Hello and welcome to Dropbox's First Quarter 2025 Earnings Conference Call. At this time all participants will be in listen-only mode. After the speaker's presentation, there will be a question-and-answer session. [Operator Instructions]. I would now like to turn the conference over to Peter Stabler. Sir, you may begin.

Good afternoon and welcome to Dropbox's first quarter 2025 earnings call. As a reminder, we will disclose non-GAAP financial measures on this call. Definitions and reconciliations between our GAAP and non-GAAP results can be found in our earnings release and our earnings presentation posted on our IR website @investors.dropbox.com. We will also make forward-looking statements on this call, including statements about our future outlook for our second quarter and fiscal year 2025 as well as our expectations regarding our business assets, strategies and the macroeconomic environment. These statements are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those described. Many of these risks and uncertainties are described in our SEC filings, including our most recent report on Form 10-K. In our forthcoming report on Form 10-Q, forward-looking statements represent our beliefs and assumptions only. As of the date such statements are made. We disclaim any obligation to update any forward-looking statements except as required by law. I will now turn the call over to Dropbox's Co-Founder and CEO, Drew Houston.

Thanks, Peter, and good afternoon, everyone. Welcome to our Q1 2025 earnings call, and I’m here with Tim Regan, our CFO. I’ll start with our business and product highlights, and then Tim will walk through our Q1 results and outlook for the rest of the year. Q1 revenue came in slightly ahead of our forecast. Our focus on operating efficiency, along with some timing related expense savings, help us achieve our highest ever non-GAAP operating margin. As expected, we saw some sequential decline in paying users after removing form switch marketing and pursuing higher efficiencies in our core business, though decrease was less than we anticipated. Now I’ll share an update on our two strategic priorities for this year, which are scaling Dash and simplifying and strengthening our core FSS business. I’ll start with Dash. A few weeks ago, we launched our major spring update, and I’m particularly excited about how it transforms the search experience for our customers. The update delivered three main improvements. First, most search tools today are still limited to text, but as we know, our work lives extend far beyond documents to images, videos, and other rich media. Our spring update breaks this barrier. For the first time, Dash can now search across all these formats, recognizing both metadata and increasingly the actual content within images and videos. Imagine being able to find that specific product photo or design mock up without having to remember what you named the file. That’s now possible with Dash. This capability is especially valuable for creative professionals who work with visual content all day, which is why we’re seeing strong interest in the creative services industry where Dropbox has traditionally been strong. We also made significant performance improvements, cutting latency for Dash’s summarize and answers capabilities by over 50%…

Thank you, Drew. I’ll cover our financial highlights from Q1 and then provide guidance for the second quarter and the full year 2025. As a reminder, our financial objectives this year are aimed at positioning our core file sync and share and document workflow business lines for increased efficiency by driving higher levels of operating margins and free cash flow from these areas. We are then leveraging this profitability and the strength of our balance sheet to reduce our share count, thereby driving growth in free cash flow per share. Concurrently, we are investing in areas where we see opportunities to return to positive revenue growth, most notably with Dash. The first quarter was a solid step forward in executing against this strategy. Starting with our financial highlights from Q1. As a reminder, we recently eliminated our marketing spend behind our FormSwift business, and we reduced the number of outbound sellers supporting our core FileSecondShare business. As expected, these factors pressured our year-over-year revenue growth. Total revenue for Q1 declined 1% year-over-year to $625 million. Constant currency revenue declined 60 basis points year-over-year to $628 million. FormSwift acted as a 70 basis point headwind to revenue on a year-over-year basis. Total ARR was $2.552 billion, down 20 basis points year-over-year and flat on a constant currency basis. FormSwift acted as a 120 basis point headwind to ARR in the quarter. We exited the quarter with 18 million paying users, down approximately 60,000 paying users on a sequential basis. Average revenue per paying user was $139.26 as compared to $140.06 in the prior quarter. The quarter’s sequential decline in paying users was driven largely by our reduced level of investment in FormSwift. ARPU declined sequentially due to both FX as well as a mix shift away from FormSwift where these subscriptions…

Thank you. Our first question comes from the line of Steve Enders with Citi. Your line is open.

