing our payment processing to reduce churn and leveraging Google one tap to streamline and improve the user onboarding experience.
Speaker Change: Given the size of a registered base. These changes impact millions of users and we believe the progress we made in 2023 will strengthen our foundation heading into 2024.
Speaker Change: Additionally, many of our customers lack of awareness of our capabilities beyond storage often asking us for features that we already have such as the signature our document tracking and analytics.
And we took several steps in the fourth quarter to address this awareness gap and to provide more value to our customers.
Drew Houston: Given the size of our registered base, these changes impact millions of users, and we believe the progress we make in 2023 will strengthen our foundation for that. Additionally, many of our customers lack awareness of our capabilities beyond storage, often asking us for features that we already have, such as signatures or document tracking and analytics. And we took several steps in the fourth quarter to address this awareness gap and to provide more value to our customers. We introduced our new web redesign that makes it easier for our users to get the most out of the Dropbox platform, including the ability to sign and send documents and use our video products. We also introduced the first generation of our fully integrated bundled offerings for our teams.
Speaker Change: We introduced our new web redesign that makes it easier for users to get the most of the dropbox platform, including the ability to sign and send documents and use our video products.
Speaker Change: We also introduced the first generation of our fully integrated bundled offerings for our teams and customers.
Speaker Change: This included updated pricing and packaging with the goal of reflecting the added value of all of our product capabilities.
Speaker Change: I'll share more on the early results of this initiative in a moment.
Speaker Change: Along the way we continue to grow our topline exceeding the guidance. We shared while also achieving record non-GAAP operating margins of over 32% generating more than $750 million of free cash flow and returning $540 million back to shareholders in the form of share repurchases.
Speaker Change: Tim will speak to the financial results in more detail, but I'm proud of our focus on improving the overall profitability profile of our business, while still investing in new initiatives and growth opportunities.
Speaker Change: Well there was a lot to be proud of last year Q4 was a challenging quarter.
Speaker Change: Some of these challenges were expected for.
Speaker Change: For instance, we continue to see the broader economic backdrop the impact both our teams and document workflow businesses as customers are being more cautious with their spend and exhibiting higher levels of price sensitivity.
Drew Houston: This included updated pricing and packaging with the goal of reflecting the added value of all of our product capabilities. I'll share more on the early results of this initiative. Along the way, we continue to grow our top line, exceeding the guidance we shared while also achieving record non-gap operating margins of over 32%, generating more than $750 million of free cash flow, and returning $540 million back to shareholders in the form of shares. Tim will speak to the financial results in more detail, but I'm proud of our focus on improving the overall profitability profile of our business, while still investing in new initiatives and growth. While Some of these challenges were expected.
Speaker Change: This resulted in reduced levels of gross new licenses and upsell activity alongside higher churn and downhill.
Speaker Change: As an example, certain teams customers, particularly those in the tech sector continued to reduce licenses due to spending cuts our head count reductions of their own.
Speaker Change: Formulas and docs and also saw elevated churn in the quarter.
Speaker Change: And as we discussed on our call last quarter, we traditionally see seasonally low activity within our file sync and share of business as well as our forest waste business in the fourth quarter of each year.
Speaker Change: We also anticipated haven't headwinds stemming from strategic business decisions, we made last year, which we believe will benefit us in the long run at the cost of some negative impact in the near term.
Speaker Change: For example, like others have done we sunset unlimited storage in our advanced plan and transitioned to a metered model.
Speaker Change: Found that some customers werent using the plant as intended and we're taking advantage of the policy to do things like mine crypto or use a business account for personal use cases or even resale storage.
Drew Houston: For instance, we continue to see the broader economic backdrop that impacts both our teams and document workflow businesses as customers are being more cautious with their spend and exhibit higher levels of price. This has resulted in reduced levels of gross new licenses and upsell activity alongside higher churn and downtown. As an example, certain teams' customers, particularly those in the tech sector, continue to reduce licenses due to spending cuts or headcount reductions of their own. FormSwift and DocSend also saw elevated churn in the quarter. And, as we discussed on our call last quarter, we traditionally see seasonally low activity within our file sync and share business, as well as our form swift business, in the fourth quarter. We also anticipated headwinds stemming from strategic business decisions we made last year, which we believe will benefit us in the long run at the cost of some negative impact.
Speaker Change: While this change will ultimately translate to increased profitability in the long term.
Speaker Change: <unk> refunds and incremental churn for those customers seeking storage solutions that we no longer offer.
Speaker Change: We also do you emphasize our family plan as we found that some business users will also using it as a loophole to obtain licenses at a lower cost.
Speaker Change: As we noted last quarter this negatively impacted the number of paying users in the quarter.
Speaker Change: We also faced a few additional challenges in Q4, which we're actively addressing.
Speaker Change: In Q4, we ran a number of tests and experiments across our individual plans with new trial flows and other initiatives.
Speaker Change: But they did not generate the uplift we were looking for.
Speaker Change: However, we still see opportunity here and we're iterating on these experiments and incorporating the related learnings into our plans for 2024.
Speaker Change: In addition, the early results on our bundled offerings for teams have been mixed.
Speaker Change: As a reminder, our approach was to offer multi product bundles to new teams customers at a higher price point to reflect the additional value we were adding to the plans.
Speaker Change: Our intention was to migrate existing customers to the new skus at their current price point.
And for now we've held off on migrating all our existing teams customers because while we're seeing an uptick in multi product adoption with new customers as well as in ARPA lift. When these plans. We're also seeing a reduction in top of funnel activity and conversion rates.
Drew Houston: For example, like others have done, we sunset unlimited storage in our advanced plan and transitioned to a metered model. However, we found that some customers weren't using the plan as intended and were taking advantage of the policy to do things like mine crypto or use a business account for personal use cases or even resell stuff. While this change will ultimately translate to increased profitability in the long term, it led to refunds and incremental churn for those customers seeking storage solutions that we no longer offer. We also de-emphasized our family plan as we found that some business users were also using it as a loophole to obtain licenses at a lower cost.
Speaker Change: As a result, we're revisiting our approach.
Speaker Change: In Q1 will keep iterating on our pricing and packaging and we'll continue to improve the in product experience for these customers the.
Speaker Change: At the same time, we will refine our marketing approach and our self serve engine to ensure that we're properly identifying and serving customers that are interested in FSS only skus versus our multi product skus.
Speaker Change: Ultimately, we're still aiming to serve those who want multi product capabilities as we continue to see that customers, who engage with these capabilities converts and they retain and notably higher rates and storage only customers.
Speaker Change: We'll be iterating on the best path forward with a bundle strategy and we'll have more to share in the following quarter.
Speaker Change: All of which brings me to our strategy for 2024.
Speaker Change: As I've been more hands on in the business over the last year I've been refocusing our team and our strategy on the fundamentals of our growth drivers and the quality of our user experience.
Speaker Change: First within our file sync and share business, we still see an opportunity to improve the collaborative experienced the strength of the funnel and drive growth.
Speaker Change: FSS is our largest business line, where small improvements can lead to a meaningful financial and customer impact.
Drew Houston: As we noted last quarter, this negatively impacted the number of paying users in the quarter. We also faced a few additional challenges in Q4, which were actively. In Q4, we ran a number of tests and experiments across our individual plans with new trial flows and other initiatives, but they did not generate the uplifts we were looking for.
Speaker Change: And in recent years, we focused heavily on churn improvements that resulted in better performance for our individual business and we see a similar opportunity with our teams customers.
Speaker Change: For example, many of the actions conducted by our teams users today are predominantly solo actions, such as storing and viewing content as opposed to sharing and commenting on shared content.
Speaker Change: We've seen in the past that as we streamlined and remove friction in our sharing and collaborative workflows like commenting this contributes to more viral growth faster team expansion and higher retention.
Drew Houston: However, we still see opportunity here, and we're iterating on these experiments and incorporating the related learnings into our. In addition, the early results on our bundled offerings for teams have been mixed. As a reminder, our approach was to offer multiproduct bundles to new Teams customers at a higher price point to reflect the additional value we were adding to the plans, while our intention was to migrate existing customers to the new SKUs at their current price points. And for now, we've held off on migrating all our existing Teams customers because while we're seeing an uptick in multiproduct adoption with new customers, as well as an ARPU lift from these plans, we're also seeing a reduction in top of funnel activity and conversion. As a result, we're revisiting our...
Speaker Change: And we see similar opportunities to improve this experience for teams as we have for individuals.
Speaker Change: In addition, we see an opportunity to improve the team admin workflow as well as the admin approval rate for new licenses on the team account remains low.
Speaker Change: Team Edmunds, often struggle with onboarding, new users and by leveraging the admin console for permissions and controls for <unk>.
Speaker Change: Focus on making improvements to make it easier for admins to discover and leverage admin workflows and more easily expand the team deployments.
Speaker Change: As we mentioned earlier, we will also invest in our teams plans by Iterating on our bundled experience to ensure that our customers are aware of and leveraging our multi product capabilities.
Speaker Change: This includes weaving advanced sharing capabilities, such as Doc sand and replay more seamlessly into our product experience given our proven strength in solving sharing for our customers as well as the viral network effects that stem from sharing content.
Speaker Change: As we improve your team experiences, we can grow through license expansion or through introducing customers to our premium functionality.
Drew Houston: In Q1, we'll keep iterating on our pricing and packaging, and we'll continue to improve the end product experience for these customers. At the same time, we'll refine our marketing approach and our self-serve engine to ensure that we're properly identifying and serving customers that are interested in FFS-only SKUs versus our multiproducts. Ultimately, we're still aiming to serve those who want multiproduct capabilities, as we continue to see that customers who engage with these capabilities convert, and they retain at notably higher rates than storage only customers. But we'll be iterating on the best path forward with our bundle strategy, and we'll have more to share in the following. All of which brings me to our strategy for 2024.
Speaker Change: Our second big opportunity is with AI powered product experiences most notably dash.
Speaker Change: Dash is aimed at solving many of the same challenges that we had originally thought with FSS.
Speaker Change: But instead of the problem of file scattered across different devices.
Speaker Change: She's addressing the challenge with cloud based content in your house scattered across hundreds of apps and browser taps.
Speaker Change: We have a long history of solving our customers' problems of organizing and searching and sharing content and we believe our strengths of the scale of our platform customer trusts and interoperability position us well to solve the same problems.
And this is a growing market IDC estimates the search and knowledge discovery software market to be about $7 billion today with the potential to more than triple over the next four years.
Speaker Change: Well continue to invest in dash is our lead AI product.
Speaker Change: We're taking a similar approach is when we launch Dropbox one point now.
