Dropbox, Inc. (DBX) Q4 2025 Earnings Call Transcript

Access earnings results, analyst expectations, report, slides, earnings call, and transcript.

Overview

The earnings call summary presents mixed signals: a slight decline in revenue and ARR due to FormSwift's wind-down, but an increase in paying users and ARPU. The Q&A reveals management's focus on Dash's long-term potential, but lacks specific metrics, causing some uncertainty. Positive factors include improved operating margin and cash flow. However, the absence of clear guidance on Dash and weak ARR create a neutral sentiment. With no market cap data, the impact on stock price is uncertain, but likely neutral due to offsetting positive and negative factors.

Key Financial Performance

Revenue Fourth quarter revenue was $636 million, a decline of 1.1% year-over-year. Excluding the impact of FormSwift, constant currency revenue was flat year-over-year. The decline was attributed to the wind-down of FormSwift, which acted as a 150 basis point headwind to revenue.

Total ARR (Annual Recurring Revenue) Total ARR was $2.526 billion, down 1.9% year-over-year. Excluding the impact of FormSwift, ARR was down 0.3% year-over-year. The decline was attributed to the same FormSwift headwind.

Paying Users Dropbox exited the quarter with 18.08 million paying users, a sequential increase of approximately 10,000 paying users. Growth was primarily driven by momentum in the Simple plan.

Average Revenue Per Paying User (ARPU) ARPU was $139.68, up from $139.07 in the prior quarter. The increase was primarily due to FX tailwinds and a mix shift from annual to monthly plans.

Gross Margin Gross margin was 80.8%, down 2.3 percentage points year-over-year. The decline was due to higher depreciation from hardware refreshes, ongoing data center build-outs, and increased infrastructure costs associated with Dash trials.

Operating Margin Operating margin was 38.2%, up 1.3 percentage points year-over-year. The increase was attributed to lower headcount following a reduction in force and the elimination of marketing support for FormSwift.

Net Income Net income for the fourth quarter was $174 million. The year-over-year decrease in diluted EPS from $0.73 to $0.68 was largely due to higher interest expenses.

Cash Flow from Operations Cash flow from operations was $235 million, an increase of 10% year-over-year. The increase was attributed to the absence of payments related to the reduction in force in Q4 2024.

Unlevered Free Cash Flow Unlevered free cash flow was $251 million, or $0.99 per share, up 44% year-over-year. The increase was driven by higher cash flow from operations and lower capital expenditures.

Capital Expenditures (CapEx) CapEx was $11 million, primarily related to data center build-outs. This marked the end of elevated spend for the hardware refresh cycle.

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Operating Highlights

Dash and Dropbox: Launched embedded Dash capabilities inside Teams plans, including semantic search, chat, and stacks organization and sharing. Early engagement shows over half of active users return multiple days per week. Scaling rollout to additional customer cohorts.

Protect and Control: Closed a 6-figure international deal for Dash's Protect and Control features in Q4. Positioned as a solution for AI data security and adoption challenges.

Sales-led growth: Hired Eric Webster as Chief Business Officer to improve sales-led motion for multiple products, including Core FSS, Dash, Protect and Control, and DocSend.

M&A: Positioned as a lever to expand product portfolio and contribute incremental ARR over time. High bar for strategic fit and financial return.

Efficiency improvements: Generated over $1 billion of unlevered free cash flow in 2025. Reduced diluted share count by over 50 million shares through share repurchase program.

Infrastructure investment: Completed elevated spend for hardware refresh cycle, leading to lower infrastructure investment in 2026.

Core FSS business stabilization: Focused on improving funnel quality, pricing, packaging, product fundamentals, and retention drivers. Early tests showed improved trial conversion rates and higher engagement.

AI integration: Dash and Dropbox integrates AI capabilities into Core FSS, enhancing value and retention. Positioned as a significant innovation for the Core FSS offering.

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Risk or Challenges

Revenue Decline: Revenue declined 110 basis points year-over-year in Q4 2025, with FormSwift acting as a 150 basis point headwind. The company also expects flat revenue growth in 2026, excluding FormSwift, indicating challenges in achieving revenue growth.

Customer Retention and Churn: While improvements in retention were noted, churn remains a significant issue, offsetting much of the gross new ARR generated by the Core FSS business.

FormSwift Wind Down: The decision to sunset FormSwift by the end of 2026 will continue to act as a headwind to revenue and paying user growth.

Competitive Market for Core FSS: The Core FSS business operates in a mature and competitive market, which poses challenges to achieving growth and retaining customers.

Onboarding Friction for Dash: Dash, a key growth initiative, faces challenges with onboarding friction, time to value, and the experience around connecting apps, which could hinder adoption and engagement.

Scaling Dash Trials: Scaling Dash trials is expected to put modest pressure on gross margins in 2026, reflecting the cost of expanding this initiative.

