Q4 2024 Dropbox Inc Earnings Call
Good afternoon, ladies and gentlemen, thank you for joining Dropbox as fourth quarter 2024 earnings conference call.
All participants will be in a listen only mode.
After todays 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 as website. Following this call.
Speaker Change: I will now turn it over to Peter Stabler head of Investor Relations.
Peter Stabler: Thank you good afternoon, and welcome to Dropbox as fourth quarter 2024 earnings call.
Peter Stabler: 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 and forecast for our first quarter and fiscal year 2025.
Peter Stabler: And our expectations regarding our revenue growth profitability and operating margin and Unlevered free cash flow as well as our expectations regarding our business assets products strategies technology employees users demand and the macroeconomic environment.
Peter Stabler: These statements are subject to risks and uncertainties that could cause actual results to differ materially.
Peter Stabler: 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.
Peter Stabler: Factors and risks that could cause our actual results to differ materially from these forward looking statements are set forth in todays earnings release and in our annual report on Form 10-K filed with the SEC.
Peter Stabler: We will also discuss non-GAAP financial measures, which are not prepared in accordance with generally accepted accounting principles.
Peter Stabler: Conciliation of GAAP and non-GAAP results is provided in our earnings release and on our website at investors Dropbox Dot com.
Peter Stabler: I will now turn the call over to Dropbox as co founder and CEO drew Houston.
Drew Houston: Thanks, Peter and good afternoon, everyone. Welcome to our Q4 2024 earnings call. Joining me today is Tim <unk>, our Chief Financial Officer.
Drew Houston: I'll kick things off with a recap of 2024, followed by a look at our strategy for 2025.
Tim will then dive into our Q4 and full year financial results along with guidance for Q1 and 2025.
Drew Houston: Let's just start.
Drew Houston: We closed out the year on a positive note.
Drew Houston: Fourth quarter revenue and operating income came in modestly ahead of our guidance.
Drew Houston: Through our share repurchase program, we reduced our diluted share count by $12 5 million shares this quarter, resulting in 23% year over year growth in free cash flow per share for both the quarter and the full year.
Drew Houston: Q4 capped a year that included difficult decisions as we continue to navigate the transition from our maturing FSS business areas of significant growth potential.
Drew Houston: These decisions are aimed at strengthening and simplifying our FSS business, including reducing the size of our workforce and scaling back investment in noncore businesses, such as farm Swift.
Drew Houston: While these decisions are introducing near term growth headwinds.
Drew Houston: Improve our profitability and efficiency, enabling us to invest in products like dash that unlocks significant long term growth opportunities.
Drew Houston: So with that let me briefly touch on the progress we've made against our main objectives last year.
Drew Houston: As a reminder, we had two primary business objectives in 2024.
Drew Houston: The first was to improve the collaborative user experience of our teams product.
Drew Houston: We upgraded sharing an invitation functionality, which remove friction for both end users and it yet.
Drew Houston: This has led to improvements in key funnel metrics, including team invites new team creation teams trial conversion rate and teams Activations all of which were up double digit percent year over year.
Drew Houston: As a result gross additions for team skus or up 10% versus a year ago.
Drew Houston: Our relaunched IC admin console will also improved admin engagement and CSA scores, which are crucial since it admins are key purchase decision makers.
Drew Houston: However over the course of the year. These gains were offset by elevated churn in downhole pressure at some teams customers sought to reduce their software license exposure often due to layoffs within their own companies.
Drew Houston: Conversely, we saw relative strength in our individual plans, particularly essentials, plus and our new lower priced Dropbox simple plan.
Drew Houston: Our second objective was to continue investing in dash.
Drew Houston: We've made significant strides here in early June we pivoted, our development work towards launching dash for business.
Drew Houston: And while we still see a viable value proposition for our self serve individual products. It became clear that the larger near term opportunity lies with that for business, where we can partner with it admins streamline the onboarding process for end users.
Drew Houston: In October we launched Ashford business as a separate SKU for our installed base of teams customers as well as non dropbox customers that need AI powered universal search.
Drew Houston: And while still early we've been pleased with the customer reception so far.
Drew Houston: We exceeded our sales goals for Q4.
Drew Houston: <unk> is building.
Drew Houston: The feature of that is resonating. The most is universal search as users come to understand how much time can be saved by being able to search all of your most important cloud apps with a single query in dash.
Drew Houston: The head of it at an outdoor retailer summed up taxes impacts by saying Dash saves me and my team is valuable time by making information accessible in a faster and easier way.
From <unk> to.
Drew Houston: Engineering, two accounting everyone's more productive.
Drew Houston: In addition, it admins are also finding value and dashes protection control features which address two critical admin concerns one is ensuring that content is strictly protected and two is having the tools to quickly remediate unapproved sharing.
Drew Houston: It is clear that security concerns are a major obstacle for AI tool adoption and customers are telling us that that's the security tools are a competitive advantage.
Superhuman as a new dash customer in our CEO remarks, as a growing company security is increasingly top of mind for us <unk>.
Drew Houston: <unk> gives us visibility into any unexpected access and helps us close security gaps that naturally accumulate over years of file sharing.
Drew Houston: Now, let's talk about our plans for this year.
Drew Houston: We have three primary objectives for 2025.
Drew Houston: Our first priority is scaling dash.
Drew Houston: We're starting to sell that through our managed sales team and are focused on scaling all aspects of this go to market motion.
Drew Houston: This includes additional investments in marketing to drive awareness of how dash can help customers solve their problems includes adding more sales people to the team as we continue to build our sales pipeline and leveraging our customer service teams to help customers onboard with the product and adopted the key features and maintaining an active dialogue with our customers as they make expansion and renewal decisions.
Drew Houston: <unk>.
Drew Houston: Over time, as we refine the product and Onboarding process will also tap into our product led growth expertise to offer additional ways for customers to try us and by dash.
Drew Houston: We're investing aggressively this year to keep improving the dash user experience and I'm excited about our 2025 product roadmap and our.
Drew Houston: Lots of this year, we expect that Youll hear more about pioneering improvements to universal search and answers new security and content governance features improved <unk> content creation tools and in an expanded universe of SaaS application connectors to name a few.
Drew Houston: And we expect to gain additional compliance standards that will help unlock international expansion.