Speaker Change: And we're using this beta period with dash to ensure that we're getting up to a high quality and scalability bar before driving adoption.
Drew Houston: As I've been more hands on in the business over the last year, I've been refocusing our team and our strategy on the fundamentals of our growth drivers and the quality of our users. First, within our file sync and share business, we still see an opportunity to improve the collaborative experience to strengthen the funnel and drive growth. FSS is our largest business line where small improvements can lead to a meaningful financial and customer impact. And in recent years, we focused heavily on churn improvements that resulted in better performance for our individual businesses, and we see a similar opportunity with our teams. For example, many of the actions conducted by our team's users today are predominantly solo actions, such as storing and viewing content, as opposed to sharing and commenting on shared content.
Speaker Change: Our primary focus in 2024 is on finding product market fit with our customers.
More specifically, we're going to focus on improving the onboarding activation and retention of users on dash to ensure we're providing the best experience to customers.
Speaker Change: For example, we noticed users found a lot of friction and adding in connecting dashed all their different apps. So we're making the experience of connecting apps during onboarding smoother. So that we can improve activation rates.
Speaker Change: We're also investing in experiences like stacks, improving discover ability and proving sharing this is critical to creating the type of virality that was essential to dropbox as growth in the early years.
Speaker Change: And once we get the quality of the product experience and metrics like retention to where we want them will run a lot of the same playbook that made dropbox successful in the past, including growing the product virally, making big investments in sales and marketing and promoting dash to our existing FSS users.
Drew Houston: We've seen in the past that as we streamline and remove friction in our sharing and collaborative workflows, like commenting, this contributes to more viral growth, faster team expansion, and higher retention. And we see similar opportunities to improve this experience for teams as we have for individuals. In addition, we see an opportunity to improve the team admin workflow as well, as the admin approval rate for new licenses on a team account remains low. Team admins often struggle with onboarding new users, and by leveraging the admin console for permissions and controls, we're focused on making improvements to make it easier for admins to discover and leverage admin workflows so they can more easily expand their teams.
Speaker Change: As I shared earlier, we know our customers are often unaware of our capabilities beyond storage.
Speaker Change: To this end last week, we announced the partnership with Mclaren Formula One team, where Dropbox is becoming an official technology partner.
Speaker Change: As part of this partnership Mclaren will rely on Dropbox to securely share files and collaborate on video review and approvals and our branding will be featured on their cars and team assets.
Speaker Change: This is an important effort to drive awareness of our latest offerings and educate customers and partners about all the ways that dropbox can help teams work more effectively together.
Speaker Change: We have ambitious goals in 2024, and I'm excited to work with our teams to achieve everything we have planned.
Speaker Change: We've also made several strong additions to both our leadership bench as well as our board over the past few months.
Speaker Change: In December Eric Cox joined Us as our chief customer officer, overseeing our go to market teams are.
Speaker Change: It comes to us from Vimeo, where he was CFO and prior to that he spent nearly 20 years at Adobe and a variety of roles across sales marketing and operations.
Drew Houston: As we mentioned earlier, we'll also invest in our team's plans by iterating on our bundles experience to ensure that our customers are aware of and leveraging our multiproduct capability. This includes weaving advanced sharing capabilities such as DocSend and Replay more seamlessly into our product experience, given our proven strengths in solving sharing for our customers, as well as the viral network effects that stem from sharing content. As we improve these team experiences, we can grow through license expansion or through introducing customers to our premium. Our second big opportunity is with AI-powered product experiences, most notably Dash. Dash is aimed at solving many of the same challenges that we had originally solved with FSS. But instead of the problem of files scattered across different devices, Dash is addressing the challenge of cloud-based content and URLs scattered across hundreds of apps and browser tabs.
Speaker Change: We also welcome Dr. Andrew more to our board of directors.
Speaker Change: Andrew is a leading expert in AI machine learning and robotics.
Speaker Change: And he's had a decade long career in academic and technical leadership.
Speaker Change: He was previously VP for the AI Division of Google Cloud and also served as the Dean of Carnegie Mellon University School of computer Science.
Speaker Change: Andrew Technical expertise building AI powered products will offer and valuable perspective, as we invest in AI internally across our product portfolio.
Speaker Change: Both Eric and Andrew will play an important role in the future of Dropbox and I couldn't be more excited to partner with them to achieve our goals for the future.
Speaker Change: In closing 2023 was a year marked by both successes and challenges and looking ahead. We're confident that we have the right team in place to execute against our strategy for 2024.
Speaker Change: This year represents a unique point in our company's evolution. Many of our mature products are seeing slowing growth in newer products like dash are still early in their lifecycle.
Speaker Change: We expect that our new products and initiatives will take time before they start to meaningfully contribute to our topline results. We're excited about the large opportunity we see in front of us.
Speaker Change: As we embark on the next phase of our company's journey I'm personally invested in building the best products, we can for our customers delivering strong results for our shareholders and achieving our mission of designing a more enlightened way of working for all knowledge workers, who use dropbox.
Drew Houston: We have a long history of solving our customers' problems with organizing, searching, and sharing content. And we believe our strengths of the scale of our platform, customer trust, and interoperability position us as well to solve these same problems. And this is a growing market. IDC estimates the search and knowledge discovery software market to be about $7 billion today with the potential to more than triple over the next four years.
Speaker Change: And with that I'll turn it over to Tim to share a recap of our 2023 financial performance as well as our expectations for 2024.
Tim: Thank you drew.
Tim: I'll cover our financial highlights from Q4.
And share guidance for Q1 and fiscal 2024, I'll then offer some context on.
Tim: On the considerations underlying our guidance.
Tim: Starting with the fourth quarter of 2023.
Tim: Total revenue for the fourth quarter increased.
Drew Houston: We'll continue to invest in Dash as our lead AI product, and we're taking a similar approach as when we launched Dropbox 1.0. And we're using this beta period with Dash to ensure that we're getting up to a high quality and scalability bar before driving adoption. Our primary focus in 2024 is on finding product market fit with our customers. More specifically, we're going to focus on improving the onboarding, activation, and retention of users on Dash to ensure we're providing the best experience to customers. For example, we noticed users found a lot of friction in adding and connecting Dash to all their different apps.
Tim: Increased 6% year over year to $635 million.
Beating our guidance range of 602000 $9 million to $632 million.
Tim: Foreign exchange rates provided an approximate $1 million headwind to growth.
Tim: On a constant currency basis revenue grew six 2% year over year.
Tim: Yeah.
Tim: Total <unk> grew to a total of two $5 billion to $3 billion up.
Tim: Up three 8% year over year on a constant currency basis.
Tim: However, on a constant currency basis, <unk> declined by $2 million sequentially.
Tim: As drew mentioned the sequential decline in <unk> was driven by a few factors.
Tim: <unk> business decisions, we intentionally made such as eliminating unlimited storage for advanced plant users, which resulted in incremental churn and.
Tim: And softness in our top of funnel.
Drew Houston: So we're making the experience of connecting apps during onboarding smoother so that we can improve activation. We're also investing in experiences like stacks, improving discoverability, and improving sharing, and this is critical to creating the type of virality that was essential to Dropbox's growth in the early years. And once we get the quality of the product experience and metrics like retention to where we want them, we'll run a lot of the same playbook that made Dropbox successful in the past, including growing the product virally, making big investments in sales and marketing, and promoting Dash to our existing FSS. As we shared earlier, we know our customers are often unaware of our capabilities. To this end, last week we announced a partnership with the McLaren Formula One As part of this partnership, McLaren will rely on Dropbox to securely share files and collaborate on video review and approvals, and our branding will be featured on their cars as well.
Tim: A continued challenging macro economy.
Tim: And the typical seasonality, we see in our business in Q4.
Tim: We exited the quarter with $18.
Tim: One 2 million paying users.
Tim: This reflects a sequential decline of roughly 50000 paying users.
Tim: A number of factors led to this decline.
Tim: Including our decision to reduce the prominence of the family plan on our plans page.
Tim: Macro headwinds facing our team skus.
Tim: Experiments that underperformed impacting or individual skus.
Tim: And finally Q4 tends to be a seasonally low quarter for file sync and share and form Swift in particular.
Tim: Collectively these factors served as headwinds to paying user growth in Q4.
Tim: I'll speak to our paying user expectations for 2024 shortly.
Tim: Finally average revenue per paying user for Q4.
Tim: It was $138 83 up slightly compared to Q3.
Speaker Change: Before we continue with further discussion of our P&L I would like to note that unless otherwise indicated all income statement figures mentioned, our non-GAAP and exclude stock based compensation.
Speaker Change: Amortization of purchased intangibles.
Speaker Change: Acquisition related expenses net gains and losses on our real estate assets and our workforce reduction expenses.
Speaker Change: Our non-GAAP net income also excludes the income tax benefit from the release of evaluation allowance.
Drew Houston: This is an important effort to drive awareness of our latest offerings and educate customers and partners about all the ways that Dropbox can help teams work more effectively. We have ambitious goals for 2024, and I'm excited to work with our teams to achieve them. We've also made several strong additions to both our leadership bench as well as our board over the past. In December, Eric Cox joined us as our chief customer officer, overseeing our go-to-market. Eric comes to us from Vimeo, where he was COO. And prior to that, he spent nearly 20 years at Adobe in a variety of roles across sales, marketing, and operations.
Speaker Change: On deferred tax assets and includes the income tax effects of.
Speaker Change: The aforementioned adjustments.
Speaker Change: Moving to our real estate strategy, where we have been actively seeking sub leases and buyouts of our vacant real estate space.
Speaker Change: Georgia, which is in San Francisco.
Speaker Change: As I mentioned during our last earnings call in Q4, we executed a buyout with our landlord of approximately 40% of our remaining sublease space in San Francisco.
Speaker Change: For $79 million to be paid over three years, beginning with an approximate $28 million payment in the fourth quarter of 2023.
Speaker Change: The remaining payments, resulting from the buyout will occur in Q2 of 2024 and Q1 of 2025.
Speaker Change: Okay.
Speaker Change: Overall, we expect this buyout to drive significant savings in the long term as we will be avoiding over $220 million in aggregate rent payments.
Speaker Change: And common area maintenance fees over the remaining 10 year lease duration.
Drew Houston: We also welcome Dr. Andrew Moore to our board of directors. Andrew's a leading expert in AI, machine learning, and robotics, and he's had a decades-long career in academic and technical leadership. He was previously VP of the AI division of Google Cloud, and also served as the Dean of Carnegie Mellon University's School of Computer Science.
