Dropbox, Inc. (NASDAQ:DBX) has announced its financial results for the fourth quarter of 2023, revealing a 6% year-over-year increase in total revenue to $635 million and a non-GAAP operating margin record of over 32%. Despite facing a sequential decline in annual recurring revenue (ARR) and paying users, the company generated over $750 million in free cash flow. Dropbox also highlighted its focus on AI-powered product experiences, particularly with the introduction of Dropbox Dash, and its plans to continue investing in this area throughout 2024. The company provided financial guidance for the first quarter and full year of 2024, with expected revenue ranging between $627 million and $630 million for Q1 and $2.535 billion to $2.550 billion for the full year.
Key Takeaways
- Dropbox's Q4 2023 revenue reached $635 million, a 6% increase year-over-year, with a non-GAAP operating margin of over 32%.
- The company's ARR grew to $2.523 billion, a 3.8% increase year-over-year, but experienced a sequential decline.
- Dropbox ended Q4 with 18.12 million paying users, a decrease of about 50,000 users from the previous quarter.
- AI-powered Dropbox Dash was introduced to enhance the user experience.
- The company plans to focus on improving collaborative and admin workflows and investing in AI in 2024.
- Financial guidance for Q1 2024 projects revenue between $627 million and $630 million, and full-year revenue between $2.535 billion and $2.550 billion.
Company Outlook
- Dropbox expects to focus on improving onboarding, activation, and retention of users on its Dash product in 2024.
- Strategic investments are planned throughout the year, with a focus on both core business and AI-powered areas.
- M&A opportunities are under consideration to accelerate the company's roadmap.
Bearish Highlights
- The company experienced reduced new licenses, higher churn, and downsell in Q4 2023.
- A sequential decline in ARR was due to changes such as eliminating unlimited storage for advanced plan users and macroeconomic challenges.
- Paying user growth is expected to be lower than previous years.
Bullish Highlights
- Dropbox achieved record non-GAAP operating margins and generated significant free cash flow.
- The company announced a partnership with McLaren Formula 1 to drive awareness of its offerings.
- Dropbox remains committed to its share repurchase program and aims to allocate a significant portion of its annual free cash flow to reduce its share count.
Misses
- The company's guidance for 2024 falls below the previously set free cash flow target of $970 million, primarily due to slower billings growth, FX headwinds, and investments in Dash.
Q&A Highlights
- Success of Dropbox Dash will be measured through product quality, onboarding success, engagement, retention, and monetization.
- Dash will be offered as a stand-alone subscription and as part of a bundle in the future.
- The demand environment is expected to remain consistent with previous quarters.
Dropbox's Q4 performance and outlook for 2024 reflect a company navigating through a challenging economic landscape while investing in innovative AI technology to drive future growth. The company's strategic focus on product development and operational enhancements, alongside partnerships and team expansions, underscore its commitment to long-term success despite short-term headwinds.
InvestingPro Insights
Dropbox, Inc. (DBX) has showcased resilience with its Q4 2023 earnings, and the financial data from InvestingPro provides a deeper look into the company's performance and potential. With a substantial market capitalization of $11.25 billion, Dropbox continues to command a significant presence in the cloud storage market. The company's P/E ratio stands at 24.84, indicating investor confidence in its earnings capacity relative to its share price.
A notable InvestingPro Tip emphasizes Dropbox's high gross profit margin, which was an impressive 80.87% in the last twelve months as of Q4 2023. This figure aligns with the company's reported non-GAAP operating margin of over 32% for Q4, reflecting efficient cost management and a strong business model.
Another InvestingPro Tip worth mentioning is the company's aggressive share buyback strategy. Dropbox's commitment to its share repurchase program is evident, aiming to allocate a significant portion of its annual free cash flow to reduce its share count, as highlighted in the article. This strategy can be beneficial for shareholders, as it often leads to an increase in earnings per share and a higher stock valuation.