Drew Houston: In short, we believe 2025 will be a big year for dash and we're more excited than ever about the opportunity we have in front of us.
Our second priority is that we'll continue simplifying and strengthening our core business, while delivering greater operating efficiency.
Drew Houston: This means doing fewer things better and improving mission critical features and functionality rather than pursuing inefficient or subscale growth.
Drew Houston: For our teams products will optimize CT invite flows and internal and external sharing motions.
Drew Houston: While our retention rates remain strong we see an opportunity to reduce churn by enhancing the usability of the most critical product capabilities and refining Keizer workflows.
Drew Houston: We will also continue optimizing our pricing structure to provide a simpler set of options that clearly illustrate our FSS value proposition.
Drew Houston: For our individual business will focus on meeting customers, where they are.
Drew Houston: Our traffic continues to shift towards mobile and customers have been requesting a lower priced entry point for our paid plans.
Drew Houston: So in response, we launched Dropbox simple last year in select countries we.
Drew Houston: We've seen steady demand strong retention and limited plus plan cannibalization.
Drew Houston: This year, we will gradually roll out simple in the U S and will focus on driving multi platform usage across our FSS plans based on our knowledge that multi surface users have higher retention rates.
Drew Houston: Our increased focus on efficiency extends to our document workflow businesses.
Drew Houston: Dr. <unk> will remain a priority as we see a solid growth opportunity building upon recent feature launches.
Drew Houston: We'll manage dropbox sign for efficiency, rather than growth as we redirect investment spend into dash and.
Drew Houston: And as mentioned previously we have been exploring strategic options for form Swift.
Drew Houston: After serving the market, we have decided to retain our ownership of formula while significantly reducing engineering and marketing investments as we aim to drive increased levels of profitability in this business.
Drew Houston: Our third priority is positioning our FSS business to serve as a launch pad for dash.
Drew Houston: While our initial managed sales efforts will work to offer dash to our install base of teams customers and new potential customers as fast as we can.
Drew Houston: We also have the opportunity to introduce <unk> to our entire fsf's user base through bundling and product integrations, we want to make it easy for our customers to see and adopt ash, so, bringing our FSS and dash experiences together will help accelerate getting gas in front of our F&B and put some of our customers.
Drew Houston: In closing like many successful technology companies before us Dropbox is managing a generational transition.
Drew Houston: Just as Netflix evolved from Dvds to streaming or Adobe from packaged software to creative cloud, we are evolving from traditional file sync and share to AI powered universal search and content intelligence.
Drew Houston: As you've heard me say in many ways, we're solving a similar set of problems that customers face when I founded dropbox, helping them secure organize and share their content.
Drew Houston: Desktop similar challenges, but for today's environment, helping customers secure organize and share both their files and their cloud content with the added capabilities of universal search and AI productivity tools.
Drew Houston: As this transitions can be challenging.
Drew Houston: They require a focus perseverance and making a lot of difficult changes.
Drew Houston: And from the outside they can look chaotic.
Drew Houston: Have a clear vision of where we're going and we're starting from a position of strength.
Drew Houston: We have over half a million business customers deep technical capabilities and content management and a trusted brand.
Drew Houston: These are all significant advantages as we build our next chapter with dash.
Speaker Change: And last but not least I'd like to extend a warm welcome to our newest board member Warren Jenson.
Warren Jenson: Where it has decades of experience, helping lead companies like Nielsen Electronic Arts, Amazon and NBC two significant transformations.
Lucky to have him on the team.
Warren Jenson: I'll now turn over the call to Tim to review, our financial results and outlook.
Tim: Thank you drew.
Tim: I will cover our financial highlights from Q4.
And then provide guidance for Q1 and the full year 2025.
Starting with our results for the fourth quarter.
Tim: While the revenue for Q4 increased one 4% year over year.
Tim: $644 million.
Tim: Foreign exchange rates contributed $2 million to revenue in the quarter.
Tim: Total <unk> grew to a total of $2 $5 74 billion up 2% year over year.
Tim: On a constant currency basis growth was one 3% year over year.
Tim: Our year over year growth in <unk> was largely driven by relative strength in our individual plants.
Tim: With respect to our teams plans, we continue to see year over year increases in sharing sign ups and user activations.
Tim: However, these top of funnel improvements and the resulting growth in gross new error that drew alluded to continue to be offset by pressure on down sell and churn and team expansion activity.
Tim: For the fourth quarter <unk> declined by approximately $5 million sequentially due to these teams dynamics as well as seasonality from form slipped.
Tim: This translated to exiting the quarter with $18, two 2 million paying users.
Down approximately 15000 paying users on a sequential basis.
Tim: Average revenue per paying users was $140 <unk>.
Tim: As compared to $139 <unk> in the prior quarter.
Tim: The quarter sequential growth was driven primarily by the increasing mix shift towards higher priced essentials individual SKU.
Tim: FX tailwind and a slight mix shift from annual to monthly plans.
Tim: Before we continue with further discussion of our P&L I would like to note that unless otherwise indicated.
Tim: All income statement figures mentioned, our non-GAAP and exclude stock based compensation.
Tim: Amortization of purchased intangibles certain acquisition related expenses net gains and losses on our real estate assets.
Tim: Workforce reduction expenses and net losses on equity investments.
Tim: Our non-GAAP net income.
Tim: Also includes the income tax effect of the aforementioned adjustments.
Tim: Gross margin was 83, 1% for the quarter.
Tim: As mentioned in previous quarters.
Tim: The primary driver of the year over year increase in gross margin was an increase in the useful life of our servers from four to five years.
Tim: <unk> January one of 2024.
This change resulted in approximately $4 million of benefit to gross profit in the fourth quarter.
Tim: For the full year, we experienced the benefit to gross profit of approximately $30 million.
Tim: Operating margin was 36, 9% ahead of our guidance of 36% and up 470 basis points from the year ago period.
Tim: Compared to the year ago period operating margin benefited from lower operating expenses following our reduction in force and lower cost of sales from the aforementioned change in useful life of our servers.
Tim: Net income for the fourth quarter was $223 million up 30% year over year.
Tim: Driven by lower operating expenses falling a reduction in force as well as the release of certain tax reserves.
Tim: Diluted EPS for the fourth quarter was <unk> 73 based.
Tim: Based on 307 million.
Diluted weighted average shares outstanding compared to <unk> 50 in the year ago quarter.