Speaker Change: The result of this buyout was a $159 million gain in Q4 2023.
Speaker Change: The gain represents the reduction to our future lease payments in excess of the sublease income we previously anticipated collecting for this space.
Speaker Change: And as I previously mentioned, we will continue to actively seek sub leases and pursue additional buyouts, where we see favorable returns.
Speaker Change: With that let's continue with the fourth quarter P&L.
Speaker Change: Gross margin was 82, 3% for the quarter up 20 basis points on a year over year basis.
Drew Houston: Andrew's technical expertise building AI-powered products will offer invaluable perspective as we invest in AI internally across our product portfolio. Both Eric and Andrew will play an important role in the future of Dropbox, and I couldn't be more excited to partner with them to achieve our goals. In closing, 2023 was a year marked by both successes and challenges, and looking ahead, we're confident that we have the right team in place to execute against our strategy for 2020. This represents a unique point in our company's evolution. Many of our mature FFS products are seeing slowing growth, and newer products like Dash are still early in their life cycle. While we expect that our new products and initiatives will take time before they start to meaningfully contribute to our top-line results, we're excited about the large opportunity we see ahead.
Speaker Change: Operating margin was 32, 2% up 200 basis points year over year.
Speaker Change: We beat our Q4 operating margin guidance by nearly a point driven by a continued focus on being efficient with our spend across the business.
Speaker Change: I would note that in Q4.
Speaker Change: Both are in person user conference and we invested in product and brand awareness marketing campaigns.
Speaker Change: Which resulted in a sequential decrease in operating margin.
Speaker Change: Net income for the fourth quarter was $171 billion.
Speaker Change: Which is a 21% increase versus the fourth quarter of 2022.
Speaker Change: Driven by operating income growth.
Speaker Change: Diluted EPS was <unk> 50 per share based on 344 million diluted weighted average shares outstanding.
Speaker Change: Which increased compared to <unk> 40 per share based on 354 million diluted weighted average shares outstanding.
Speaker Change: For the fourth quarter of 2022.
Speaker Change: Moving onto our cash balance and cash flow.
Speaker Change: We ended the quarter with cash and short term investments of $1 4 billion.
Cash flow from operations was $200 million in the fourth quarter.
Speaker Change: Capital expenditures were $10 million during the quarter.
Speaker Change: This resulted in quarterly free cash flow of $190 million compared to $182 million.
Speaker Change: In Q4 of 2022.
Drew Houston: As we embark on the next phase of our company's journey, I'm personally invested in building the best products we can for our customers, delivering strong results for our shareholders, and achieving our mission of designing a more enlightened way of working for all knowledge workers who use Dropbox. With that, I'll turn it over to Tim to share a recap of our 2023 financial performance, as well as our expectations. Thank you, Drew.
Speaker Change: I note that free cash flow for 2023 came in lower than our guidance range of $775 million to $785 million.
Speaker Change: Through a reduced level of billings as well as the timing of payments and collections.
Speaker Change: Yeah.
Speaker Change: In the quarter, we also added $51 billion to our finance leases for data center equipment.
Speaker Change: As we mentioned on our last call. We expected this sequential increase in our finance lease lines.
Speaker Change: Given the higher storage costs, we are seeing with users on our advanced plan as we wait for grandfathering periods to expire customers maintaining elevated storage levels.
Tim Regan: I'll cover our financial highlights from Q4, share guidance for Q1 and fiscal 2024, and then offer some context on the considerations underlying our guidance, starting with the fourth quarter of 2023.
Speaker Change: As it related to our share repurchase program in Q4, we repurchased nearly 4 million shares spending approximately $106 million.
Speaker Change: As of the end of the fourth quarter, we had approximately $1 $4 billion remaining under our current repurchase authorization.
Tim Regan: Total revenue for the fourth quarter increased 6% year over year to $635 million, beating our guidance range of $629 to $632 million. Foreign exchange rates provided an approximate $1 million headwind to growth. On a constant currency basis, revenue grew 6.2% year-over-year. Total ARR grew to a total of $2.523 billion, up 3.8% year over year on a constant currency basis. However, on a constant currency basis, ARR declined by $2 million to coin. As Drew mentioned, the sequential decline in ARR was driven by a few factors.
Speaker Change: Our philosophy on share repurchases has not changed.
Speaker Change: We remain committed to returning a significant portion of our free cash flow to shareholders in the form of share repurchases.
Speaker Change: With the intention of reducing our share count.
Speaker Change: I would now like to share our 2020 for first quarter and full year guidance.
Speaker Change: I will also provide some context on the thinking behind this guidance.
Speaker Change: For the first quarter of 2024, we expect revenue to be in the range of 627.
Speaker Change: $630 million.
Speaker Change: We expect a minimal impact from FX this quarter.
Speaker Change: I will note that Q1 2024 has one less day versus Q4 2023.
Speaker Change: We recognized one less day of subscription revenue in Q1 relative to the prior quarter.
Speaker Change: We expect non-GAAP operating margin to be approximately 33%.
Speaker Change: Finally, we expect diluted weighted average shares outstanding to be in the range of 342.
Tim Regan: Including business decisions we intentionally made, such as eliminating unlimited storage for advanced client users, which resulted in incremental churn, softness in our top of funnel, a continued challenging macroeconomy, and the typical seasonality we see in our business in Q4. We exited the quarter with 18.12 million paying users, which reflects a sequential decline of roughly 50,000 paying users. A number of factors led to this decline, including our decision to reduce the prominence of the family plan on our plans, macro headwinds facing our team skew, and experiments that underperformed, impacting our individual SKUs.
Speaker Change: To 347 million shares based on our trailing 30 day average share price.
Speaker Change: For the full year 2024, we expect revenue to be in the range of two five to three five.
Speaker Change: Two 550 billion.
Speaker Change: On a constant currency revenue basis, we expect revenue to be in the range of two five to three two.
Speaker Change: 254, 7 billion equating to a full year currency tailwind of approximately $3 million.
Speaker Change: We expect gross margin to be in the range of 83 to 83, 5%.
We expect non-GAAP operating margin to be in the range of 32%.
Speaker Change: 232, 5%.
Speaker Change: We expect free cash flow to be in the range of $910 million to $950 million.
Speaker Change: I would note that this free cash flow guidance ranges is inclusive of several onetime items totaling $47 million.
Tim Regan: And finally, Q4 tends to be a seasonally low quarter for FileSync and Share and FormSwift. Collectively, these factors served as headwinds to paying user growth in Q4, where I'll speak to our paying user expectations for 2024 shortly. Finally, average revenue per paying user for Q4 was $138.83, up slightly compared to Q3.
Speaker Change: The first is an approximate $30 million headwind as a result of R&D tax legislation slightly lower than the $36 million estimate that we shared last quarter.
Speaker Change: The second is a $15 million payment for the second tranche of the pilot related to our San Francisco headquarters.
Speaker Change: And the third is $2 million in cash outflows for the 2024 installments of acquisition related deal consideration holdback for community.
Tim Regan: 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 expense, net gains and losses on our real estate assets, and our workforce reduction. Our non-GAAP net income also excludes the income tax benefit from the release of a valuation on Deferred Tax Assets and includes the income tax effects of the aforementioned.
Speaker Change: Moving on to capital expenditures, we expect our addition to finance, we find to be approximately 7% of revenue.
Speaker Change: And we expect cash capex to be in the range of 20 million to $30 million in 2024.
Speaker Change: Finally, we expect 2024 diluted weighted average shares outstanding.
Speaker Change: To be in the range of 336 to 341 million shares.
Just on our trailing 30 day average share price.
I'll now share some additional context on the thinking behind our guidance.
Tim Regan: Moving to our real estate strategy, where we have been actively seeking subleases and buyouts of our vacant real estate space, the majority of which is in San Francisco. As I mentioned during our last earnings call, in Q4, we executed a buyout with our landlord of approximately 40% of our remaining sublease space in San Francisco for $79 million to be paid over three years, beginning with an approximate $28 million payment in the fourth quarter of 2020. The remaining payments resulting from the buyout will occur in Q2 of 2024 and Q1 of 2025.
Speaker Change: Starting with revenue as a reminder, we are lapping the benefits of our team's price increase.
Speaker Change: And our acquisition of form Swift and thus, we expected slowing revenue growth rate.
Also consistent with our historical approach our guidance reflects what we have a high degree of visibility into today.
Speaker Change: This includes our current business trends and trajectory as well as the product and growth related initiatives, we have launched to date.
Speaker Change: Notably our guidance does not include any benefit from dash in 2024.
Speaker Change: As drew mentioned our primary focus in 2024 is centered on finding product market fit.
Speaker Change: Diving usage of the product and closely following dashes adoption engagement and retention trends.
Tim Regan: Overall, we expect this buyout to drive significant savings in the long term, as we will be avoiding over $220 million in aggregate rent payment and common area maintenance fees over the remaining 10-year lease duration. The result of this buyout was a $159 million gain in Q4 2020, which again represents a reduction to our future lease payments in excess of the sublease income we previously anticipated.
Speaker Change: Once we have increased certainty the dash is meeting our customers' needs. We will then pursue our monetization strategies. However, this may not be until the latter portion of this year or early next year.
Speaker Change: Similarly, our guidance does not include any benefit from a bundled skus.
Speaker Change: As our teams continue to iterate on the optimal product experience and go to market motion for these plans.
Speaker Change: As we gain more clarity on how we are approaching our bundles rollout to new and existing customers along with signals on.
Speaker Change: On the customer response to our approach we will update our guidance accordingly.
Tim Regan: Page 1 And, as I previously mentioned, we will continue to actively seek subleases and pursue additional buyouts where we see favorable returns. With that said, let's continue with the fourth quarter P&L. Gross margin was 82.3% for the quarter, up 20 basis points on a year-over-year basis, and operating margin was 32.2%, up 200 basis points year over year. We beat our Q4 operating margin guidance by nearly a point given by our continued focus on being efficient with our spend across. I'd note that in Q4, we held both our in-person user conference and we invested in product and brand awareness marketing, which resulted in a sequential decrease in... Net income for the fourth quarter was $171 billion, which is a 21% increase versus the fourth quarter of 2022, driven by operating. Diluted EPS We ended the quarter with cash and short-term investments of $1.4 billion. Cash flow from operations was $200 million in the fourth quarter. Capital expenditures were $10 billion during the.
Speaker Change: As it relates to paying users our guidance contemplates a reduced level of paying user growth relative to 2023.
Speaker Change: And there may be some quarters, where our paying user editions trend negative.
Speaker Change: This is due to the continued headwinds we are facing as well as the de emphasis of the family claim.