Okay. Great. Thanks for thanks for taking the questions here. I guess I just want to ask on or to start asking about some of the, I guess, just better user levels. It looks like was a little bit better than you expected. But just what is it that’s maybe supporting that or helping to drive the better outcomes there? And, guess, how do you kind of feel about the incremental levers or, you know, additional things that you can that are in your control to manage levels from, from here?

Sure. I can start, and Tim can add on. So we’re making progress on a lot of our priorities in the core business. So, in particular, we’re focused on the Teams business, which has higher retention rates, higher ARPU, as has a good attach potential for Dash. And the improvements really stemmed from product performance improvements. So we’ve been focused on making onboarding easier and reducing friction and streamlining that experience. And we’ve seen some of that pay off with from leading indicators like the number of desktop activations to be let successfully install and get up and running on the desktop app. But that number has increased 50% year-over-year. We’ve made similar efforts and improvements on team expansion. We continue iterating iterate on pricing to get the price value equation right. So I think we both made progress on those fronts, and we still have headroom in each of those areas too. And, ultimately, one of the best things we can do for core retention is to complement it with Dash so that the value we provide extends from syncing your files to organizing all your cloud content and providing an intelligence layer over everything and doing that safely.

Hey, Steve. It’s Tim. As Drew talked about, we did see some outperformance on our individual and team SKUs relative to expectations. But as related to the full year, what we did outperform in the first quarter, certainly mindful of the evolving macro environment. And so that’s why we’re maintaining our initial commentary in expecting paying users to decline by roughly 300,000 users. Still expect that FormSwift will represent about half of the paying user decline, and we expect that decline to be roughly evenly spread throughout the year.

Okay. Great. That’s that’s helpful. And then maybe just on on on Dash, you know, I guess, any kind of change in your view since, I guess, over the the past ninety days since we last talked around, you know, the monetization potential or how you expect the, you know, the the rollout and and the sales initiatives back into the base to to play out from here?

Nothing major. I think the things I’m most excited about are things like our recent product release, a couple weeks ago. So our spring release for Dash breaks a lot of new grounds in being able to support images and video, for example, whereas a lot of, other products are focused on text and documents. And we’ve closed a lot of or we we’ve been responsive to a lot of key customer requests, particularly on some of our connector coverage with adding connectors for, apps like Slack and Teams and Zoom and Canva, which are some of our most heavily requested. And then more broadly, the the basic value prop continues to resonate in our our existing customers. Certainly, see this as a natural evolution of what we do. We’ve got half a million paying businesses on Dropbox who also need to organize their cloud content and need to roll out AI safely. And it’s also been good just the progress we’ve been seeing in building pipeline and getting our pilot customers up and running. I mean, I think we’ve had some expected friction. Just there’s opportunities for us to just compress the cycle times of getting customers up and running and making onboarding easier and making teams set up an education easier. So those are the kinds of things we’re iterating on. But overall, no major changes, pretty excited about the opportunity.

Okay. Awesome. Great to, great to hear, and, thanks for taking the questions. Thanks.

Thank you. Our next question comes from the line of Rishi Jaluria with RBC. Your line is open.

Wonderful. Thanks so much for taking my questions. Maybe I want to continue to follow-up on Dash. So I know it’s going take a while before this turns into monetization. But maybe can you be a little bit more specific in terms of early adopters? Kind of what sort of feedback you’re getting from them? And maybe more importantly than that, given the space is competitive and arguably getting more competitive with a number of different players entering it, when you are seeing customers use Dash versus any of the other alternatives, what are typically the reasons you hear from them about why they chose to go with Dash versus using another one of those services? And then I got a quick follow-up.

So one is, as we expected, things like just the basic AI search resonates. But but we’ve actually also seen that, the features around organizing and sharing content, specifically stacks resonate with a lot of our, early users. And so our customers have challenges not just around search, but around organizing and sharing all their content in a cross-platform way. Because if you think about it, you know, getting ready for a board meeting or working on a project and you have a, you know, Google Doc and a video file and an Airtable or something, there’s not really a common container, until stacks. And so, I think customers get really excited about the possibilities and especially when you combine that with the multimodal support to being able to organize images and video, anything about especially the sort of the Dropbox customers skew, or we have a lot of adoption in, like, the creative community or people that work with big files and video. Dash is pretty unique in how, we support that. And then also on the IT side, protect and control really resonates. So when you think about rolling out AI within a company or search, but really AI of any kind, one challenge is it makes it a lot easier for employees to access content that shouldn’t have been shared in the first place and protect and control really helps you identify improperly shared or sensitive content across every platform which is unique and then actually lets you remediate it at its source. So it allows you to identify over shared content, mass unshare it, and set policies, to keep that in line going forward and that’s something that, again, is unique to Dash and a really resonating part of the the value prop beyond, search.