Tim: Representing a 46% year over year increase.
Tim: Moving onto our cash flow and balance sheet.
Tim: We ended the quarter with cash and short term investments of $1 6 billion.
Tim: Cash flow from operations was $214 million, an increase of 7% versus the year ago period.
Tim: This includes $52 million of severance and benefits payments made related to our reduction in force.
Tim: Capital expenditures in the quarter totaled $3 million.
Tim: This resulted in quarterly free cash flow of $211 million.
Tim: Compared to $191 million in Q4 of 2023.
Tim: Free cash flow per share for the quarter was <unk> 69, representing a 24% year over year increase.
Tim: In the quarter, we also added $51 million to our finance leases for datacenter equipment as we continue to invest in refreshing our data centers.
Tim: With respect to our balance sheet as a reminder in December.
Tim: We entered into a secured five year term loan of up to $2 billion.
Tim: Consisting of an initial $1 billion term loan.
Tim: And a delayed draw feature that provides us optionality to borrow another $1 billion in the future.
Tim: This new loan bears interest at Sulphur plus 375% on the drawn amount.
Tim: And a 1% interest rate on the Undrawn amount.
Tim: As part of this capital raise we also terminated our $500 million.
Tim: Revolver.
In addition, and concurrent with this capital raise our board authorized a new one.
Tim: $1 $2 billion share repurchase program.
Tim: Collectively.
Tim: These actions fortify our balance sheet and enable us to invest in our growth initiatives and to allocate capital towards reducing our share count.
Tim: To this effect in the fourth quarter, we repurchased approximately 12 5 million shares spending approximately $350 million.
Tim: As of the end of the fourth quarter, we had approximately $1 4 billion remaining under our existing share repurchase authorizations.
Tim: In addition to the term loan we continue to carry $1 4 billion of zero percent coupon convertible notes.
Tim: Split equally across two tranches maturing in March of 2026 and 2028.
Tim: We are actively considering our options as we approach the 2026 maturity.
Tim: But have no further news to share today.
Tim: I will now offer our updated outlook for Q1 and the full year 2025, However, I will first offer a few updates.
Tim: Since we shared early thinking on our 2025 expectations during our November earnings call.
Tim: First during our November earnings call. We noted that we were undergoing a strategic review of our options with respect to form swift, including a potential sale.
Tim: This decision stemmed from the objectives underlying our risk as we are aiming to direct our company focus towards our most material and strategic initiatives.
Tim: We have since completed our assessment and have concluded that the profit maximizing outcome is to continue our ownership of forms with while concurrently significantly reducing our head count.
Tim: And eliminating our marketing investment in that business.
Tim: We expect that this approach will thereby serve as a headwind to revenue growth over the next few years.
Tim: So it will also serve as a tailwind to free cash flow.
Tim: Second the U S. Dollar has meaningfully strengthened since we shared our early thinking on 2025 impact.
Impacting both our revenue and free cash flow expectations for 2025.
Tim: And third in light of our recent capital raise we will begin to guide to Unlevered free cash flow.
Tim: Which we define as free cash flow, excluding the impact of interest payments associated with our term loans.
Tim: Net of associated tax benefit.
Tim: While we will still report free cash flow as we have previously we will guide to Unlevered free cash flow to provide a metric that best aligns with our core operating performance of our business.
Tim: Given these updates for the first quarter of 2025, we expect revenue to be in the range of $618 million to $621 million.
Tim: We are expecting a currency headwind of approximately $3 million.
Tim: On a constant currency revenue basis.
Tim: We expect revenue to be in the range of $621 million to $624 million.
We expect <unk> to serve as a roughly 80 basis point headwind to revenue as a result of the shift in our strategic direction.
Tim: I'd also note that Q1 2025 has one less day versus Q1 2024.
Tim: And consequently, we recognize one less day of revenue this Q1 relative to the year ago quarter.
Tim: We expect our non-GAAP operating margin to be approximately 38, 5%.
Tim: The shift in strategic direction performance is factoring into the strong margins for Q1.
Tim: Given that we will be eliminating marketing funding performed swift, which was historically weighted towards the first quarter.
Tim: Finally, we expect diluted weighted average shares outstanding to be in the range of 299.
Tim: To 304 million shares based on a 30 day trailing.
Tim: Trailing average share price.
Tim: For the full year 2025, we expect revenue to be in the range.
Tim: Of 2.465.
Tim: To two 480 billion.
We are expecting a currency headwind of approximately $18 million or roughly 70 basis points.
Tim: On a constant currency revenue basis, we expect revenue to be in the range of $2 $4 83.
Tim: To to $4 98 billion.
Tim: Billion.
Tim: We expect form Swift to serve as a roughly 150 basis point headwind to revenue for the full year.
Tim: We expect gross margin to be approximately 82%.
Tim: We expect non-GAAP operating margin to be in the range of 37, 5% to 38%.
Tim: We expect unlevered free cash flow to be at or above $940 million.
Tim: This unlevered free cash flow guidance is inclusive of a few one time items totaling $47 million.
The first is a $36 million payment that we made in January but the third and final tranche of our San Francisco lease buyout that we executed in 2023.
Tim: The second is $11 million for severance employee benefits and related costs associated with our Q4 reduction enforced.
We expect capex to be between $25 million to $30 million for the full year.
Tim: In addition to finance lease lines to be approximately 6% of revenue.
Tim: As it related to the aforementioned term loans, we expect cash interest expense net of tax benefits of approximately $90 million.
Finally, we expect diluted weighted average shares outstanding to be in the range of 283.
Speaker Change: The 288 million shares.
Speaker Change: I'll now share some additional perspective on this guidance for 2025.
Speaker Change: Starting with revenue as mentioned our guidance factors in headwinds from reducing our head count and.
Speaker Change: And marketing investments in form Swift as well as FX headwinds.
Speaker Change: This guidance also contemplates the ongoing dynamics of our team's business that I mentioned earlier.
Speaker Change: Consistent with our historical approach our guidance reflects what we have a high degree of visibility into today.
Speaker Change: We have not yet seen a meaningful change in these teams trends.
Speaker Change: In addition, while we are excited about the long term opportunities for dash and are encouraged by the early progress on our sales efforts.
Speaker Change: Our guidance does not include a material contribution from dash given the nascent state of this product.