Speaker Change: In the nascent stage of our growth initiatives.
Speaker Change: Ultimately, we do expect to add paying users in 2024.
Speaker Change: However at lower levels than prior years.
Speaker Change: As it related to gross margins, we are guiding to 83 to 83, 5%, which is above our long term target.
Speaker Change: Yeah.
Speaker Change: Want to highlight that from the beginning of 2024, we are increasing the useful life of our servers from four to five years.
Speaker Change: Which will apply to asset balances on our balance sheet as of December 31, 2023, as well as future asset purchases.
Speaker Change: As a result, we expect the benefit to our full year gross margins of approximately $30 million.
Speaker Change: For Q1, we expect a benefit of approximately $10 million.
Speaker Change: As it related to operating margins, we are guiding to 32% to 32, 5%.
Speaker Change: This level of operating margins above our long term target and is roughly consistent with our operating margins in 2023.
Speaker Change: This range includes continued investment in our longer term AI and growth related investments such as dash.
Speaker Change: Additionally, we are planning for increased levels of marketing investments, including our new partnership with Mclaren Formula One racing.
Speaker Change: As we aim to drive market awareness of our platform's capabilities.
Speaker Change: Lastly, this guidance preserve some optionality to make strategic investments across the business over the duration of the year.
Speaker Change: We also expect our additions to finance lease lines to increase in 2024 versus prior years. This was primarily due to two factors.
Tim Regan: This resulted in quarterly free cash flow of $190 million compared to $182 million in Q4. I note that free cash flow for 2023 came in lower than our guidance range of $775 to $785 million. Due to a reduced level of billings, as well as the timing of payments, and In the quarter, we also added $51 million to our finance leases for data centers. As we mentioned on our last call, we expected this sequential increase in our financial results given the higher storage costs we are seeing with users on our advanced plan as we wait for grandfathering periods to expire for customers maintaining elevated storage. As related to our share repurchase program, in Q4, we repurchased nearly 4 million shares, spending approximately $106 million. As of the end of the fourth quarter, we had approximately $1.4 billion remaining under our current repurchase authorization.
Speaker Change: The first is the onetime storage quota grants, we are providing to a portion of our customers on the advance plan as we deprecate our previous as much space as you need policy.
Speaker Change: While this requires incremental storage capacity in the near term.
Speaker Change: Our revised plan around storage usage will enable us to have a more profitable SKU.
Speaker Change: Once the onetime extension for these customers has expired.
Speaker Change: Yeah.
Speaker Change: The second factor is it anticipated refresh of some of our data center equipment consistent with past practices.
Speaker Change: As it related to full year free cash flow, we are guiding to a range of $910 million to $950 million.
Speaker Change: This guidance fall short of our long term free cash flow target, which we adjusted during our previous earnings call to be roughly $970 million.
Speaker Change: After taking into account headwinds from R&D tax legislation and related payments.
Speaker Change: And while our guidance range is below this figure I'd note that we have more than doubled our annual free cash flow since we initially set the target.
Speaker Change: While I'm proud of the progress we've made.
Speaker Change: There are several factors driving the shortfall between our guidance and our target.
The most prominent being a reduced level of billings associated with our revenue guidance.
Tim Regan: Our philosophy on Sherry purchases has not changed; we remain committed to returning a significant portion of our free cash flow to shareholders in the form of shares with the intention of reducing our shareholding. I'd now like to share our 2024 first quarter and full year guide, where I will also provide some context on the thinking behind this. For the first quarter of 2024, we expect revenue to be in the range of $627,000. $630 million.
The incremental FX headwinds, we are facing relative to when we first introduced our target.
Speaker Change: As well as the investments, we're making to fuel our future growth in products such as dash.
Speaker Change: While we could scaled back our investments in dash to meet our free cash flow target. We do not believe this would be the right long term decision for the business.
Speaker Change: These investments and Nathan product initiatives, along with decisions such as our San Francisco lease buyout and the changes we made to our advanced plan.
Speaker Change: A short term strain on our financial trajectory. However.
Speaker Change: However are in line with our primary focus on strengthening the company's long term position.
Speaker Change: And while our current level of visibility does fall short of our long term target.
Tim Regan: We expect a minimal impact from FX this quarter. I will note that Q1 2024 has one less day versus Q4 2023, and thus, we recognize one less day of subscription revenue in Q1 relative to the prior quarter. We expect the non-GAAP operating margin to be approximately 33%. Finally, we expect the diluted weighted average shares outstanding to be in the range of 342, million to 347 million shares based on our trailing 30 day average share price.
There is still time to draw closer to our free cash flow target through improved product experiences.
Speaker Change: Through identifying additional efficiencies within our operations during the year.
Speaker Change: In conclusion, we are mindful that we are in a unique period, where our core file sync and share of business is maturing.
Speaker Change: And our new products are in their early stages.
Speaker Change: However, our core file sync and share business is still generating growth in revenue and free cash flow.
Speaker Change: While we also reduce our share count.
Speaker Change: Concurrently we are in an exciting new phase in the evolution of our business as we invest in our future and AI powered areas such as dash to drive long term growth.
Tim Regan: For the full year 2024, we expect revenue to be in the range of $2.535 to $2.550 billion. On a constant currency revenue basis, we expect revenue to be in the range of $2.532 billion to $2.547 billion, equating to a full year currency tailwind of approximately $3 million. We expect gross margin to be in the range of 83 to 83.5%. We expect non-GAP operating margin to be in the range
Speaker Change: We will make progress on both dimensions in 2024 and.
Speaker Change: And we will continue to maintain a disciplined mindset around how we are operating the company to ensure we're not only providing innovative solutions for our customers.
Speaker Change: Creating value for our shareholders.
Speaker Change: And with that.
Speaker Change: I'll turn it over to the operator for questions.
Thank you.
Speaker Change: As a reminder to ask a question. Please press star one on your telephone and wait for your name to be announced.
Speaker Change: Withdraw your question. Please press star one again please.
Speaker Change: Please standby, while we compile the Q&A roster.
Speaker Change: And our first question will come from Rishi <unk> from RBC capital markets. Your line is open.
Tim Regan: We expect free cash flow to be in the range of $910 to $950. However, I note that this free cash flow guidance range is inclusive of several one-time items totaling $47 million. The first is an approximate $30 million headwind as a result of R&D tax legislation, slightly lower than the $36 million estimate that we shared last. Second, is a $15 million payment for the second tranche of the buyout related to our San Francisco operations, And the third is $2 million in cash outflows for the 2024 installments of acquisition-related deal consideration holdbacks. Moving on to capital expenditures. We expect our addition to finance lease lines to be approximately 7% of revenue, and we expect Cash CapEx to be in the range of $20 million to $30 million. Finally, we expect 2024 diluted weighted average shares, at standard, to be in the range of 336.
Rishi: Wonderful Thanks, guys for taking my questions I wanted to start out generally in the past you've talked about.
Rishi: There is maybe some appetite for M&A, especially transformational M&A, given there's kind of a roadmap of wanting to develop new products and capabilities.
Rishi: See around generative AI, how are you viewing the potential for M&A to just accelerate your roadmap and kind of broadening that platform.
From the SaaS kind of a more jet AI enabled company and then I've got a quick follow up.
Rishi: Sure.
Rishi: <unk> still see big opportunity for M&A to accelerate our road map.
Rishi:
And actually the dash Starbucks to Ash is a great example of that.
Rishi: Seeded by an acquisition of a company called <unk>, we did.
Rishi: And another benefit is that unlike the first few years after we Republic, one when valuations are really frothy.
Tim Regan: $341 million, based on our trailing 30 day average. I'll now share some additional context on the thinking behind our guidance, starting with revenue. As a reminder, we are lapping the benefits of our team's pricing and our acquisition of FormSwift, and thus, we expect revenue growth to slow. Also, consistent with our historical approach, our guidance reflects what we have a high degree of visibility into today. This includes our current business trends and trajectory, as well as the product and growth-related initiatives we have launched to date. Notably, our guidance does not include any benefit from DASH in 2021.
Rishi: As the external environment has moderated we've certainly seen that moderation happened in public company SaaS and I think we've been slowly seeing that translate to a private company valuations too. So we think it's a door that keeps opening.
Rishi: But our philosophy and so I think we will we are certainly opportunistic and on the lookout for good.
Rishi: Good companies to buy.
Rishi: But at the same time our philosophy.
Rishi: It's pretty consistent and we want to be disciplined because I mean, another thing is even in the AI realm, there's a little bit of a bubble around AI startup funding and I don't think its everywhere, but I think you have to be careful but yes. M&A is certainly continues to be.
Rishi:
Rishi: So a big opportunity for us.
Speaker Change: Alright wonderful that's really helpful and then turning to cash.
Speaker Change: It's still early next year is going to be kind of the big proof point of the year before we can start talking about monetization, but how are you internally measuring the success of cash both from a technology perspective, as well as customer adoption right because it sounds like it's solving a real problem.
Tim Regan: As Drew mentioned, our primary focus in 2024 is centered on finding product-market fit, driving usage of the product, and closely following Dash's adoption, engagement, and retention. Once we have increased certainty that Dash is meeting our customers' needs, we will then pursue our monetization strategy. However, this may not be until the latter portion of this year or early next year.
Speaker Change: Well I think a lot of times over the years, we've learned customers may not use it even if they should be so how are you measuring that success and what can you do to drive user adoption of dash to begin with.
Speaker Change: Yeah, Yeah, so measuring qualitatively and quantitatively so.
Tim Regan: Similarly, our guidance does not include any benefit from our bundles, as our teams continue to iterate on the optimal product experience and go-to-market motion. As we gain more clarity on how we are approaching our bundles rollout to new and existing customers, along with Signals. On the customer response to our approach, we will update our guidance accordingly. As related to paying users, our guidance contemplates a reduced level of paying user growth relative to 2023, and there may be some quarters where paying user additions trend negatively. This is due to the continued headwinds we are facing, as well as the de-emphasis on the family. The Nation-State of Our Growth Initiative.
Speaker Change: Really great news and something we pay a lot of attention to.
Speaker Change: Is when.
Speaker Change: When we watch customers, we've talked to customers everybody has got this problem everybody struggles with.
Speaker Change: Information overload fragmentation of using all of these different apps and so when we explain the value prop.
Speaker Change: The most common responses yeah, yeah I totally have this problem and then the question is more like can you really solve it for me.
Speaker Change: So we start with like is there a real job to be done in market here and we are seeing really encouraging validation.
Speaker Change: <unk> from our customers on that.
Speaker Change: And then when we look at in terms of.