Investors looking to delve deeper into Dropbox's financial health and future prospects can access additional InvestingPro Tips by visiting https://www.investing.com/pro/DBX. There are currently 13 more InvestingPro Tips available, providing a comprehensive analysis of Dropbox's financial metrics and market position. To get an additional 10% off a yearly or biyearly Pro and Pro+ subscription, use the coupon code PRONEWS24.
Dropbox's focus on AI-powered product experiences and strategic investments, as mentioned in the article, is supported by its solid financial foundation and prudent fiscal management. As the company navigates through economic challenges, these InvestingPro Insights offer valuable context for investors considering Dropbox's potential for sustained growth and profitability.
Full transcript - DropBox Inc (DBX) Q4 2023:
Operator: Good afternoon, ladies and gentlemen, thank you for joining Dropbox's Fourth Quarter 2023 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded and will be available for replay from the Investor Relations section of Dropbox's website following this call. I will now turn it over to Ishaan Gupta with Dropbox's Investor Relations Team.
Ishaan Gupta: Thank you. Good afternoon, and welcome to Dropbox's fourth quarter 2023 earnings call. 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 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. 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 will also discuss non-GAAP financial measures, which are not prepared in accordance with Generally Accepted Accounting Principles. A reconciliation of GAAP and non-GAAP results is provided in our earnings release and on our website at investors.dropbox.com. I will now turn the call over to Dropbox's Co-Founder and Chief Executive Officer, Drew Houston.
Drew Houston: Thank you, Ishaan, and good afternoon, everyone. 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 2024. Tim will then go over our financial results for Q4 and fiscal year 2023, as well as provide guidance for Q1 and fiscal 2024. Let's get started. In 2023, we had two main business objectives. The first was to build AI-powered product experiences centered around organizing all your cloud content. The second was to continue evolving our core FSS offering to provide a seamless product experience for our customers workflows. I'm proud of the work our team accomplished on both of these fronts. Starting with building AI-powered product experiences. In 2023, we introduced the first iteration of Dropbox Dash, a standalone universal search product, leveraging AI and machine-learning. With more of our 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. 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 experience. While still very early, we are gaining valuable insights into the types of customers that are engaging with this product and the features that are generating the most interest. 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. 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. 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 the funnel and ultimately ensure we're delivering the best product experience to our users. 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 (NASDAQ:GOOGL) One Tap to streamline and improve the user onboarding experience. Given the size of our registered base, these changes impact millions of users and we believe the progress we made 2023 will strengthen our foundation, heading into 2024. Additionally, many of our customers lack awareness of our capabilities beyond storage, often asking us for features that we already have such as e-signature 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 customers. 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 in a moment. 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. 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. Although I was proud of last year, Q4 was a challenging quarter, some of these challenges were expected. For instance, we continue to see the broader economic backdrop impacted both our Teams and document workflow businesses, as customers are being more cautious with their spend and exhibiting higher levels of price sensitivity. This resulted in reduced levels of gross new licenses and upsell activity, alongside higher churn and downsell. As an example, certain Teams customers, particularly those in the tech sector, continue to reduce licenses due to spending cuts, our headcount reductions of their own. FormSwift and DocSend also saw elevated churn in the quarter. And as we've discussed on our call last quarter, we traditionally see seasonally low activity within our File Sync and Share business as well as our FormSwift business in the fourth quarter of each year. 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 in the near-term. For example, like others have done, we sunset unlimited storage and our advanced plan and transition to a metered model. We found that some customers weren't using the plan 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 resell storage. While this change will ultimately translate into increased profitability in the long-term, I'd like to increase funds and incremental churn for those customers seeking storage solutions that we no longer offer. We also de-emphasize our family plan, as we found that some business users were also using it as a loophole to obtain licenses at a lower cost. 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 we're actively addressing. 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 uplift we were looking for. However, we still see opportunity here and we're iterating on these experiments and incorporating the related learnings into our plans for 2024. 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 point. 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 rates. As a result, we're revisiting our approach. In Q1, we'll keep iterating on our pricing and packaging and will continue to improve the product experience for these customers. At the same time, we will refine our marketing approach in our self-serve engine to ensure that we we're properly identifying and serving customers that are interested in FSS only SKUs versus our multiproduct. 