Dropbox Stock

Thank you for standing by, and welcome to Dropbox's Second Quarter 2026 Earnings Conference Call. Currently, all participants are in a listen-only mode. [Operator Instructions] I would now like to hand the call over to Sarah Shubha, Chief Accounting Officer and Head of Investor Relations. Please go ahead.

Good afternoon, and welcome to Dropbox's Second Quarter 2026 Earnings Call. As a reminder, we will discuss 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 at investors.dropbox.com.

We will also make forward-looking statements on this call, including statements about our future outlook for our third quarter and fiscal year 2026 as well as our expectations regarding our business, assets, strategies and the macroeconomic environment. Such statements are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those described. Many of those risks and uncertainties are described in our SEC filings, including our most recent report on Form 10-Q in the 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 Co-CEO, Drew Houston.

Thank you, Sarah, and good afternoon, everyone. Before I turn it over to Ashraf, I want to briefly address the CEO transition we announced in May. Asha and I are currently serving as co-CEOs. And after this transition period, I'll become Executive Chairman, and Ashraf will become sole CEO. We're taking a deliberate approach to the handoff and I'll remain deeply engaged as Executive Chairman. I want to say a word about why I have so much confidence in Ashraf. When he took over our core business, there were real questions about whether we continue our trajectory.

He made a series of difficult calls and the business has gotten stronger every quarter since. He's built a strong leadership team and brought a level of operating regular that has made this company better. You'll hear the results directly from him in a moment. The next phase for Dropbox is about execution and turning the progress we've made into consistent durable growth. Shops the right leader for our next chapter, and I'm looking forward to supporting him and the team.

With that, I'll turn it over to Ashraf.

Thanks, Drew, and good afternoon, everyone. Before I turn to the quarter, I want to start by thanking Drew. Dropbox exists because of his vision and leadership over the past 2 decades. He built 1 of the most recognized technology brands in the world, and I'm grateful not only for the opportunity to help lead this company but for the trust he has placed in me to help write its next chapter. I joined Dropbox because I believe it had significantly more potential than the market than customers appreciated. Dropbox has over 18 million paying users, 1 of the most trusted consumer and business brands on the Internet, strong cash generation and a global infrastructure built over nearly 2 decades.

At the same time, I saw a real opportunity to improve execution, modernize the product experience and return core to durable, sustainable growth. Today, my conviction is even stronger. Over the last 18 months, we've strengthened the leadership team, sharpened our execution and focus relentlessly on the fundamentals, improving conversion, onboarding, activation, retention pricing and packaging and delivering a better customer experience. While we're still early in the journey, the results are encouraging. We've turned core from a business that had been slowing for years. Into 1 that is once again demonstrating sustainable growth.

There's still a great deal of work ahead, and a few quarters don't define success, but we're putting points on the board and reinforcing the belief that have brought me here in the first place. The second thing that has frantic in Vricon is something I did not fully appreciate when I joined, and that's how valuable Dropbox's foundation would become in an AI first world. Over the last 2 decades, we have built far more than a storage application. We have built 1 of the world's largest and most optimized content platforms. when responsible for storing, synchronizing, securing, searching, processing and governing hundreds of billions of pieces of content across multiple exabytes of data. As AI makes intelligence more abundant, trusted content becomes more valuable, not less.

Every AI application ultimately needs content to reason over, permissions to respect, governance to reinforce Bersin history to rely on an infrastructure that scales globally and securely. Those capabilities we have been building for nearly 2 decades, and they're what allow us to return AR into durable value for customers rather than a feature that is easy to copy. That realization has shaped how we think about dropout's future. Our priority remains exactly what it has been since I joined, continued strengthening and growing core and build on it. I think about that opportunity in 3 connected parts.

First, we're bringing Dropbox services onto a common platform built around shared content, identity, permissions, search and AI. Smaller teams increasingly powered by AI can build richer workflows faster because they're building on capabilities that already exists instead of recreating them. That also means showing up where our customers already work. We've launched integrations with tools like Claude and Chat and even without much dedicated investment behind them, we've already seen over 150,000 users connected to integrations, an early signal of how embedded Dropbox already is in the way people work.

Second, we're embedding DASH intelligence directly into Dropbox itself. Rather than treating AI as a separate destination that customers need to learn or adopt independently, customers expect intelligence to be a native part of how they interact with their content, helping them find it faster, understand it more deeply, organize it more effectively and ultimately do more of the work around it, all grounded in the trust, permissions and context already built on drop off.

One of our biggest learnings throughout building Dash is that customers respond most AI that is grounded in their own context and help them get their work done. That's informed how we think about DASH going forward. We've come to see the bigger opportunity as Dash and core together, bringing that same in-context intelligence natively into Dropbox for all our customers, not a stand-alone product for a subset of them. The third is using those capabilities to build deeper workloads in the markets where we are best positioned to win. The goal is not to become a broad software suite. It is to go deeper in a focused set of areas where content sits at the center of customers' work and where our existing assets give us a genuine advantage.