Speaker Change: Success or leading indicators are how is the quality of the dash experience. So we've spent a lot of.
Speaker Change: Time and effort and made a lot of progress in improving things like search search ranking and quality.
Tim Regan: Ultimately, we do expect to add paying users in 2024. However, at lower levels, the priority As related to gross margins, we are guiding to 83 to 83.5%, which is above our long-term target. I want to highlight that from the beginning of 2024, we are increasing the useful life of our servers from four to five, which will apply to asset balances on our balance sheet as of December 31st, 3, as well as future assets. As a result, we expect a benefit to our full-year gross margins of approximately $30 million.
Speaker Change:
Speaker Change: We'd look at how do we.
Speaker Change: New categories. So similarly to Dropbox, one point, though we spent a lot of time focusing on what's the onboarding experience look like if people understand the concepts.
Speaker Change: There's a lot of new things like connecting dash to your different apps and so how do we make that as seamless and streamline of an experience as possible and so we still see and minimize time to value things like that.
Speaker Change: So product quality onboarding success engagement generally retention.
And then monetization and these kind of go we work on all of them in parallel, but I think you kind of clear you go through them a little bit in sequence. So first you have a great product you get the product experience the great than U sand down rough edges in the Onboarding, then you drive engagement and monetization our engagement retention and monetization.
Tim Regan: In Q1, we expect a benefit of approximately $10 million. As related to operating margins, we are guiding to 32 to 32.5. This level of operating margins is above our long-term target and is roughly consistent with our operating margins in 2020. This range includes continued investment in longer-term AI and growth-related investments such as DAX. Additionally, we are planning for increased levels of marketing investments, including our new partnership with McClure and Formula One Racing, as we aim to drive market awareness of our platform's capabilities. Lastly, this guidance preserves some optionality to make strategic investments across the business over the duration. We also expect our additions to the finance baseline to increase in 2024 versus prior, primarily due to too fast. The first is the one-time storage quota grants we are providing to a portion of our customers on the advance plan as we deprecate our previous as-much-space-as-you-need policy.
Speaker Change: And virality. So we're still in the early innings of that so I think making progress on all fronts and.
Speaker Change: And yes this year, we will.
Speaker Change: Continue to open the doors wider and wider to dash.
Speaker Change: As we.
Speaker Change: As we scale it up.
Speaker Change: Really helpful. Thank you so much.
Speaker Change: Thank you.
Speaker Change: Our next question will come from Steve Enders from Citi. Your line is open.
Speaker Change: Yeah.
Steve Enders: Okay, great. Thanks, Thanks for taking the questions here.
Steve Enders: I guess, maybe just to start.
Steve Enders: I think it would be getting a little more clarity on the.
Steve Enders: Packaging and pricing change.
Steve Enders: Changes that you were have been working on in.
Steve Enders: And trying to convert over the base I guess, what were the learnings coming out of that and I guess as you think about changes moving forward.
Yes, trying to try to build on those learnings.
I guess kind of look like through.
Steve Enders: Calendar 'twenty four here.
Steve Enders: Sure.
Steve Enders: So some of the lessons from last year, we did a big launch in October.
Tim Regan: While this requires incremental storage capacity in the near term, a revised plan around storage usage will enable us to have a more profitable SKU once the one-time extension for these customers has expired. The second factor is an anticipated refresh of some of our data center equipment consistent with past practices. As related to full-year free cash flow, we are guiding to a range of $910 to $950 million.
Steve Enders: Where we wanted to address.
Steve Enders: One of the biggest gaps in our funnel, which is that we have all of these products is that customers. The majority of our customers are not aware that we do more than storage.
Steve Enders: And we believe a big reason for that is that in many cases.
Steve Enders: We haven't promoted products to our users or.
Steve Enders: Integrated those experiences are seamlessly.
Steve Enders: As we could and because when you look at sign in docks and.
Tim Regan: This guidance falls short of our long-term free cash flow target, which we adjusted during a previous earnings call to be roughly $970 million. After taking into account headwinds from R&D tax legislation, and while our guidance range is below this figure, I'd note that we have more than doubled our annual free cash flow since we initially set the target, and I'm proud of the progress we've made. There are several factors driving the shortfall between our guidance and our target, the most prominent being a reduced level of billing associated with our revenue guidance, incremental FX headwinds we are facing relative to when we first introduced our technology, as well as the investments we are making to fuel our future growth in products. While we could scale back our investments in Dash to meet our free cashflow target, we do not believe this would be the right long-term decision for the business.
Steve Enders: It was started this acts as a separate company isn't there we brought them in the acquisition.
Steve Enders: We're fully we're doing the rest of the work to integrate them. So in October we launched our redesigned.
Steve Enders: Website, where we could start a lot of these document workflows from a new experience.
Steve Enders: We made we launched new bundles that include the workflow products as well as the FSS.
Steve Enders: And then what we found is.
Steve Enders: We made a lot of changes and then a lot of metrics changed.
Steve Enders: And it was a little difficult to isolate some of the variables and a lot of the changes are favorable. So for example, we saw more.
Steve Enders: Significantly elevated attachment to multiple products.
Steve Enders: But some changes were negative.
Tim Regan: These investments in nascent product initiatives, along with decisions such as our San Francisco lease buyout and the changes we made to our advance plan, are putting a short-term strain on our financial trajectory, but are in line with our primary focus on strengthening the company's long-term, and while our current level of visibility does fall short of our long-term target. There is still time to draw closer to our free cash flow target through improved product experience or through identifying additional efficiencies within our operations during the year. In conclusion, we are mindful that we are in a unique period where our core file sync and share business is maturing, and our new products are in their early stages. However, our core file thinks that your business is still generating growth and revenue and free cash.
Steve Enders: For example, as he is the default skus for more expensive we saw.
Steve Enders: A decrease in new subscriptions on our team's skus and so.
Steve Enders: And then there were some other optimizations, we are doing around Onboarding, where we for example.
Steve Enders: Some people we stopped promoting the desktop client is heavily <unk>.
Steve Enders: A number of steps, but then that.
That had a negative impact on engagement and as customers who are going into there.
Steve Enders: The second through six months, we're saying things like that so it's affecting our retention curves. So part of what we're doing is backing up a little bit.
Steve Enders: And testing and Iterating, our way back into making a lot of the same changes, but making sure that we know.
Steve Enders: Exactly where the deltas are coming from.
Tim Regan: While we also reduce our share, concurrently, we are in an exciting new phase in the evolution of our business as we invest in our future in AI-powered areas such as Dash to drive long-term growth. We will make progress on both dimensions in 2024. We will continue to maintain a disciplined mindset around how we are operating the company to ensure we're not only providing innovative solutions for our customers but creating value for our share. With that, I'll turn it over to the operator. Thank you. As a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again.
Steve Enders: So we're taking a little bit more of a stepping back and taking more of your approach to preserve as many of the good changes as we can.
Steve Enders: And edit out the ones that.
Steve Enders: We're less promising.
Steve Enders: So but for sure we continue to focus on building awareness and driving adoption of multiple products.
Steve Enders: Whether that's our document workflow products, our newer products like Dropbox replay, which is around video collaboration and Dropbox Dash, which is around AI powered universal search.
Speaker Change: Alright I appreciate it.
Speaker Change: I appreciate the context around that.
Speaker Change: Some of those changes.
Speaker Change: And then maybe just on the macro side of it.
Speaker Change: It seems like most of the challenges for more related to the business from the <unk> side I guess just wanted to clarify.
Operator: Please stand by while we compile the Q&A roster. And our first question will come from Rishi Jaluria from RBC Capital Markets. Your line is open.
Speaker Change: Kind of any impact more on the consumer front as well.
Speaker Change: And then.
Speaker Change: For the top of funnel activity.
Speaker Change: So down a little bit how does that kind of trended. So far are now 24 in the first half of the quarter here.
Drew Houston: Oh, wonderful. Thanks, guys, for taking my questions. I wanted to start out, Drew, in the past you've talked about there being maybe some appetite for M&A, especially transformational M&A. Given, you know, this kind of roadmap of wanting to develop new products and capabilities, especially around generative AI, how are you viewing the potential for M&A to just accelerate your roadmap in kind of broadening the platform and, you know, going from the EFSS to kind of a more Gen AI enabled And then I've got a quick follow-up. Sure. So I still see a big opportunity for M&A to accelerate our roadmap. And actually, Dash, Dropbox Dash is a great example of a, it was seeded by an acquisition of a company called Command-E, we did. And another benefit is that unlike, First, for you, a few years after we were public, when valuations were really frothy as the external environment moderated, we've certainly seen that moderation happen in public companies, SaaS, and I think we've been slowly seeing that translate to private company valuations, too. So we think it's a door that keeps opening.
Speaker Change: Sure I'd say overall, it's been pretty stable I think.
Speaker Change: I don't I don't think the headwinds we saw in Q4 or have a different kind than we were seeing in prior quarters.
Speaker Change: It's broadly things when you look at the teams business as well.
Speaker Change: Driven by customers, becoming more price sensitive in general or something we see often is or we saw a lot last year was as companies are especially tech companies made head count reductions of their own then that means fewer SaaS licenses and so dropbox.
Speaker Change: Is affected by that.
Speaker Change: And then we've seen more broadly with our document workflow businesses Youre looking like the esignature category.
Speaker Change: Or things like docs and.
Speaker Change: There's a big acceleration during Covid, and then a bit of a pullback.
Speaker Change: So things like E signature.
Speaker Change: We are a sector wide.
Speaker Change: And then Dax and has.
Speaker Change: Our focus is on the fundraising and kind of startup part of the ecosystem and in a world where vcs are doing a lot less investing or theres less IPO activity things like that than <unk> business.
Drew Houston: But our philosophy is, and so I think we are certainly opportunistic and on the lookout for good. And at the same time, our philosophy is pretty consistent, and we wanna be disciplined. Because, I mean, even in the AI realm, there's a little bit of a bubble around AI startup funding. I don't think it's everywhere, but I think you have to be careful.
Speaker Change: Has been impacted by that so there's a lot we're doing in response.
Speaker Change: Then like integrating the experiences to be make.
Speaker Change: Make it a lot easier to get start get up and running on these other products via dropbox or via the Dropbox UI and sue through things like the redesign we did in October help and then with dock with Docs and <unk>.
Drew Houston: But MBNA certainly continues to be successful, a big opportunity for us. All right, wonderful. That's really helpful. And then turning to Dash, you know, I know this, it's still early, and this year is going to be kind of the big proof point of the year before we can start talking about monetization. But how are you internally measuring the success of Dash, both from a technology perspective, as well as customer adoption? Because it sounds like it's solving a real problem that customers have.