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 at notably higher rates than storage only customers, but will be iterating on the past desktop forward with our bundle strategy and we'll have more to share in the following quarter. All of which brings me to our strategy for 2024. As I have 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. 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 business and we see a similar opportunity with our Teams customers. 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. 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 the 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 can more easily expand their team deployments. As I mentioned earlier, we will also invest in our Teams plans by iterating on our bundles experience to ensure that our customers are aware of and leveraging our multi-product capabilities. This includes weaving advanced sharing capabilities such as DocSend and Replay more seamlessly into our product experience, given our proven strengths and 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 functionality. 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 solve with FSS, but instead of the problem of files scattered across different devices, Dash is addressing the challenge with cloud-based content and URLs scattered across hundreds of apps and browser tabs. We have a long history of solving our customer's problems as 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. We'll continue to invest in Dash, as our lead AI products 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 are providing the best experience to customers. For example, we noticed users and a lot of friction in adding and connecting Dash to all the different apps, so we're making the experience of connecting apps during onboarding smoother, so that we can improve activation rates. We're also investing in experiences like stacks, improving discoverability, improving sharing. 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 in metrics like retentions to where we want them, we will run a lot of the same playbook that may 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. As I shared earlier, we know our customers are often unaware of our capabilities beyond storage. To this end, last week we announced a partnership with McLaren Formula 1 team, where Dropbox is becoming an official technology partner. 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. 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. We have ambitious goals in 2024 and I'm excited to work with our teams to achieve everything we have planned. We've also made several strong additions to both our leadership bench as well as our Board over the past few months. In December, Eric Cox joined us as our Chief Customer Officer, overseeing our go-to-market teams. Eric comes to us from Vimeo (NASDAQ:VMEO), where he was COO and prior to that, he spent nearly 20 years at Adobe (NASDAQ:ADBE) in a variety of roles across sales, marketing and operations. We also welcome Dr. Andrew Moore to our Board of Directors. Andrew is a leading expert in AI, machine-learning and robotics and he has had a decade-long career in academic and tactical leadership. 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. 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 for the future. 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. This year represents a unique point in our Company's evolution. Many of our mature FSS products are seeing slowing growth and newer products like Dash are still early in their lifecycle. 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 in front of us. 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 for 2024.
Tim Regan: Thank you, Drew. I'll cover our financial highlights from Q4 and share guidance for Q1 and fiscal 2024. I will then offer some context on the considerations underlying our guidance. Starting with the fourth quarter of 2023, total revenue for the fourth quarter increased 6% year-over-year to $635 million, beating our guidance range of $629 million to $632 million. Foreign-exchange rates provided an approximately $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 sequentially. As Drew mentioned, the sequential decline in ARR was driven by a few factors, including business decisions we intentionally made such as eliminating unlimited storage for advanced plan users, which resulted in incremental churn and softness in our top of funnel, a continued challenging macro-economy 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 page, macro headwinds facing our Teams SKUs, experiments that underperformed impacting our individual SKUs and finally, Q4 tends to be a seasonally low quarter for File Sync and Share and FormSwift in particular. 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. Before we continue with further discussion on our P&L, I would like to note that, unless otherwise indicated, all income statement figures mentioned are non-GAAP and exclude stock-based compensation, amortization of purchased intangibles, certain acquisition-related expenses, net gains and losses on our real-estate assets, and our workforce reduction expenses. Our non-GAAP net income also excludes the income tax benefit from the release of a valuation allowance on deferred tax assets and includes the income tax effects of the aforementioned adjustments. Moving to our real estate strategy, where we have been actively seeking subleases and buyouts of our vacant real estate space, 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 2023. The remaining payments resulting from the buyout will occur in Q2 of 2024 and Q1 of 2025. 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 and common area maintenance fees over the remaining 10-year lease duration. The result of this buyout was a $159 million gain in Q4 2023. The gain represents the reduction to our future lease payments in excess of the sublease income we previously anticipated collecting for this space. And as I previously mentioned, we will continue to actively seek subleases and pursue additional buyouts, where we see favorable returns. With that, 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. Operating margin was 32.2%, up 200 basis points year-over-year. We beat our Q4 operating margin guidance by nearly a point driven by our continued focus on being efficient with our spend across the business. I note that in Q4 we held both our in-person user conference, and we invested in product and brand awareness marketing campaigns, which resulted in a sequential decrease in operating margin. Net income for the fourth quarter was $171 million, which is a 21% increase versus the fourth quarter of 2022, driven by operating income growth. Diluted EPS was $0.50 per share based on 344 million diluted weighted average shares outstanding, which increased compared to $0.40 per share based on 354 million diluted weighted average shares outstanding for the fourth quarter of 2022. Moving on to our cash balance and cash flow. 