Speaker Change: With respect to paying users, we expect paying users in 2025 to decline by roughly one 5% a 300000 users.
Speaker Change: With our reduced investment informs swift driving about half of this decline.
Speaker Change: We expect the remaining half of paying user pressure to stem from our reduced outbound sales force subsequent to our risks.
Speaker Change: As well as to a lesser extent some continued pressure on self serve teams.
Speaker Change: We expect roughly half of the full year's decline to occur in Q1, coinciding with the elimination of our marketing investment inform slips.
Speaker Change: Moving onto operating margins, where we were guiding to a range of 37, 5% to 38% this year.
Speaker Change: The driver of this year over year margin expansion is a reduction in force.
Speaker Change: This benefit however will be partially offset by two main factors.
Speaker Change: First 2020 for gross margin benefited from a $30 million tailwind due to the extension of the useful life of our data center hardware where.
Speaker Change: We will not see this tailwind in 2025.
Speaker Change: Second we will also be investing across both R&D and sales and marketing to scale dash.
Speaker Change: And back filling select positions impacted by our risk.
Speaker Change: Our free cash flow, we expect unlevered free cash flow to be at or above $940 million.
Speaker Change: This is slightly below the early thinking we shared in November given that FX has deteriorated.
Speaker Change: By more than $30 million since that time as a result of the strengthening of the U S. Dollar.
Speaker Change: However, this was partly offset by gains from our decision to reduce our investments in forums.
Speaker Change: Lastly, we expect our weighted average shares outstanding to decrease to approximately 283.
Speaker Change: Two 288 million shares as we remain committed to reducing our share count over time via our share repurchase program.
Speaker Change: In closing, we are positioning our core file sync and share and document workflow business lines for increased efficiency.
Speaker Change: As we continue to drive higher levels of operating margins and free cash flow from these areas.
Speaker Change: We are then leveraging this profitability and the strength of our balance sheet to reduce our share count.
Speaker Change: Thereby driving meaningful growth in free cash flow per share.
Speaker Change: Concurrently we are investing in our future vectors of growth most notably dash.
Where we see a large long term opportunity.
Speaker Change: While it will take time for these efforts to translate to revenue growth.
Speaker Change: We believe that these decisions will culminate in creating long term value for our shareholders.
Speaker Change: With that operator, please open the line for questions.
Speaker Change: Certainly as a reminder to ask a question. Please press star one on your telephone and wait for your name to be announced to withdraw. Your question. Please press star one again and.
Speaker Change: And we ask that participants limit themselves to one question and one follow up.
Speaker Change: Our first question comes from the line of Rajeev jewelry with RBC capital markets.
Speaker Change: Wonderful. Thanks, so much for taking my question.
Speaker Change: I wanted to first start with dash.
Speaker Change: I understand that it's early too early obviously to disclose.
Speaker Change: If we think about maybe two pieces there number one what have you seen so far in uptake and usage that gives you confidence.
Speaker Change: Can be a successful kind of pay date or growth driver over the next call. It three to five years and maybe number two if we think about the competition in the space with <unk>.
Speaker Change: Peer players that are doing the universal search and other platforms, adding the advanced semantic search capabilities. What gives you the right to win within that space and gives you confidence again that you can actually get meaningful revenue out of that and then I've got a quick follow up thanks.
Speaker Change: Sure.
Speaker Change: Great question, so as far as first what.
Speaker Change: It gives us confidence that that so far in uptake in usage and just as far as what makes this.
Speaker Change: I was confident that it can drive growth over the next few years, let me first start with the market.
Speaker Change: The more we've been in the space. The more it is clear that this is a universal knowledge worker problem like everybody struggles with having too much stuff on too many apps and too many tabs open.
Speaker Change: And then that translates to a big market pretty much anyway, you look at it I mean, <unk> said, it's an $8 billion market today doubling over the next few years.
Speaker Change: And it's a big market, it's a greenfield market, so theres not really.
Speaker Change: Great solutions to this for a lot of customers are you most customers are not.
Speaker Change: Where that this is a solvable problem.
Speaker Change: In the first inning.
Speaker Change: And then with respect to Dropbox and the right to win.
Speaker Change: Our customers and prospects understand that this is a natural.
Speaker Change: A natural evolution of what we do.
Speaker Change: And we have a lot of advantages we have over half a million business accounts on dropbox today, but we see a 100% of them has good prospects for dash.
Speaker Change: And it's a natural evolution to go from <unk>.
Speaker Change: From organizing People's files to organizing their cloud content.
Speaker Change: And so it's it's a progression makes a lot of sense and where we sit.
Believe that in theory, and then we've been validating that that's become a lot clearer and more validated since launch and so the signals we've been paying attention to since launch our first.
Speaker Change: We exceeded our internal sales targets in Q4 were growing pipeline.
Speaker Change: And have a lot of positive customer reception so far.
Speaker Change: Early but then we're seeing the the key value props around universal search and all of the security and content governance features with our protect and control functionality really resonate with customers.
Speaker Change: Not so much about like competition generally and the way we see it is there going to be.
Speaker Change: Theres certainly startups in the space and our advantages there are pretty clear like our distribution and technical scale and infrastructure and the investments we're able to make in leverage.
Speaker Change: A lot of which we built in the first chapter of Dropbox.
Speaker Change: Are also relevant to this problem.
Speaker Change: And again like not starting from scratch, having over half a million business accounts.
Speaker Change: And then also having a lot of advantages in the product experience itself with protecting control on a number of other things that are coming this year.
Speaker Change: And then the future I'm sure we will compete with the incumbents are the platform companies.
Speaker Change: Compared to them.
Speaker Change: The fact that Dropbox and dash are platform agnostic is really important. So most incumbents today are focusing if you look at their AI products in the office suites, I mean, most of them revolve around integrating the stuff within their own ecosystem, but not across ecosystems. So we think that's a big opportunity and then lastly.
Speaker Change: I think for for all of our customers and prospects are trust and privacy.
Speaker Change: Posture and brand is a big advantage and certainly when you look at some of the bigger companies.
Speaker Change: I think our users are apprehensive about some of the conflicts there like kids you interesting all of your most important data to accompany but they're also selling your ads are if theyre also training their next foundation model.