Speaker Change: Expanding to.
Speaker Change: To new audiences and use cases. So for example, we've been working towards so we've had a lot of good early signal on a virtual data room offering.
Speaker Change: <unk> and we'll be rolling that out to.
Speaker Change: Later this year.
Speaker Change: So I'd say there wasn't a lot of change in the shape of the curves as more of the carrying forward of similar trends and then we also see in Q4 that there tends to be seasonality in both or tends to be a lighter quarter for both FSS and.
Speaker Change: Doc workflow products, especially form Swift.
Speaker Change: For different reasons.
Speaker Change: And then Steve Real quick this is Tim I believe you asked about top of funnel activity in the first part of this year, so far have not seen any material changes.
Drew Houston: But I think a lot of times over the years, we've learned customers may not use it even if they should. So what how are you measuring that success? And what can you do to drive user adoption of Dash to begin with? Thanks. Yeah, yeah.
Speaker Change: So.
Tim: That's all in line with our guidance. So that's been factored in and we see less of that seasonality effect in Q1.
Speaker Change: Perfect I appreciate it.
Tim: The commentary there and ill jump back in the queue.
Thank you.
Speaker Change: Thank you.
Drew Houston: So measuring it qualitatively and quantitatively. So really great news and something to pay a lot of attention to is that when we watch customers or talk to customers, everybody's got this problem. Everybody struggles with, um, information overload, and fragmentation of using all these different apps, and so when we explain the value prop, the most common response is, yeah, yeah, I totally have this problem. And then the question is more like, can you really solve it for me?
Speaker Change: And our next question will come from Michael Funk from Bank of America. Your line is open.
Michael J. Funk: Yeah. Okay. Thank you for the question couple if I could so on.
Michael J. Funk: On the call you mentioned fleet rationalization is one of the factors that you've been seeing the last 12 months or so specifically.
Michael J. Funk: Software companies, we did see a notable increase in reps across software.
Michael J. Funk: Some day of the year.
Michael J. Funk: Can you comment on how much the most recent reductions are factored into your forecast for the year.
Drew Houston: So we start with, like, is there a real job to be done in the market here? And we are seeing really encouraging validation from our customers on that. And then when we look at in terms of success or leading indicators, how's the quality of the Dash experience? And so we've spent a lot of time on that. Time and effort and made a lot of progress in improving things like search ranking and quality. We look at how do we, this is a new category, so similarly to Dropbox 1.0, we spend a lot of time focusing on what the onboarding experience looks like, and do people understand the concepts. There are a lot of new things, like connecting Dash to your different apps, and so how do we make that as seamless as possible?
Michael J. Funk: But I'll draw a direct correlation between that with reduction of the customer and the.
Michael J. Funk: Seek rationalization.
Speaker Change: Sure. So we do factor in what we're seeing across the industry, particularly in that tech vertical as far as layoffs that were seeing there.
Speaker Change: Into our into our guidance. So that's certainly been contemplated and maybe just to provide a bit more color. We don't formally guide to paying users, but I do expect that we will still add paying users in 2024 I do expect our total additions this year to be less than last year again, largely due to the de emphasis of our family plan.
There may be some quarters, where we lose paying users depending on things like the state of the economy, the potential turn of larger customers and the timing of our initiatives.
Drew Houston: www.youtube.com.uk Engagement, Retention, and Monetization, or, um, and Virality. So we're still in the early innings of that, so I think we're making progress on all fronts. And yeah, this year, we'll continue to open the doors wider and wider to Dash as we scale it up. Really helpful. Thank you so much.
Speaker Change: But again, we still expect to add paying users this year.
Speaker Change: Okay, and then just on <unk>.
On the share repurchase plan and the guidance for the share count for the year.
Speaker Change: Hard to run some back of the envelope math here.
Speaker Change: Roughly imply a similar cadence to share repurchase in 2004 to what we saw in 2023 absolute dollars.
Operator: Thank you. Our next question will come from Steve Enders from Citi. Your line is open.
Speaker Change: Yes, I'd say no changes in our philosophy as far as share repurchase programs still remained very dedicated to that we continue to expect to allocate a significant portion of our annual free cash flow to share repurchases.
Drew Houston: Thanks for taking the questions, Pierre. I guess, maybe just to start, I think it would be good to get a little more clarity on the packaging and pricing changes that you have been working on in trying to convert the base. I guess what the learnings were coming out of that? And I guess if you think about changes moving forward and trying to build on those learnings, what does that look like through calendar 24 here? Sure. So some of the lessons from last year; we did a big launch in October, where we want to do the draft. One of the biggest gaps in our funnel, which is that we have all these products, is that customers, the majority of our customers, are not aware that we do more than storage.
Speaker Change: With the intention of reducing our share count and maybe provide some color on how it is structured buyback program buys more shares at lower price points and less shares at higher price points again, all reflected in our full year share count guidance.
Speaker Change: Alright. Thank you so much for the questions.
Speaker Change: Thank you.
Speaker Change: And our next question will come from Pat Walraven from citizens JMP. Your line is open.
Patrick D. Walravens: Oh, great. Thank you.
Patrick D. Walravens: I mean drew very big picture, how happy were you with with how this business executed in Q4.
Yeah.
Patrick D. Walravens: Sure.
Speaker Change: So I mean I.
Patrick D. Walravens: I.
Was happy to get things like Dash to open beta and I was happy with the improvement to a lot of the customer experience and product quality with things like our web redesign.
Drew Houston: And we believe a big reason for that is that, in many cases, we haven't promoted the products to our users or integrated those experiences as seamlessly as we could because, when you look at Sign and DocSend, those started as separate companies, and we brought them in via acquisition, and we're doing the rest of the work to integrate them. So in October, we launched a redesigned website where we could start a lot of these document workflows from the new experience. We made and launched new bundles that include the workflow products as well as FSS.
Patrick D. Walravens: And I was unhappy with.
Patrick D. Walravens: The overall results.
Patrick D. Walravens: And the fact that some of the upside we had been projecting didn't fully materialize and we have to kind of go back and take a more iterative approach to making sure all the new ingredients or changes we're making.
Patrick D. Walravens: Yeah.
Patrick D. Walravens: <unk>.
Patrick D. Walravens: That we're doubling down on the additive ones and filtering out the ones that aren't working and I think there were so many variables that got kind of conflated with making so many changes at once I think that was a lesson.
Drew Houston: And then what we found is that we made a lot of changes, and then a lot of metrics changed, and it was a little difficult to isolate some of the variables. And a lot of the changes were favorable. So, for example, we saw more, or significantly elevated, attachment to multiple products. But some changes were negative.
Patrick D. Walravens: And then some of the lessons around yes, it did more difficult macro environment a lot of our customers are more price sensitive and so when I say, we're iterating on pricing and packaging, we want to make sure that.
Drew Houston: So, for example, as the default SKUs were more expensive, we saw a decrease in new subscriptions on our team. Qs. And so, and then there were some other optimizations we were doing around onboarding where we... For example, some people, we stopped promoting the desktop client as heavily to reduce the number of steps, but then that had a negative impact on engagement as customers were going into their, you know, second through six months or things like that. So it's affecting the retention curves.
Patrick D. Walravens:
Patrick D. Walravens: As thing.
Patrick D. Walravens: Our customers used to be able to.
Patrick D. Walravens: Many SaaS companies would just be on a regular clip of price increases and customers are fine with that now in a world where.
Patrick D. Walravens: Things are more difficult or theres more budget pressure.
Patrick D. Walravens: Value props are more compelling so the idea of like well I can consolidate spend by in addition, if I can have not just file sync and share, but also be able to have esignature with dropbox or I can do video collaboration or I can do.
Drew Houston: So part of what we're doing is backing up a little bit and testing and iterating our way back into making a lot of the same changes but making sure that we know exactly where the deltas are coming from. So we're taking a little bit more of a step back and taking a more iterative approach to preserve as many of the good changes as we can and edit out the ones that are less prominent. So, but for sure, we continue to focus on building awareness and driving adoption of multiple products. Whether that's our document workflow products or newer products like Dropbox Replay, which is around video collaboration, and Dropbox Dash, which is around AI-powered units.
Patrick D. Walravens: AI powered universal search and get that all as part of one subscription so bundling things.
Patrick D. Walravens: Things like that so this is the kind of iteration that we need to do so.
Patrick D. Walravens: Overall, I mean, I'm not happy with the headline result, but I think we've got so we took that took away some clear lessons.
Patrick D. Walravens: And we will be making targeted improvements in response.
Speaker Change: Okay. Thank you and then.
Speaker Change: Tim is there did I missed it is there sort of a new $1 billion of free cash flow target.
Tim: Yeah, Let me walk you through that Pat So as a reminder, last quarter, we did adjust our free cash flow target by the amount of the R&D tax legislation.
Which we now estimate to be $30 million effectively taking our $1 billion target to a revised target of 970 <unk>.
Drew Houston: Perfect. I appreciate the context around some of those changes. And then maybe just on the macro side of it, it seems like most of the challenges were more related to the business and the team side. I just want to clarify if there was any kind of any impact on the consumer front as well. And then, you know, for the public funnel activity, it seemed like that slowed down a little bit. How has that kind of trended so far right now in 24 hours and in the first half of the quarter here?
Tim: Our guidance of 910 to 950 falls below that target and Thats, primarily driven by slower billings growth incremental FX since we first set the target.
Speaker Change: And our investments in dash now, while we could withhold investments in our long term initiatives to meet the target that would be short sighted approach.
Speaker Change: So that's where this guidance reflects our continued investment in the long term health of the business.
Speaker Change: And again, we still have time to outperform that guidance throughout the year and via product execution or identifying efficiencies within the business.
Drew Houston: Sure. I mean, I'd say overall that it's been pretty stable, I think. I don't think the headwinds we saw in Q4 are of a different kind than we were seeing in prior quarters. It's broad things, you know, when you look at the team's business, it's mostly driven by customers becoming more price sensitive in general. Or, you know, something we see often is, we saw a lot last year, that as companies, or especially tech companies, made headcount reductions of their own, then that means fewer SaaS licenses. And so Dropbox is affected by that. And then we've seen more broadly, with our document workflow businesses, you're looking at the e-signature category or things like DocSend. There was a big acceleration during COVID and then a bit of a pullback. So things like e-signature were implemented sector wide.
Speaker Change: Okay. Thank you.
Speaker Change: Thank you and as a reminder to ask a question. Please press star one one.
Speaker Change: One moment for our next question.