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 quarter. This resulted in quarterly free cash flow of $190 million compared to $182 million in Q4 of 2022. I note that free cash flow for 2023 came in lower than our guidance range of $775 million to $785 million, due to a reduced level of billings as well as the timing of payments and collections. In the quarter, we also added $51 million to our finance leases for data center equipment. As we mentioned on our last call, we expected this sequential increase in our finance lease lines, 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 levels. 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 authorizations. Our philosophy on share repurchases has not changed. We remain committed to returning a significant portion of our free-cash flow to shareholders in the form of share repurchases with the intention of reducing our share count. I'd now like to share our 2024 first-quarter and full year guidance, where I will also provide some context on the thinking behind this guidance. In the first quarter of 2024, we expect revenue to be in the range of $627 million to $630 million. 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 recognized one less day of subscription revenue in Q1 relative to the prior quarter. We expect non-GAAP operating margin to be approximately 33%. Finally, we expect 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. For the full year 2024, we expect revenue to be in the range of $2.535 billion 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-GAAP operating margin to be in the range of 32% to 32.5%. We expect free cash flow to be in the range of $910 million to $950 million. 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 quarter. The second is a $15 million payment for the second tranche of the buyout related to our San Francisco headquarters. And the third is $2 million in cash outflows for the 2024 instalments of acquisition-related deal consideration holdbacks for Command E. 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 in 2024. Finally, we expect 2024 diluted weighted-average shares outstanding to be in the range of 336 million to 341 million shares, based on our trailing 30-day average share price. 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 Teams price increase and our acquisition of FormSwift and thus, we expected a slowing revenue growth rate. 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 2024. As we 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 trends. Once we have increased certainty that 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. Similarly, our guidance does not include any benefit from our bundled SKUs, as our Teams continue to iterate on the optimal product experience and go to market motion for these plans. 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 negative. This is due to the continued headwinds we are facing as well as the de-emphasis of the family plan and the latest state of our growth initiatives. Ultimately, we do expect to add paying users in 2024, however, at lower levels than prior years. 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 years, which will apply to asset balances on our balance sheet as of December 31st, 2023, as well as future asset purchases. As a result, we expect the benefit to our full-year gross margins of approximately $30 million. For Q1, we expect a benefit of approximately $10 million. As related to operating margins, we're 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 2023. This range includes continued investment in our longer-term AI and growth-related investments such as Dash. Additionally, we are planning for increased levels of marketing investments, including our new partnership with McLaren Formula 1 racing, as we aim to drive market awareness of our platform's capabilities. Lastly, this guidance preserved some optionality to make strategic investments across the business over the duration of the year. We also expect our additions to finance lease lines to increase in 2024 versus prior years. This was primarily due to two factors. The first is the one-time storage quota grants we are providing to a portion of our customers on the advanced plan, as we deprecate our previous as much space as you need policy. While this requires incremental storage capacity in the near-term, our revised plan around storage usage will enable us to have a more profitable SKU once the onetime 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 million to $950 million. This guidance falls short of our long-term free-cash flow target, which we adjusted during our previous earnings call to be roughly $970 million after taking into account headwinds from R&D tax legislation related payments. 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, where 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 billings associated with our revenue guidance, the incremental FX headwinds we are facing relative to when we first introduced our target as well as the investments we're making to fuel our future growth in products such as Dash. While we could scale 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. These investments in product initiatives along with decisions, such as our San Francisco lease buyout and the changes we made to our advanced plan are putting a short-term strain on our financial trajectory, however, are in line with our primary focus on strengthening the company's long-term position. 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 experiences 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 Sync and Share business is still generating growth in revenue and free-cash flow, while we also reduce our share count. 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, 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, but creating value for our shareholders. And with that, I'll turn it over to the operator for questions.