Speaker Change: But that's something that all customers are naturally apprehensive about and so we don't have those kinds of complex. We're just here to provide a good or provide a good service and we're not doing anything else with your data other than providing the service so.
Speaker Change: These are all really important points.
Speaker Change: And we're really excited about the early progress.
Speaker Change: Alright got it that's really helpful. Thank you and then Tim just a quick point pointing to a clarification. So look I. Appreciate that you are providing the guidance in the deck now thats, great to see and definitely saves us a lot of time and anxiety I noticed in the deck youre highlighting two different <unk>.
Speaker Change: New metrics in terms of profitability number one ICU, highlighting adjusted EBITDA and kind of the deck to my knowledge at least since IPO that has not been a metric you focus on is that something that we should be paying closer attention to and then in your guide you actually talk about Unlevered free cash flow.
Speaker Change: Apologize if I missed a bridge there, but if you could maybe help us understand why now the focus on Unlevered free cash flow versus the prior operating cash flow less capex that you typically guided to and why the change over there that'd be helpful. Thank you.
Sure maybe starting with the latter question. So in light of our recent capital raise we are going to guide to Unlevered free cash flow, which we do define as free cash flow, excluding the impact of interest payments associated with our term loan net of their related tax benefit and we just believe that this.
Speaker Change: Metric best aligns with our core operating performance of our business. So consistent with how other companies have have treated this metric with a similar term loans. That's what we're what we're aiming to do here and then as far as adjusted EBITDA. This is just another metric we're offering to help understand our business.
Speaker Change: Our debt to EBITDA.
Speaker Change: EBITDA ratios of our business.
Speaker Change: So additional line of sight to provide to analysts and investors.
Speaker Change: Got it thank you so much.
Speaker Change: Thank you.
Speaker Change: And our next question comes from the line of Steve Enders with Citi.
Speaker Change: Yeah.
Speaker Change: Okay, great. Thanks for thanks for taking the questions here.
Speaker Change: I guess I just wanted to ask a little bit more on kind of the growth outlook.
Speaker Change: I know you gave a good breakdown for the puts and takes there, but just thinking through kind of the pace of business through the year and some of the incremental growth headwinds.
Speaker Change: Seemed like that they are building throughout.
Speaker Change: You are always going from I think a little bit better growth rate in <unk> versus the back part of the year. So can you just kind of help us think through.
Speaker Change: The factors going on there or is there some different timing around form swift or is it just kind of like the buildup.
Speaker Change: The build of the user declined kind of throughout the year that's impacting that.
Speaker Change: I'll, let them speak to the specific timing and ins and outs, but just from a from a higher level.
Speaker Change: A lot of this so at a high level one there's a lot of the.
Speaker Change: Headwinds that we've talked about over the last.
Speaker Change: A handful of quarters I think it does a pretty stable. So there's something like market aspects, but then a lot of this a lot of it a.
Speaker Change: A lot of what Youre seeing is also the result of like voluntary choices.
Speaker Change: To cut inefficient growth and simplify and strengthen the core business in and rotate towards dash.
So when youre seeing us kind of optimize the forms with business or cut back on some of these areas. It's less if there was like no opportunity. There. It's more just that we feel like the dollars are much better spent.
Speaker Change: On dash, given the market and just greenfield nature, or the greenfield nature of that market and the size and the growth and the opportunity.
Speaker Change: But as we cut back in some of these areas, we cut kind of inefficient marketing spend or if we cut back.
On some of our product portfolio.
Speaker Change: That is not cost less in the near term that shows up as headwinds are compounding the growth headwinds you are seeing and we're very mindful of the optics here.
Speaker Change: But they are the right long term decisions for the health of the business. We think we can get better returns on those dollars.
Speaker Change: By deploying them towards dash and in other places.
Speaker Change: Yes.
Speaker Change: Some thoughts maybe on a full year and then all shifted maybe some quarters Asian, So if we do normalize for FX inform swift our guidance at the high end of the range implies a decline of roughly 50 basis points and we continue to see pressure on our team's business with respect to team expansion down sell and churn trends in part due to the <unk>.
Speaker Change: Pricing sensitivity, we've been talking about we've also scaled back our managed sales team as part of the risk, which is pressuring our outbound sales expectations.
Speaker Change: And then while we're excited about dash and its long term potential we are still very much in the early innings here and don't expect a material contribution to revenue from from Dash. This year and then maybe with respect to how would you translate for the core for the quarters.
Speaker Change: So for this year, if I think about paying users. We do expect paying users to decline by about 300000 users and that reduce investment inform swift represents about half of that decline and we expect.
Speaker Change: Most of this to occur in the first quarter, coinciding with the elimination of marketing for form Swift and so that's what does put pressure on the first half of the year and you see that flow through with respect to the full year guidance.
Okay Gotcha.
Speaker Change: That's helpful.
Speaker Change: I guess within that teams business and the headwinds that youre that you have seen there I guess does it feel like thats at least stabilizing and the downward pressure is that kind of a consistent pace.
Speaker Change: And then I guess on the other side of it.
Speaker Change: Good to hear I guess dash is at least.
Speaker Change: Kind of exceeding expectations, there for Q4, but how.
Speaker Change: How should we think about like one that maybe becomes a bigger piece of the business, where maybe it's starting to offset some of the declines is there a kind of a good framework that we should.
Speaker Change: Should have to think about those kind of moving pieces there.
Speaker Change: Sure I mean I think.
Speaker Change: All of this has netted out in our guidance I'd say, but directionally, we see we continue to see just because of different a few different parts.
Speaker Change: How we reaccelerate growth. So there's continued optimization opportunity and the team's business.
Speaker Change: As I was sharing earlier theres, a number of areas across the funnel ranging from on boarding success to team expansion to pricing optimizations.
Speaker Change: To just turn improvements.
Speaker Change: Where we can continue to.
Speaker Change: Or we can offset some of the headwinds we have been seeing.
Speaker Change: We're obviously very excited about <unk> potential and growth and as we have more signal there we will share it.
Speaker Change: But its little too early to give kind of timing as far as when exactly this will all net out.
Speaker Change: And the third opportunity is.
Speaker Change: Bringing returning our core business into a launch pad for dash. So we see.
Speaker Change: Unlike some of our previous products we.
Speaker Change: We see a lot more overlap in our between our core business and ash in terms of.