Speaker Change: And our next question will come from Richard Hilliker from UBS. Your line is open.
Richard Davis: Hi, guys. Thanks for taking my question.
Richard Davis: My question is on the R&D line so.
Richard Davis: I appreciate the exciting opportunity ahead, particularly.
Richard Davis: With dash and AI, but I guess, what Im wondering is can.
Richard Davis: Can you help me understand why we couldnt potentially see more leverage on this R&D line, while still investing in AI and these other exciting opportunities and then I have a follow up thanks.
Speaker Change: Sure I'll start you, obviously feel free to jump in so R&D increased slightly to 25% of revenue.
Drew Houston: And then DocSend focuses on the fundraising and kind of startup part of the ecosystem. And in a world where VCs are doing a lot less investing, or there's less IPO activity, things like that have been impacted by that. So there's a lot we're doing in response, again like integrating the experiences to make it a lot easier to get up and running on these other products, via Dropbox or via the Dropbox UI, and through things like the redesign we did in October, which helped, and then with DocSend expanding to new audiences and use cases. So, for example, we've been working towards, and we've had a lot of good early signals on So I'd say there wasn't a lot of change in the shape of the curves.
Speaker Change: That's primarily due to hiring for our longer term growth initiatives such as dash.
Speaker Change: On that side. These engineers with an AI background typically do command premium compensation and are located in higher cost locations, such as the Bay area and Seattle, So certainly want to make sure that we're focused on investing in these long term initiatives.
Speaker Change: And that we're funding them at the proper rate, so certainly contemplates an investment.
Speaker Change: On that front and then maybe just provide some more color on our overall operating margins that's between 32% and 32, 5%.
Speaker Change: At the highest level, what we're doing across the business, we will be driving increased efficiencies within our core file sync and share and document workflow businesses again, while concurrently investing in long term growth initiatives, such as dash, but we're also going to be investing in marketing to drive product and brand awareness.
Speaker Change: <unk>, our partnership with Mclaren Formula One racing that drew alluded to and the guidance does preserve some flexibility to invest across the business to drive long term growth.
Speaker Change: And I would just add that it's a balancing act I mean, we certainly care about margins, we certainly care about efficiency.
Drew Houston: It was more of the carrying forward of similar trends. And then we also see in Q4 that there tends to be seasonality in both, or it tends to be a lighter quarter for both FSS and some of the dock workflow products, especially FormSwift. And Steve, real quick, this is Tim.
Speaker Change: And we also don't want to Miss these like once a decade or once a generation platform shifts I mean, you look at.
Speaker Change: The move to mobile and cloud made Dropbox, one point I'll.
Speaker Change: Possible to begin with.
Speaker Change: And all of the emergence of AI is going to make Dropbox you pointed out.
Tim Regan: I believe you asked about top of funnel activity in the first part of this year. So far, I have not seen any material changes. That's all in line with our guidance, though, and we see less. That's the commentary there, so I'll turn it back over to you.
Speaker Change: Possible.
Speaker Change: And ultimately I think it can be a much larger opportunities. So we don't want to miss that but.
<unk>.
Speaker Change: That's like the attention we're navigating I mean, Fortunately were able to do a lot of these investments within.
Operator: Thank you. And our next question will come from Michael Funk from Bank of America. Your line is open. Yeah, thank you for the questions. A couple, if I could.
Speaker Change: The general envelope that we've provided so no I don't.
Speaker Change: Expect there to be like massively different shaped curves and I think another thing is we're also we've also been reallocating.
Drew Houston: So, you know, on the call, you mentioned seat rationalization is one of the factors that you've been seeing the last 12 months or so. Specifically, software companies, we did see a notable increase in rifts across software since the beginning of the year. So, can you comment on how much the most recent reductions are factored into your forecast for the year? And if we don't draw a direct correlation between those reductions that customers and the seat rationalization, sure. So we do factor in what we're seeing across the industry, particularly in that tech vertical, as far as layoffs that we're seeing there, into our guidance so that that's certainly been contemplated, and maybe just to provide a bit more color. We don't formally guide to paying users, but I do expect that we will still add paying users in 2024.
Speaker Change: Our resources away from less efficient or less promising areas.
Speaker Change: And more towards things like AI and dash.
So that's a little bit harder to see it was just the aggregate R&D line.
Speaker Change: Okay. Thanks, and then maybe one last one for you here.
I was curious I think you mentioned that.
Speaker Change: Finance lease would would jump up to about 7% of revenue and I think thats from right around 5% seems like kind of a big jump maybe wondering if you could give us any other color help us understand that change. Thanks, so much.
Speaker Change: Yeah sure. Good question. So we are seeing an increase in our finance lease additions. This year. That's due to two reasons first we are nearing a hardware refresh cycle for equipment that is reaching the end of its life, where we did have a similar refresh in 2019 2020.
Tim Regan: I do expect our total additions this year to be less than last year, again, largely due to the de-emphasis of our family. There may be some quarters where we lose paying users depending on things like the State of the Economy and the potential turn of larger customers. But again, we still expect to add. Okay, and then just on the share repurchase plan and the guidance for the share count for the year. I'm trying to run some back of the envelope math here. Does that roughly imply a similar cadence to share repurchase in 24 to what we saw in 2023 in absolute dollars? Yeah, I'd say no changes in our philosophy as far as share repurchase programs still remain very dedicated to that. We continue to expect to allocate a significant portion of our annual free cash flow to share repurchase with the intention of reducing our share count and maybe to provide some color on how it is structured. Our buy-back program buys more shares at lower price points and less shares at higher prices. Again, all reflected in our full year. Great. Thank you so much for the question. Thank you. And our next question will come from Pat Walravens from Citizens JMP. Your line is open.
Speaker Change: And then additionally, we are supporting onetime quota grants to customers on our advanced plan who are you.
Speaker Change: Using an excess amount of storage. So we've grandfathered some of these customers customers in and so we need to support those customers. So that's partly what's driving that additions.
Thank you.
Speaker Change: Yeah.
Our next question will come from Mark Murphy.
Mark Murphy: From Jpmorgan your line is open.
Mark Murphy: Thank you do you notice much of a difference and the signals you're seeing from.
Mark Murphy: The very very small businesses, which are more sensitive to interest rates.
Mark Murphy: Banks, extending credit if you compare that to your relatively midsized and larger customers within the mix.
Mark Murphy: Okay.
Mark Murphy: Yeah.
Speaker Change: Yeah, Hey, Mark.
Mark Murphy: I think this is all part of what we're seeing on the macro side, where as you know most of our teams plans are in the SMB space, where we do continue to see a challenging demand environment there.
Speaker Change: As Judy has talked about some of that is due to heightened price sensitivity and we've seen that since our price increase in 2022.
Speaker Change: As Jews also touched on some of that also pertinent to smbs seeing downhole pressure as teams trim their license counts.
Drew Houston: Oh, great. Thank you. I mean, Drew, the very big picture.
Speaker Change: Following whether thats layoffs or budget cuts and those sorts of things.
Speaker Change: So our guidance factors in a continuation of these trends.
Speaker Change: And.
Drew Houston: How happy were you with how this business executed in Q4? Um... So, I mean, I was happy to get things like Dash into open beta, and I was happy with the improvement to a lot of the customer experience and product quality with things like our web redesign. But I was unhappy with... the overall results. And the fact that some of the upside we had been projecting didn't fully materialize, and we have to kind of go back and take a more iterative approach to making sure all the new ingredients or changes we're making are doubling down on the additive ones and filtering out the ones that aren't working. And I think there were so many variables that got kind of conflated with making so many changes.
Speaker Change: I wanted to ask as well.
Speaker Change: Describe this as a unique period, what do you think has to happen through the course of the year, if we're going to look back on it.
Speaker Change: A trough ing out.
Speaker Change: Period for growth there is no real price increase as a driver you're you're taking some intentional actions, which are which are minor headwinds and you had you had.
First shattered a lot of this is coming off the Q3 call.
Speaker Change: The new products haven't ramped yet we still love Tech companies that are out there doing incremental layoffs.
Speaker Change: Is it a bit of a perfect storm this year, where.
Speaker Change: That kind of alignment of all these factors might be might be marking a trough ing out period.
Speaker Change: Yes.
Speaker Change: Yes.
Speaker Change: Yeah. So last year, we had to make some difficult decisions with layoff lay off of our own and.
Speaker Change: And then kind of weaning ourselves off of.
The things that I didn't find sustainable like like price increases or.
Drew Houston: I think that was a lesson, and then some of the lessons around, yeah, a more difficult macro environment; a lot of our customers are more price sensitive. And so when I say we're iterating on pricing and packaging, we want to make sure that, as our customers used to be able to; many SaaS companies would just be on a regular clip of price increases, and customers are fine with that. Now, in a world where things are more difficult or there's more budget pressure, different value propositions are more compelling. So the idea of, well, I can consolidate spend by, in addition, if I can have not just files I can share, but I can also be able to have e-signature with Dropbox, or I can do video collaboration, or I can do AI-powered universal search and get that all as part of one subscription. So bundling, and things like that.
Speaker Change: Inefficient sources of growth or inefficient marketing spend or sort of over investment in areas that weren't gonna there as much fruit.
Speaker Change: And then reallocating a lot of resources towards the future in things like AI and dash.
Speaker Change: Like a lot of the more difficult decisions.
Speaker Change: Are behind us in winning this year would look like.
Speaker Change: Finishing the swing on the rotating away from.
Speaker Change: Things like price and monetization experience experiments to areas of the funnel, especially on our <unk> business.
Speaker Change: There are that have been overlooked.
Speaker Change: So I mentioned a few of them in my prepared remarks, but things like.
Speaker Change: We see a lot of opportunity to improve the team onboarding experience. There's a lot of friction a lot of friction I would see is unnecessary.
Speaker Change: Many steps or or.
Speaker Change: Things that are confusing to customers when you actually sit down with customers and watch them go through that process, we've identified plenty of things that.
Speaker Change: We can do to make that better and make similar improvements to.
Speaker Change: The ones, we've made on the individual side of the business where over the years, we've been able to really chip away of churn and as we've improved the user experience on things like sharing we see more engagement more sharing more viral sign ups and just more focusing more on the fundamental levers of engagement and virality more so than monetization.
Tim Regan: So this is the kind of iteration that we need to do. Overall, I mean, I'm not happy with the headline result, but I think we've got, we took away some clear lessons, and we'll be making targeted improvements in response. Okay, thank you. And then, Tim, is there? Did I miss it?
Speaker Change: So I think stabilizing the core business and like.
Speaker Change: And getting after some of those.