Operator: Thank you. [Operator Instructions] And our first question will come from Rishi Jaluria from RBC Capital Markets. Your line is open.
Rishi Jaluria: Oh, wonderful. Thanks guys for taking my questions. I wanted to start out, Drew, in the past, you've talked about there is maybe some appetite for M&A, especially transformational M&A. Given this kind of road map 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 road map in kind of broadening the platform and going from the EFSS to kind of a more Gen AI-enabled company? And then I've got a quick follow-up.
Drew Houston: Sure. So still see a big opportunity for M&A to accelerate our road map. And actually, Dash - Dropbox Dash is a great example of - it was seeded by an acquisition of a company called Command E We did. And another benefit is that unlike the first few years after we were public, when valuations were really frothy, 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 private company valuations, too. So we think it's a door that keeps opening. But our philosophy is - and so, I think we are certainly opportunistic on the lookout for good companies to buy. But at the same time, our philosophy is pretty consistent. 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 start-up funding. And I don't think it's everywhere, but I think you have to be careful. But yes, M&A certainly continues to be a big opportunity for us.
Rishi Jaluria: All right. Wonderful. That's really helpful. And then turning to Dash. I know 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, right? Because it sounds like it's solving, a real problem that customers have. But I think a lot of times over the years, we've learned customers may not use it, even if they should be. So what - how are you measuring that success? And what can you do to drive user adoption of Dash to begin with? Thanks.
Drew Houston: Yes, yes. So measuring it qualitatively and quantitatively. So really great news and something we pay a lot of attention to, is when we watch customers or talk to customers, everybody's got this problem. Everybody struggles with information overload, fragmentation of using all these different apps. And so, when we explain the value prop, the most common response is, yes, yes, I totally have this problem. And then it's - the question is more like can you really solve it for me? So we start with like, is there a real job to be done in 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 are, how is the quality of the Dash experience? And so, we've spent a lot of time and effort and made a lot of progress in improving things like search ranking and quality. We look at how do we - I mean this is a new category. So similarly to Dropbox 1.0, we spend a lot of time focusing on what the onboarding experience look like, do people understand the concepts. 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 minimize time to value, things like that. 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 is great, then you sand down rough edges in the onboarding. Then you drive engagement, then monetization - or engagement retention, then monetization and virality. So, we're still in the early innings of that, so I think making progress on all fronts. And yes, this year, we'll continue to open the doors wider and wider to Dash as we scale it up.
Rishi Jaluria: Really helpful, thank you so much.
Operator: Thank you. Our next question will come from Steve Enders from Citi. Your line is open.
Steve Enders: Hi, great. Thanks for taking the questions here. I guess maybe just to start, I think it'd be getting a little more clarity on the packaging, and pricing changes that you were - have been working on, 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, and trying to build on those learnings, like what does that, I guess, kind of look like through calendar '24 here?
Drew Houston: Sure. So some of the lessons from last year, we did a big launch in October where we wanted to address one of the biggest gaps in our funnel, which is that we have all these products that customers. The majority of our customers are not aware that we do more than storage. 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. And because when you look at Sign and DocSend, those started as acquisition of companies and we brought them in via acquisition, and we are fully - 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 -- we launched new bundles that include the workflow products as well as FSS. And then what we found is 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 are favorable. So for example, we saw more or like a significantly elevated attachment to multiple products, but some changes were negative. So for example, as the default SKUs were more expensive, we saw a decrease in new subscriptions on our team's SKUs. 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 a number of steps, but then that had a negative impact on engagement in, as customers who are going, into their second through six months or things like that. So it's affecting retention curves. So part of what we're doing is backing up a little, and it 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 - stepping back and taking more iterative approach, to preserve as many of the good changes as we can and edit out the ones that were less promising. 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 universal search.