Speaker Change: This being a natural evolution of what we already do for our customers and so we see the <unk>.
Speaker Change: Majority of our FSS subscribers as being.
Speaker Change: Good prospects for Dash, and we also see dash as being relevant to all new generation of knowledge workers, whose workflows, maybe don't revolve around file so as much as they used to.
Speaker Change: So those are the major parts of how we'll drive growth and we will continue to refresh how these all net out in our guidance.
Speaker Change: And provide more single a signal on the different parts through the year.
Speaker Change: Okay perfect. Thanks for taking the questions.
Thank you.
Speaker Change: And our next question comes from the line of Michael Funk with Bank of America.
Speaker Change: Great Hi, Thanks. This is Matt on for Mike I appreciate the question.
Speaker Change: Understanding youre still seeing some pricing sensitivity in cans I was curious can you provide some additional color on what youre seeing out there in terms of general macro trends, obviously theres been some relatively positive data points on SMB and just curious if you've seen any benefit from user behavior customer behavior during the quarter.
Speaker Change: And I wouldn't say anything to call a major new trend I think a lot of the dynamics that we've been talking about.
Speaker Change: In terms of macro headwinds and so on are pretty stable.
Speaker Change: There's a lot of positive.
Speaker Change: Trends too or just consistency, where and the reason we're focused on teams just as a reminder, like it has higher retention rates higher ARPA.
Speaker Change: Strong expansion opportunity for dash.
Speaker Change: And we've also been we've been able to show that we can improve.
Speaker Change: A lot of the elements and the team's business through.
Speaker Change: These optimizations across the funnel that I mentioned.
Speaker Change: And these rebounds, where a bunch of those fundamentals are up double digit percent over last year.
Speaker Change:
Speaker Change: So I'd say, it's pretty stable.
Speaker Change: Not seeing any.
Speaker Change: Major new.
Speaker Change: Dynamics in Smbs.
Speaker Change: But what we are monitoring it closely.
Speaker Change: And then briefly Matt our guidance largely factored in similar trends to what we saw last year still expecting a challenging demand environment in the SMB space and as many of our customers are looking for ways to reduce costs as we are doing ourselves.
Speaker Change: Got it thank you very much.
Speaker Change: Yeah.
Speaker Change: Thank you.
Speaker Change: And our next question comes from the line of Patrick Wall Ravens with citizens Bank.
Speaker Change: Oh, great. Thank you.
Speaker Change: Okay.
Speaker Change: Can we talk a little bit about the sort of the competitive dynamics for dash and I realize that it's largely greenfield but.
You have one neighbor in San Francisco Glean raised.
Speaker Change: Yeah.
Speaker Change: $260 million and almost a $5 billion valuation at the end of last year. So how are you differentiated.
Speaker Change: From them, where where do you see yourselves fitting in better and where do you see them.
Speaker Change: Competitors like that better.
Speaker Change: Sure. So we are so we certainly track lean closely as you'd imagine.
Speaker Change: We believe we have a number of advantages.
Speaker Change: I mean first is just our existing customer base since as I've been saying, we've got more than half a million business accounts. So we're not starting from scratch here and we're gonna be able to leverage a lot of the assets that we've built in our first chapter from our technical infrastructure.
Speaker Change: Our privacy and trust brand.
Speaker Change: And many other things.
Speaker Change: When we look at the product we see a lot of customers are at.
Speaker Change: Hence a about security.
Speaker Change: And that perhaps is about.
Speaker Change: After having said about security in the context of.
Speaker Change: Starting with giving all of that information to a startup and then at a more basic level. One challenge that every company has one adopting AI is rolling it out safely.
Speaker Change: And we find that a lot of customers understand quite well that if you give sort of universal search and rolling out AI and your company can have a lot of activity benefits, but it can also these tools can also surface a lot of improperly shared content. So before giving everybody. All this X-ray vision to find that compensation Doc that you.
Speaker Change: Never been shared.
Speaker Change: A lot of customers and prospects want an opportunity to really identify all that content and remediated.
Speaker Change: <unk>, a lynchpin part of the dash offering is functionality that we call protected control, which was aided by an acquisition. We made last year of a company called mirror.
Speaker Change: That lets you it's the only the only product that lets you identify there have global visibility into what's being shared across every major content platform and then to identify content that some properly shared or dangerous or noncompliant and then three to be able to master mediate and on share all of that content across every platform and thats been a very <unk>.
Speaker Change: Annual process for most companies and.
Speaker Change: Cash gives you the opportunity to bring automation, there and a much greater scale.
Speaker Change: Think lean or anyone else. So we see we see security.
Speaker Change: As a big advantage.
Speaker Change: Then I'm also really excited about our product roadmap for 2025, and we think we're going be able to push the experience forward.
Speaker Change: Anyone in a lot of ways.
Speaker Change:
Speaker Change: And I think our customers also recognize and broader.
Drew Houston: <unk> and our customers recognize this again this is a natural evolution for Dropbox, we started by organizing your files and now we're expanding from file. So again I think all your cloud content and providing intelligence layer on top of that.
Speaker Change: So.
Speaker Change: We're really excited about the early signal, we're seeing obviously, it's going to be it's a competitive space.
Speaker Change: Sure there'll be more competition in the future.
Speaker Change: But I think Thats, just a validation of what we believe for a long time that this is a universal problem.
Speaker Change: And that plays well to our strength.
Thank you Joe.
Speaker Change: Thank you.
Speaker Change: Our next question comes from the line of Mark Murphy with JP Morgan.
Speaker Change: Great. Thanks for taking the question. This is <unk> on for Mark Murphy.
Speaker Change: Drew you had discussed in the past exploring adjacent opportunities around AI beyond the core dash product.
Are there any other domains that seem like national near term extensions for the AI product portfolio and maybe perhaps any feedback on how you evaluate that process as it relates to building in house versus acquisitions.
Speaker Change: Sure so.
Speaker Change: There are a number of adjacencies.
Speaker Change: That are natural adjacencies from dash.
Speaker Change: I mean, one benefit of Dash is it allows you.
Speaker Change: Or companies then link up all the different apps. So that we can have this.
Speaker Change: Pretty unprecedented 360 degree view.
Speaker Change: Of the state of work in your company and then Theres a lot with that foundation. There is a lot you can build on top of that.