Tim Regan: Is there sort of a new billion dollar free cash flow target? Yeah, let me walk you through that, Pat. So as a reminder, last quarter, we did adjust our free cash flow target by the amount of the R&D tax legislation, which we now estimate to be $30 million, effectively taking our billion dollar target to a revised target. Our guidance of 910 to 950 falls below that target, and that's primarily driven by slower billings growth, incremental effects when first setting the target, and our investments in Dash. And now, while we could withhold investments in our long-term initiatives to meet the target, that would be a shortsighted approach.
Speaker Change: Levers, where we've been under investing around team Onboarding team expansion sharing in general.
And then the other the other main goal is getting dash to true product market fit so getting it to be great product experience great retention smooth onboarding.
Speaker Change: And bridging from individual use cases like search and organizing your stuff to sharing.
Speaker Change: And a lot of this is the playbook that made Dropbox, one point I was successful in ore.
Speaker Change:
Speaker Change: We're doubling down on a lot of those things.
Speaker Change: Thank you.
Speaker Change: Thank you.
Speaker Change: And our last question will come from.
Speaker Change: Rent sale from Jefferies. Your line is now open.
Speaker Change: Hello. This is <unk> on for Brent Thill, Thanks for taking my question.
Speaker Change: My first question is just at a high level, what's the demand environment and better worse or in line with what you saw in <unk> and I have a follow up after.
Tim Regan: So that's where this guidance reflects our continued investment in the long-term health of the business. And again, we still have time to outperform that guidance throughout the year, via product execution or identifying a fish. Okay. Thank you. And as a reminder, to ask a question, please press star 11.
Speaker Change: Yeah, Great question I'd say it was in line have not seen an improvement in macro trends, we've talked a bit about what we saw in our teams business, which stayed rather consistent as we've talked about forms with which sees a seasonal low point in the <unk>.
Operator: One moment for our next question, and our next question will come from Richard Hilliker from UBS. Your line is open.
Speaker Change: Fourth quarter, and then tends to rebound in the first quarter as we entered or tax season.
Speaker Change: Then we saw consistent pressure across docks and in our E signature categories docks and in particular continues to see headwinds in the fundraising space. So a lot of consistency.
Tim Regan: Hi, guys. Thanks for taking my question. My question is on the R&D line. So I, you know, I appreciate the exciting opportunities ahead, particularly with Dash and AI. But I guess what I'm wondering is, can you help me understand why we couldn't potentially see more leverage on this R&D line while still investing in AI and these other exciting opportunities? And then I have a follow-up. Thanks. Sure, I'll start Drew
Speaker Change: What we have been seeing in.
Speaker Change: And that has all been extrapolated into our guidance for next year as far as a continuation of those trends.
Speaker Change: Super Helpful. And then the second part of my question is just in terms of the monetization of Dropbox Dash I know, it's still early days, but should we expect it to be embedded in the more premium skus.
Speaker Change: Forward, whether it be price as a separate SKU.
Tim Regan: Obviously, feel free to jump in. So R&D increased slightly to 25% of revenue. That's primarily due to hiring for our longer-term growth initiatives such as Dash. On the other hand, these engineers with an AI background typically do command premium compensation and are located in higher-cost locations, such as the Bay Area and Seattle. So, certainly want to make sure that we're focused on investing in these long-term initiatives and that we're funding them at a proper rate, so certainly think about and invest in that front. And then maybe just to provide some more color on our overall operating margins, that's between 32 and 32.5%. At the highest level, what we're doing across the business, we will be driving increased efficiencies within our core file sync and share and document workflow businesses, again, while concurrently investing in long-term growth, such as Dash. We're also going to be investing in marketing to drive product and brand awareness, including our partnership with McLaren Formula One Racing that Drew alluded to. The guidance does preserve some flexibility to invest across the business to drive it. Yes. And I would just add that it's a balancing act.
Speaker Change: Like high level, how should we think about it.
Speaker Change: Yeah, it'll be both so that will be available as a standalone subscription and then there will also be different add on and bundle options overtime.
Speaker Change: So and we're still pretty early in terms of signal on monetization, we're focusing on finding.
Speaker Change: On driving adoption right now.
Speaker Change: Thanks Super helpful.
Speaker Change: Thank you.
Speaker Change: And this does conclude today's conference call. Thank you for your participation you may now disconnect everyone have a wonderful day.
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Drew Houston: I mean, we certainly care about margins, we certainly care about efficiency, and we also don't want to miss these like once a decade or once a generation platform shifts. I mean, you look at how the move to mobile and cloud made Dropbox 1.0 possible to begin with, and all the emergence of AI is going to make Dropbox 2.0 possible.
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Drew Houston: And ultimately, I think it's gonna be a much larger opportunity, so we don't want to miss that. But that's like the tension we're navigating. I mean, fortunately, we're able to do a lot of these investments within the general envelope that we've provided. So I don't expect there to be like massively different shaped curves.
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Tim Regan: And I think another thing is that we've also been reallocating resources away from less efficient or less promising areas and more towards things like AI and dash. So this, that's a little bit harder to see, it was just the aggregate R&D. Okay, thanks. And then Tim, maybe one last one for you here.
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Tim Regan: I was curious, I think you mentioned that finance lease would jump up to about 7% of revenue. And I think that's from right around 5%. Seems like kind of a big jump. Maybe wondering if you could give us any other color to help us understand that change. Thanks so much.
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Tim Regan: Yeah, sure. Good question. So we are seeing an increase in our finance lease additions this year. That's due to two reasons.
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Tim Regan: First, we are nearing a hardware refresh cycle for equipment that's reaching the end of its life, where we did have a similar refresh in 2019-2020. And then additionally, we are supporting one-time quota grants to customers on our advance plan, using an excess amount of storage. So we've grandfathered some of these customers in, to support www.dropbox.com. Thank you. Our next question will come from Mark Murphy from J.
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Tim Regan: Thank you. Do you notice much of a difference in the signals you're seeing from the very, very smallest businesses, which are, you know, more sensitive to interest rates and banks extending credit? If you compare that to your relatively mid-sized and larger customers within the next... Yeah, hey, Mark. I think this is all part of what we're seeing on the macro side, where, as you know, most of our team's plans are in the SMB space, where we do continue to see a challenging demand environment there. Again, as Drew has talked about, some of that is due to heightened price sensitivity.
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Drew Houston: We've seen that since our price increased, to get, as Drew's also touched on, some of that also pertinent to SMBs seeing down cell pressure, www.dropbox.com following whether that's layoffs or budget cuts or Guidance Factory, www.buffalo.edu. And I wanted to ask as well, you described this as a unique period. What do you think has to happen through the course of the year if we're going to look back on it as kind of a troughing out period for growth? You know, there's no real price increase as a driver. You're taking some intentional actions, which are minor headwinds.
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Drew Houston: And you had foreshadowed a lot of this coming off the Q3 call. You know, the new products haven't ramped up yet. We still have tech companies that are out there doing incremental layoffs. Is it a bit of a perfect storm this year where, you know, that kind of alignment of all these factors might be marking a troughing out period? Yeah, so last year, we had to make some difficult decisions with layoffs, a layoff of our own, and then kind of weaning ourselves off of things that I didn't find sustainable, like price increases or inefficient sources of growth or inefficient marketing spend or sort of over investment in areas that weren't going to bear as much fruit. And then reallocating a lot of resources towards the future and things like AI and Dash. So I'm hopeful that a lot of more difficult decisions are behind us and that winning this year would look like.
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Drew Houston: Finishing the swing on that, rotating away from... uh, things like price and monetization experience experiments to areas of the funnel, especially in our team's business where those have been overlooked. So I mentioned a few of them in my prepared remarks, but things like we see a lot of opportunity to improve the team onboarding experience. There's a lot of friction.
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Drew Houston: A lot of friction I would see as unnecessary, like too many steps or things that are confusing the customers when you actually sit down with customers and watch them go through that process. We've identified plenty of things that we can do to make that better and make similar improvements to the ones we've made on the individual side of the business, where, over the years, we've been able to really chip away at churn. And as we've improved the user experience on things like sharing, we see more engagement, more sharing, more viral signups, and just focus more on the fundamental levers of engagement and virality more so than monetization. So I think stabilizing the core business and getting after some of those levers where we've been under-investing in team onboarding, team expansion, and sharing in general. And then the other main goal is getting Dash to a true product market fit.
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Drew Houston: So getting it to be a great product experience, great retention, smooth onboarding, and bridging from individual use cases like search and organizing your stuff to sharing. And a lot of this is the playbook that made Dropbox 1.0 successful. We're doubling down on a lot of them.
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Operator: Thank you. And our last question will come from Brent Thill from Jeffries. Your line is now open. This is Avalon Liani on ProPrento.
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Operator: Thanks for taking my question. My first question is just at a high level. Was the demand environment better, worse, or in line with what you saw in 3Q? And then I have a follow-up. Yeah, great question. I'd say it was in line.
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Tim Regan: I have not seen..., https://www.youtube.com.uk, And then we saw consistent pressure across DocSins in our e-signature categories. DocSin, in particular, continues to see headwinds in the fundraising. So there is a lot of consistency in what we have been seeing.
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Drew Houston: That has all been extrapolated into our guidance for next year as far as, super helpful. And then the second part of my question is just in terms of the monetization of Dropbox Dash. I know it's still early days, but should we expect it to be embedded in the more premium SKUs of the platform, or should it be priced as a separate, Just like the high level, how should we think about it? Yeah, it'll be both, so Dash will be available as a standalone subscription, and there will also be different add-on and bundle options. So, and we're still pretty early in terms of signals on monetiz
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Drew Houston: We're focusing on finding, on Driving Adoption. Thanks, super helpful. Thank you. And this does conclude today's conference call. Thank you for your participation. You may now disconnect. Everyone, have a wonderful day.
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Operator: Click on the bell for the latest notifications! Updated daily Monday to Friday. Updated daily Monday to Friday. Thanks for watching! ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? Good afternoon, ladies and gentlemen.
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Speaker Change: Good afternoon, ladies and gentlemen.
Speaker Change: Thank you for joining Dropbox as fourth quarter 2023 earnings conference call.
Thank you for joining Dropbox's fourth quarter 2023 earnings conference call. All participants will be in listen-only mode. After the 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 would
All participants will be able will be in listen only mode. After the presentation, there will be an opportunity to ask questions.
Speaker Change: Ask a question during this session you will need to press star one on your telephone.
Speaker Change: As a reminder, this conference call is being recorded and will be available for replay from the Investor Relations section of Dropbox as web site. Following this call.