Steve Enders: All right. Perfect. I appreciate the context around some of those changes on. And then maybe just on the macro side of it. It seems like most of the challenges were more related to the business on the team side. I guess I just want to clarify if there is kind of any impact more on the consumer front as well? And then, for the public funnel activity, seemed like that slowed down a little bit. How has that kind of trended so far in '24 in the first half of the quarter here?
Drew Houston: Sure. I mean I'd say, overall, 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 broadly things when you look at the teams business, it's mostly driven by customers becoming more price-sensitive in general, or something we see often is, where we saw last year was 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 look like the eSignature category or things like DocSend. There's a big acceleration during COVID and then a bit of a pullback. So things like eSignature were sector wide. And then DocSend has - focuses on the fundraising and kind of start-up 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, then DocSend's business has been impacted by that. So there's a lot we're doing in response. Again, like integrating the experiences to be - 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 help. And then with DocSend expanding to new audiences and use cases. So for example, we've been working towards - we've had a lot of good early signal on our virtual data room offering in DocSend, and we'll be rolling that out to GA later this year. So I'd say there wasn't a lot of change in the shape of the curves. It's 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 some of - and doc workflow products, especially FormSwift for different reasons.
Tim Regan: 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. So that's all in line with our guidance. So that's all been factored in.
Drew Houston: And we see less of the seasonality effect in Q1.
Steve Enders: Okay, perfect, I appreciate the commentary there. So I'll turn it back to you.
Operator: Thank you. And our next question will come from Michael Funk from Bank of America. Your line is open.
Michael Funk: Yes, thank you for the questions. A couple if I could. So on the call, you mentioned seat rationalization is one of the factors that you've been seeing in the last 12 months or so, specifically software companies. We did see a notable increase in rest across software since the beginning of the year. So can you comment on how much the most recent reductions back into your forecast for the year? And if we don't draw a direct correlation between those reductions customers and the seat rationalization?
Tim Regan: 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'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. And there may be some quarters where we lose paying users, depending on things like the state of the economy, potential turn of larger customers and the timing of our initiatives. But again, we still expect to add paying users this year.
Michael Funk: Okay. And then just on the share repurchase plan, and the guidance for the share count for the year, trying to some back envelope math here. Does that roughly imply a similar cadence, to share repurchase in '24, to what we saw in 2023 absolute dollars?
Tim Regan: Yes, I'd say no changes in our philosophy as far as share repurchase program, still remain very dedicated to that. We continue to expect, to allocate a significant portion of our annual free cash flow to share repurchases, with the intention of reducing our share count. And maybe to provide some color on how it is structured, our 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.
Michael Funk: Great, thank you so much for the questions.
Operator: Thank you. And our next question will come from Pat Walravens from Citizens JMP. Your line is open.
Pat Walravens: Oh, great, thank you. I mean, Drew, very big picture, how happy were you with how this business executed in Q4?
Drew Houston: So I mean, 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. And 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 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 to the ones. I think that was a lesson. And then some of the lessons around, yes, 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 props are more compelling. So the idea of like, well, I can consolidate spend by. In addition, if I can have not just files we can share, but also be able to have eSignature 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. So this is the kind of iteration that we need to do. So 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.
Pat Walravens: Okay. Thank you. And then, Tim, is there - did I miss it? Is there a sort of a new $1 billion free cash flow target?
Tim Regan: Yes. 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 million. Our guidance of 910 to 950 falls below that target, and that's primarily driven by slower billings growth, incremental FX since we first set the target and our investments in Dash. Now while we could withhold investments in our long-term initiatives to meet the target, that would be a shortsighted approach. 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 and via product execution or identifying efficiencies within the business.