Speaker Change: And this is an area, where we will have more specifics to share over time, but I can say.
Speaker Change: We bought a good example is we bought a company called reclaim.
Speaker Change: Last year that does AI time analytics and optimization.
Speaker Change: And a lot of what people do are one key feature in Dash. In addition to search is we'll give you a start page where in whenever you open a new tab in your browser, we'd give you a kind of a cockpit for your day that shows you that you can do search from there for sure. But then also like here all of the different Arizona, the content and projects and I'm working on.
Speaker Change: Here's my day, Here's my agenda.
Speaker Change: And so we see that as a very extensible.
Speaker Change: Starting point for that surface area has been really valuable to be able to build additional experiences on top of that and so for example, a lot of customers when they see their agenda and their day all lined up next to everything else, they're working on they have a lot of requests and interest and deepening that functionality are bringing out and other things I Wonder My task for my priorities.
Speaker Change: So.
Speaker Change: And reclaim is an example of an acquisition, but we've also.
Speaker Change: For years dating back to 2020, we decided to turn Dropbox into a lab for distributed work, where we think a lot about okay. Okay, My laptop and 23% what do I see what's the same what's can be different and we think theres going be a lot of new categories that emerge in a lot of things that have become possible now that work is so much more distributed we're mostly working out of.
Speaker Change: Screens instead of offices, even when Youre in the office and then of course, there's a lot.
That changes after the large language model so.
Speaker Change: That's some early indications of where we're headed as a lot of optionality and kind of neighboring spaces and adjacencies with dash.
Speaker Change: There's a lot more to share this year.
Speaker Change: Very helpful. Thank you and then as a quick follow up on dash. So far it seems like a lot of the focus is on upselling or retaining some of the existing installed base of the core FSS business. So well understanding it's early days any rough sense of of the customers you've seen traction for so far this split.
Speaker Change: Those between existing users Bruce entirely net new to Dropbox.
Speaker Change: Yeah. So we're we're both.
Speaker Change: Both tracks are really important both reaching existing FSS users and then unlocking a much larger tam of folks who may not be using FSS from dropbox today.
Speaker Change: And I'd say to your point they are going to have slightly different trajectories.
Speaker Change: And different ceilings.
Speaker Change: But we're certainly we certainly observe that existing FSS customers massive home field advantage, there pretty short sales cycles.
Speaker Change: We already have an existing relationship that I think we were able to compress.
Speaker Change: A lot of that timeline.
Speaker Change: And so that's why we've already observed.
Speaker Change: Is that is that pieces working and then we're also standing up.
Speaker Change: <unk>.
Speaker Change: The big effort to reach net new customers and larger customers because we see that.
Speaker Change: And the larger the company the bigger pain points around content and search and AI.
Speaker Change: So we will be pursuing both of them slightly different trajectory as the newer customers may have a longer sales cycle, but they might also be higher <unk> and higher ARPA.
Speaker Change: So there's but in both tracks are important level, we'll share more as we as we get signal.
Speaker Change: Awesome. Thank you very much.
Speaker Change: Thank you.
Speaker Change: Our next question comes from the line of Gilead <unk> with Goldman Sachs.
Speaker Change: Hey, everyone. Thanks for taking my question Gary on for cash.
Speaker Change: Question I kind of extend on our next question from before it seems to be somewhat of a renewed focus on SaaS and how that can support future dashboard can you maybe like layer down talented layer down further as to how you are investing or addressing the cross sell opportunity you see in this business and I have a follow up after that please.
Speaker Change: Yeah.
Speaker Change: Sure so.
Speaker Change: So yes, we see this as a really.
Speaker Change: Important opportunity in transition as I said.
Speaker Change: A little while ago on my prepared remarks.
Speaker Change: We see big opportunity to transform our core business into a launch pad for dash.
Speaker Change: And we think there are a lot of parallels between what we're doing and a lot of the successful kind of generational transitions.
Speaker Change: They've seen in SaaS and consumer Internet so.
Speaker Change: I think things like creative cloud and Adobe are a good example, I think one generation of users downloaded photoshop onto their computers and bought it.
As packaged software.
Speaker Change: And then as they shifted to the cloud they modernize the product and then.
Speaker Change: It was it continued to be relevant to the next generation and these platform transitions are difficult, but pretty comment I think Netflix is another example, we think about a lot we're.
Speaker Change: I think you've kind of looked at their D E mailing business and drawn conclusions about kind of a it's.
Speaker Change: Its limits.
Speaker Change: But that audience ended up being really went from what one might have seen as a liability to an asset as it is having that initial audience helped them bootstrap a victory in the streaming wars.
Speaker Change: And.
Speaker Change: I think there are many great things about that transition, but certainly one of them was that by <unk>.
Speaker Change: Modern rising.
Speaker Change: The product and shifting to streaming they are both able to bring their existing.
Speaker Change: Their initial user base along.
Speaker Change: But then they unlock the Tam that was 10 or 100 times larger than DVD mailing could have ever been.
Speaker Change: And so we're looking at all of the mechanics are working all of the mechanics of how you do that ranging from deep product integrations to pricing and packaging and bundling.
Speaker Change: Yes.
Speaker Change: But we see Theres, a lot, where we already see theres, a lot of synergy and opportunity to bring a lot of the benefits of dash to our FSS customers, which both improves that experience and then most importantly create.
Speaker Change: Create some more retentive experience and extend their lifetime. So this is an area. We will again have more to share in the coming quarters.
Speaker Change: Yeah. Thank you it sounds like maybe it's more of like a migration.
Speaker Change: To that to maybe think that also is impacting the way you might be able to disclose a little bit of das contribution.
Speaker Change: That may be the right way of thinking about it but the second question.
Speaker Change: Actually had was a bit more on the selling motion how many of you.
Speaker Change: Your sales reps are single product focus.
Speaker Change: Paul platform has a review of pharmacy left turned up any additional changes that you make one undertaken organization.
Speaker Change: Sure.
Speaker Change: On the migration point I think it's less.
Speaker Change: Coming back to I think it's less I mean, I think Netflix he really had people kind of leaving.
Speaker Change: Yeah.
Speaker Change: Just like stopped using DVD players are an important nuance here is that files are not going anywhere certainly for a lot of creative industries and a lot of areas, where we're strongest.