Sales-Led Motion Challenges: The sales-led motion for selling multiple products, including Dash and Core FSS, requires significant improvement in funnel, process, and enablement.

Economic and Currency Risks: Currency fluctuations have impacted revenue and ARPU, and economic uncertainties could further affect financial performance.

Infrastructure Costs: Higher depreciation and infrastructure costs associated with data center build-outs and Dash trials are pressuring gross margins.

AI and Data Security Investments: While Protect and Control shows promise, the company faces challenges in capitalizing on emerging demand for AI data security solutions.

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Guidance & Outlook

Revenue Expectations: For Q1 2026, revenue is expected to be in the range of $618 million to $621 million, implying 0.4% growth year-over-year at the midpoint, excluding FormSwift. For the full year 2026, revenue is expected to be in the range of $2.485 billion to $2.5 billion, reflecting flat growth year-over-year at the midpoint, excluding FormSwift.

Operating Margin: Non-GAAP operating margin for Q1 2026 is expected to be approximately 38%. For the full year 2026, operating margin is expected to be in the range of 39% to 39.5%.

Capital Expenditures: CapEx for 2026 is expected to be in the range of $20 million to $25 million, with a slight increase due to a one-time investment in the new San Francisco headquarters.

Unlevered Free Cash Flow: Unlevered free cash flow for 2026 is expected to be at or above $1.040 billion.

Gross Margin: Gross margin for 2026 is expected to be in the range of 81.5% to 82%, with modest pressure due to scaling Dash trials.

Finance Leases: Finance lease additions are expected to be approximately 4% of revenue, with lower infrastructure investment anticipated due to the completion of the hardware refresh cycle.

Paying Users: Modestly negative net new paying users are expected in Q1 2026 due to seasonality and FormSwift headwinds, with roughly flat paying user growth for the remainder of the year.

Dash Product Rollout: Investments will focus on scaling Dash trials across new customers and a larger segment of the FSS user base, with improvements in onboarding and user experience planned for the first half of 2026.

AI and Data Security: Protect and Control features are expected to play a significant role in addressing AI data security challenges, with potential for growth as a standalone opportunity and AI adoption enabler.

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Shareholder Return Plan

Share Repurchase Program: Through our share repurchase program, we reduced diluted share count by more than 50 million shares in 2025. In the fourth quarter, we repurchased approximately 14 million shares, spending approximately $415 million. As of the end of the fourth quarter, we had approximately $1.17 billion remaining under our existing share repurchase authorization and $1.2 billion of additional term loan liquidity with $700 million allocated to retire our March 2026 convertible notes. Reducing share count under these conditions increases free cash flow per share and enhances long-term shareholder returns.

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Key Q&A

Q:Can you provide a quantitative framework around Dash seats, attach rates, or ARR contribution?

A:Management focused on the conceptual framework, emphasizing product quality, engagement, and adoption before monetization. Specific metrics and targets will be shared in the second half of the year as they progress towards monetization.

Q:What metrics can you provide around engagement with Dash, such as time spent, percentage of paying users, or impact on gross retention?

A:Management highlighted good early results from a small user base, with repeat usage exceeding expectations. They are accelerating Dash's rollout and will introduce metrics as adoption and monetization progress.

Q:What is the longer-term strategy for Dash, including potential workflow integration and platform development?

A:Management discussed building a new generation of technical infrastructure called the 'context engine' to enhance AI capabilities. They aim to shift from informational use cases to automating workflows and addressing security concerns, with a focus on providing value to users.

Q:What drove the sequential growth in paid users, and how sustainable are these improvements?

A:Improvements were attributed to new leadership and enhancements across the customer funnel, including retention, conversion, and onboarding. Management is optimistic about sustaining and building on these improvements.

Q:Why is there a divergence between revenue stabilization and weaker ARR?

A:The divergence is due to FX positives in ARPU metrics and timing-related differences. Management expects ARR and revenue to align more closely in the future.

Q:What are the paying user growth assumptions for the year, and how will they evolve across individual and Teams plans?

A:Management expects net new paying users to be flat year-over-year, with a decline in Q1 followed by recovery throughout the year. They are targeting improvements in retention, gross adds, and upsell.

Q:What is the M&A strategy and key areas of focus for expanding the product portfolio?

A:Management emphasized the importance of M&A for scaling the company, focusing on AI talent, early-stage products, and established businesses. They are particularly interested in opportunities related to AI infrastructure, agentic capabilities, and security.

Q:Review of Unclear Management Responses

A:Management avoided providing specific quantitative metrics for Dash engagement and ARR contribution, citing the need to focus on adoption and product quality before monetization. They also used broad language when discussing M&A strategy and longer-term plans for Dash, without detailing specific initiatives or timelines.

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Earnings Word Cloud

The most frequently occurring keywords in this quarter's earning call

DBX Transcript

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DBX Slides

Dropbox Q1 2025 slides: margin expansion offsets revenue stagnation

2025-05-08

DBX Report

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