Alright. Wonderful. Helpful. And then maybe just turning to the macro environment. Look, I appreciate the color, out there. I want to think maybe specifically about the consumer side of the business. I know this stuff takes time to flow through, but we’ve seen kind of reports of weakening consumer confidence. And I imagine that’s kind of maybe a little bit of a challenged area. Maybe can you walk me through what are you seeing specifically in the consumer business? And as we think about your guidance for the rest of the year, unless consumer kind of stays at this sort of level, how should we see this playing out? Thanks.

Yes. So in in our world, consumer adoption often in our context means a mixed personal and work use case. And and that’s important because a lot of our individual subscribers are often using Dropbox for something like 80% of our users are using Dropbox or of our subscribers using Dropbox for either a entirely a work use case or a mixed personal and work use case. And then a lot of our that subscriber base has been with us for a long time. And in that context, Dropbox is a pretty, you know, mission critical thing. The reason that people stay on Dropbox is because their most important information is on there and they have this whole sharing network set up in both personal and work context. And so we and we’ve also just observed that while there are the general trends, I think we’re all looking in, you know, keeping an eye on the macro environment, and we haven’t really seen major changes in these trends. And so some of what we’ve seen around we we have seen, like, price sensitivity with SMBs, but both in our, like, SMB segment and consumer segment or individual segment, we haven’t really seen, like, major new changes to leading indicators that indicate some big impact on the macro environment. I mean, obviously, that that can change, but it’s not something we’ve seen yet.

And, Rishi, this is Tim. And maybe as Drew was alluding to as related to guidance, we’ve not seen any meaningful change in our trends at this point, but certainly mindful of this incremental macro risk. We’re also facing some uncertainty as to the pacing of Formswift’s revenue just given the elimination of our marketing investment in that business. And so I’d say we are being prudent with the guidance we’ve shared.

Our next question comes from the line of Matt Bullock with Bank of America.

This is Matt on for Mike Funk. So really strong margin during the quarter. It sounds like there was some timing benefit in sales and marketing, but there was also a pretty substantial downtick in R&D spend, I think down about 20% year-over-year. Should we expect that run rate to be sustainable under the new operational structure? Or should we expect R&D intensity to come back up as some of these investments in Dash contain a ramp?

Sure. I’d say it’s largely sustainable. If you look at our guidance, we’re raising our guidance to 38% to 38.5%, certainly largely reflects our latest outlook on FX. And as you noted, while we beat on operating margins in the first quarter, some of that was due to delayed vendor spend and hiring that we expect to incur later this year. And specific to R&D, certainly mindful of our R&D spend. We’re very focused on optimizing the core business for efficiency. We’re certainly making good progress with that effort but also rotating investments towards our higher growth opportunities such as Dash, where we will continue to invest marketing and headcount to support that.

Understood. Thank you. And then just one more quick follow-up if I could. Sounds like the integration work on Dash is progressing nicely. Are there are there any other major integrations coming down the pipeline that are worth noting that you think could be an unlock for demand?

So one area where we’re really focused is building a self-serve version of Dash to which is, important for unlocking the potential of our self-serve base. So if you think about the more than half a million business customers on Dropbox, the vast majority of those are self-serve. So having a version of Dash that you can just kind of get up and download and get up and running, on your own is important. And then we also have a lot of historical strength which will leverage again in in the self-serve and viral motion and things like stacks and sharing really accelerating growth. So really building that connectivity between FSS and Dash and then making it so it’s, like, really easy for folks to both existing customers to get up and running on Dash in in a seamless way and also for new customers, we think that’s going to be a big accelerant. And I’d just say another part is just touching on the competitive comment before is in our sweet spot, which is largely SMBs in mid-market, we really don’t see a lot of competition. And when I talk to customers and prospects, most of them have not even heard of some of the enterprise focused competitors. So we see this as a lot of white space for Dropbox, which is another area another reason why we’re really focused on building from strength in our in our home field.