Speaker Change: Construction media architecture. These are all customers, who have big files like files are not going away. So it's more of an additive it's more of an expansion of the value we provide more than a migration, which I think is just a bit of an important nuance and that's just something that can build on top of what.
Speaker Change: The value we already provided with FSS.
Speaker Change: And then the selling motion I'd say.
Speaker Change: Our primary focus is is selling dash.
I mean, certainly theres, a broader portfolio of products to but we see dash is the big opportunity of where we're focused.
Speaker Change: Great. Thank you.
Speaker Change: Thank you.
Speaker Change: And our next question comes from the line of Alex <unk> with Jefferies.
Speaker Change: Hi, Thank you for taking my questions. If I listen correct me through your initial remarks, you mentioned that farm Schmidt will contribute one five percentage point of revenue headwind this year.
Speaker Change: Full year revenue.
Speaker Change: Two 3% decline on a constant currency basis. So if I were to normalize for farm Smith equity tie 0.8 point.
Speaker Change: Decline in constant currency in terms of revenue.
Speaker Change: That is a little bit softer than what you have the floor.
Speaker Change: Back in the previous quarter so.
Speaker Change: I guess I'm, just trying to get a sense are you there.
Speaker Change: Being more conservative on the guidance. This time around is that a function of.
Speaker Change: Incrementally weaker and demand is that yes.
Speaker Change: For being conservative there.
Speaker Change: Okay.
Speaker Change: Sure. So our math, if we do normalize for FX inform swift at the high end of our guidance range does imply a decline of roughly 50 basis points.
Speaker Change: So relatively in line with the commentary we gave last earnings call last November and from a philosophy perspective, I'd say, we're being consistent with our historical approach, where our guidance largely reflects what we have visibility into today and as far as what else is embedded into 25 guide is in.
Speaker Change: An extension of the pressure that we have been seeing on our team's business.
Speaker Change: With respect to team expansion in down sell and churn trends.
Speaker Change: In part due to pricing sensitivity, which is offsetting the lift that we're seeing in gross new bedroom.
Speaker Change: Yeah drew mentioned in his remarks.
Speaker Change: And then we also have scaled back our sales team as part of the risk and so that's pressuring some of our outbound sales expectations and then we've talked a lot about dash, where we're very optimistic about the long term opportunity, but just given the nation state of that product. It will take time to build up the <unk> and see it flow through to revenue. So those are some of the factors that are.
Speaker Change: We've gone into the guide, but again no change to our overall philosophy when it comes to guidance.
Speaker Change: Got it thank you and then.
Speaker Change: Can I just follow up on the guidance on the free cash flow as well.
Speaker Change: I can I can I just check with you roughly what is your cash tax rate what I'm trying to guess, yes that is that has that been any change in terms of.
Speaker Change: Got it.
Speaker Change: Cash flow if you translate that above 900, I'm, sorry, 940 million of Unlevered free cash flow to lever free cash flow, which you have.
Speaker Change: Bob.
Speaker Change: 50 million, how would that be okay.
Speaker Change: Sure.
Speaker Change: So I think we clarified our definition of Levered versus Unlevered.
Speaker Change: Free cash flow, which contemplates the interest that we're spending on our term loan, which we do expect to spend roughly $90 million in interest payments related to our debt net of associated tax benefit.
Speaker Change: But if you think about the thoughts that have gone into that call. It 940 of Unlevered free cash flow for this year. So this does account for a few factors and that accounts for the latest thinking that we have on our revenue as well as changes in FX, which did deteriorate by more than $30 million.
Speaker Change: Since the remarks that we gave last November so that's certainly a new headwind that we've baked in.
Speaker Change: We're seeing reinvestments into the business to fund dash as well as critical <unk> for certain roles. So that's baked in higher cash taxes and merit increases are included and then we do have a few one time items, including the $36 million payment for the final installment of our San Francisco lease and $11 million of severance from our risks.
Speaker Change: It's all factored in but if you.
Speaker Change: Thinking about the 950, we said back in November relative to the 940, the major changes there FX headwind of 30, but thats offset by some of the benefits that we're getting from our decision on form Swift.
Speaker Change: He also asked about our cash tax rate no major changes.
Speaker Change: From what we saw in 2024, so thats not a major delta as though of course as we get more profitable we do have to pay higher cash taxes and that that's another headwind that we will be incurring as we as we get more profitable.
Speaker Change: That's helpful. Thank you.
Thank you I'll now hand, the call back over to head of Investor Relations, Peter Stabler for any closing remarks.
Speaker Change: Thank you everyone for joining us today, we look forward to speaking with you next quarter Hope you all have a good day. Thank you.
Speaker Change: Ladies and gentlemen, thank you for participating this does conclude today's program and you may now disconnect.
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Speaker Change: Sure.
Speaker Change: Okay.
Speaker Change: Yes.
Speaker Change: Yes.
Speaker Change: Okay.
Speaker Change: Yes.
Speaker Change: Okay.
Speaker Change: Okay.
Speaker Change: Okay.
Speaker Change: Thank you.
Speaker Change: Okay.
Speaker Change: Yeah.
Okay.
Speaker Change: [music].
Speaker Change: Okay.
Speaker Change: Okay.
Speaker Change: Sure.
Speaker Change: Yes.
Okay.
Speaker Change: Yes.
Speaker Change: Okay.
Speaker Change: Okay.
Speaker Change: Okay.
Speaker Change: Yes.
Speaker Change: Okay.
Speaker Change: Yes.
Speaker Change: Thanks.
Speaker Change: No.
Speaker Change: Yes.
Speaker Change: Yes.
Speaker Change: Thank you.
Speaker Change: Yes.
Speaker Change: Okay.
Speaker Change: Okay.
Speaker Change: Yes.
Speaker Change: Okay.
Speaker Change: [music].
Speaker Change: Okay.
Speaker Change: Yes.
Speaker Change: Yes.
Speaker Change: Okay.
Speaker Change: Yes.
Speaker Change: Yes.
Speaker Change: Okay.
Speaker Change: Okay.
Speaker Change: Yes.
Speaker Change: Yes.
Speaker Change: Yeah.
Speaker Change: Okay.
Speaker Change: Yes.
Speaker Change: [music].
Speaker Change: Okay.
Speaker Change: [music].
Speaker Change: Yes.
Speaker Change: [music].