Pat Walravens: Okay. Thank you.
Operator: Thank you. [Operator Instructions] And one moment for our next question. And our next question will come from Richard Hilliker from UBS. Your line is open.
Richard Hilliker: Hi guys, thanks for taking my question. My question is on the R&D line. So I appreciate the exciting opportunity 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.
Tim Regan: Sure. I'll start, Drew. 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 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, we 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 contemplates an investment on 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 initiatives such as Dash. We're also going to be investing in marketing, to drive product and brand awareness, including our partnership with McLaren Formula 1 racing that Drew alluded to. And the guidance does preserve some flexibility to invest across the business, to drive long-term growth.
Drew Houston: Yes. And I would just add that it's a balancing act. 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 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. And ultimately, I think it's going to 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. And I think another thing is we're also been reallocating our resources away from less efficient or less promising areas and more towards things like AI and Dash. So that's a little bit harder to see was just the aggregate R&D line.
Richard Hilliker: Okay. Thanks. And then, Tim, maybe one last one for you here. 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%. It 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.
Tim Regan: Yes. 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'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 advanced plan who are using an excess amount of storage. So, we've grandfathered some of these customers in. And so, we need to support those customers. So that's partly what's driving that additions.
Operator: Thank you. Our next question will come from Mark Murphy from JPMorgan. Your line is open.
Mark Murphy: Thank you. Do you notice much of a difference in the signals you're seeing from the very, very smallest businesses, which are more sensitive to interest rates, and banks extending credit if you compare that to your relatively midsized, and larger customers within the mix?
Tim Regan: Yes. Hi Mark, 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. Again, as Drew has talked about, some of that is due to heightened price sensitivity, and we've seen that since our price increase in 2022. And again, as Drew has also touched on, some of that also pertinent to SMBs seeing down sell pressure as teams trim their license counts, following whether that's layoffs, or budget cuts, those sorts of things. So our guidance factors in a continuation of these trends.
Mark Murphy: 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, there's no real price increase as a driver. You're taking some intentional actions, which are minor headwinds. And you had foreshadowed a lot of this coming off the Q3 call. The new products haven't ramped yet. We still have tech companies that are out there doing incremental layoffs. Is it a bit of a perfect storm this year where that kind of alignment of all these factors might be marking a troughing out period?
Drew Houston: Yes. So with last year, we had to make some difficult decisions with 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 investments 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 there are like a lot of more difficult decisions are behind us and winning this year would look like finishing the swing on that, rotating away from things like price and monetization experiments, to areas of the funnel, especially on our teams business where that 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. A lot of friction, I would see is unnecessary, like too many steps or 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 we continue to make that better, and make some more 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 a 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. So, I think stabilizing the core business and like - and getting after some of those levers where we've been underinvesting around team onboarding, team expansion, sharing in general. And then the other main goal is getting Dash to true product market fit. 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, and we're doubling down on a lot of those things.
Mark Murphy: Thank you.
Operator: Thank you. And our last question will come from Brent Thill from Jefferies. Your line is open.
Eylon Liani: This is Eylon Liani on for Brent Thill. 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 I have a follow-up after.
Tim Regan: Yes, great question. I'd say it was in line. I 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. We talked about FormSwift, which sees a seasonal low point in the fourth quarter, and then tends to rebound in the first quarter as we enter tax season. And then we saw consistent pressure across DocSend and our eSignature categories. DocSend, in particular, continue to see headwinds in the fundraising space. So a lot of consistency in what we have been seeing. And that has all been extrapolated into our guidance, for next year as far as a continuation of those trends.
Eylon Liani: 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 would they be priced as a separate SKU? Just like a high level, how should we think about it?
Drew Houston: Yes, it will be both. So Dash will be available as a stand-alone subscription and then there will also be different add-on and bundle options over time. So - and we're still pretty early in terms of signal on monetization, we're focusing on finding on driving adoption right now.
Eylon Liani: Thanks, super helpful.
Operator: 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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