Thank you. Our next question comes from the line of Alex Nguyen with Jefferies. Your line is your line is open.

Yes. Hi. This is Alex for Brent Thill. I want to ask about the recent addition of Promoted AI to the team. It looks like the senior individuals there specialize in marketplace app technology. So can you talk more about the strategic implication of this addition, and how are you intending to leverage Promoted AI expertise within your overall business?

Yes. So Promoted AI is a recent acquisition we made. It’s a really talented team with a lot of machine learning and AI experience both within their startup, but then also at a lot of established companies. And they’re coming in to really strengthen our machine learning and search and AI talent on Dash. And they were doing some work on or their company is doing work on advertising, but we’re we’re not going to be leveraging that here.

Yes. Okay. That’s helpful. And then I have another follow-up. I want to ask about the investment throughout the year for Dash that you were implying in your commentary and guidance. What do those expenditures look like? I imagine some of it, it would be to increase the headcount in sales and then the overall sales channel distribution. So, yeah, would love to hear more about that.

Sure. So we will continue to invest in in hiring and marketing investments behind Dash, and that will be some degree of r and d, some as well as as sales and marketing. Drew just alluded to Promoted.ai, which is an r and d investment that we’re making behind Dash. And, certainly, as we’re scaling up our our sales and marketing function, gaining momentum behind that, we’ll continue to add sellers to support Dash. So I expect that investment to hit both sales and marketing and R&D throughout the year.

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

Congratulations on the better-than-expected results in the quarter. So I actually have sort of a product related question, Drew. What so, you know, you’re talking about, like, connectors for Slack and Team and Zoom and Canva. How hard is it to build those connectors? Like, what what’s involved?

It’s pretty challenging. It it sort of sounds easy, but, it is deceptively difficult, and requires a pretty significant r and d, investment to do it properly. So in a lot of ways, what we’re really talking about is a a new form of sync where we have, obviously, lot of experience. But this is a pretty mission critical, capability where it needs to be to operate at Dropbox’s scale. It needs to be totally reliable. It needs to be completely permissions aware. We have to be good partners in terms of consumption and are you making sure that we’re making an appropriate number of API calls and handling rate limits? And, anyway, that’s a very long tail of technical considerations. And we just as some color, we early on, we experimented with using some of these third party, you know, integrations as a service, type partners, but we found that they had significant scalability and engineering correctness and reliability issues. So we both. You know, just sort to safeguard our customers’ data. We felt, the responsible choice was to bring this in house, but we also see that as also we also see that as a potential part of our moat and a and a technical advantage to really make the experience as seamless and performant as possible. And and so it’s an important investment.

Yeah. I agree. And so my follow-up is when you, when you rolled out the spring twenty five release, you sort of summarized the four areas of, you know, search across video audio images, kick start content creation. Number three, connect to even more of the tools. We just discussed that. Number four, more control over what your team can and can’t. Right? Which of those is the most expensive and time consuming for you? Is it what we just talked about?

I think they’re all big big investments with somewhat different shape. I think, certainly, when you’re supporting images and video, that’s really like, on the one hand, that that is an expensive capability and requires a lot of storage and compute. That said, you know, certainly for the Dropbox customers, we’re already we’re already handling the storage at scale and doing it really efficiency efficiently. So while on the one hand, it is, you know, it’s a big technical lift, on the other hand, it’s way you know, it’s much easier for us to support these use cases efficiently and profitably than, than a smaller the smaller scale competitor. And we’re drafting off of a lot of the technical investments we’ve made over the last eighteen years.

Thank you. Ladies and gentlemen, I am showing no further questions in the queue. I would now like to turn the call back over to Peter for closing remarks.

Thanks, Towanda, and thank you, everyone, for joining us today. We look forward to speaking you to again next quarter. Have a good day.

Ladies and gentlemen, that concludes today’s conference call. Thank you for your participation. You may now disconnect.