Replay our video media review and approval tool is a good example, and we're validating adjacent opportunities such as digital asset management and other AI-powered workflows that extend naturally from our platform. Let me make that a little bit more tangible with an example. Take West Chester Publishing. What started as a place to securely store and sync files has grown over time into the foundation for much of their business operations. the core Dropbox platform they've relied on for years also powers a custom portal they used to collaborate with internal teams and external partners.

On top of that foundation, they've adopted DASH to find an organized content, helping teams quickly synthesize information and draft materials, while tilting agented capabilities that automate previously manual and time-intensive workflows. We -- we're also seeing that the infrastructure behind Dropbox has become increasingly relevant in an AI first world. AI models need trusted content, source permissions, audit trails, governance, multiplayer functionality and work will continually to deliver real value. And those are capabilities we've been building for nearly 2 decades. As AI companies build new products, many want to leverage that existing foundation rather than recreated themselves, and we're seeing this demand already with our ChasiPTand cloud integration.

It's still early but we believe Dropbox can play an increasingly important role as the layer that connects AI is a trusted customer knowledge and infrastructure across the broader ecosystem. That in sort is our strategy. continue executing to restore durable growth in core through foundational improvements that increase our baseline, use that stronger foundation to build increasingly intelligent workloads for our customers and grow the flywheel that may drop box successful in the first place.

And over time, with the platform we've built to work more broadly across the AI ecosystem wherever that creates real value. Turning to the quarter. Our Q2 performance was largely the product of the foundational work that we believe is so critical to returning to sustainable growth in the long term. The platform intelligence and workflow strategy I just walked through is what we believe compounds on top of that foundation and unlock the higher level of sustainable growth over time. We continue to see positive year-over-year revenue growth in Q2, excluding Forms lift, and we added 96,000 paying users, our third consecutive quarter of paying user growth.

We also exceeded our guidance on non-GAAP operating margin, achieving over 39% and generated $283.5 million of unlevered free cash flow. Within Teams, our continued investment in pricing, packaging, onboarding, checkout and activation translated into stronger conversion and team net new ARR grew sequentially. Within individuals, targeted retention initiatives along with Apple Pay, Simple and a clear upgrade experience for customers approaching their storage limits all contributed to a stronger monetization. These are not isolated wins. They are the kind of steady execution that compounds over time and is returning core to sustainable growth.

At the same time, we continue to build towards a smarter Dropbox with AI natively embedded in the experience. As the product has evolved, we are transitioning the rollout of what we previously called Dash and Dropbox to the next-generation smart FSS experience, which we are currently testing with a select group of customers. This evolution does not change our rollout time line, and we remain on track to significantly expand access to our base throughout the remainder of 2026. We will scale thoughtfully, validating customer value, engagement and business impact along the way.

As we enter the second half of the year, our priorities remain clear. Key building on the momentum we have established in core see pull have stronger foundations to innovate faster, adding AI as a native in context capability across our product portfolio. That's the platform in thousands and workflows, we believe will define Dropbox's next phase of growth. Reaching more of the over 18 million paying users already on Dropbox and leveraging the same flywheel that made us successful in the first place.

With that, I'll turn the call over to Ross.

Thank you, Asha. When I joined Dropbox, investors were asking whether our core business could grow again. Today, I think they're asking a different question, not whether we can grow but whether that growth is durable and ultimately, how much we can sustainably grow over time. Q2 doesn't answer those questions completely, but it does provide another meaningful proof point. Ashok laid out 3 connected parts to our platform and AI strategy. I think about how those translate financially in 3 phases. Phase 1 was simply returning our FSS product to growth.

Over the past several years, we had increasingly shifted our attention away from our FSS product because we no longer believe it represents our greatest opportunity. What changed was refocusing on the fundamentals. Things like pricing and packaging, onboarding, retention, checkout. And that work has returned us back to positive growth. Phase 2 is why I believe we are today, proving that growth is durable, not just a couple of quarter results.

We're encouraged by what we're seeing, 3 consecutive quarters of paying user growth, teams returned to positive license growth and improving retention, but we're not overstating where we are. What lies ahead is proving to you what we believe that we can build and enhance products that will provide value to our customers and drive growth higher. Phase 3 is where Astro's strategy to bring Dropbox onto a unified platform, embed DASH intelligence natively and build deeper workflows around our customers' content becomes increasingly important financially.

As we do that, the question changes from whether Dropbox can sustain growth to how fast we can grow over time. One thing that has strengthened my conviction since joining Dropbox is recognizing that we spent nearly 2 decades building and running infrastructure and intelligent services, such as our content processing platform that becomes more valuable, not less in an AI first world. Agent or human, we believe there is no future where there's not a lot more content. As Ashraf described, Dropbox is far more than a storage application.

It's a trusted content platform with capabilities around storage, synchronization, permissions, governance, search and content processing that become increasingly important as AI becomes embedded in how work gets done. We believe those assets give us a differentiated foundation to build on, both inside Dropbox and over time, potentially other companies can also build on our content platform. We'll pursue that opportunity the same way we've approached the turnaround of core with disciplined execution and capital allocation.

We won't scale investment because an opportunity is exciting. We'll scale it because customers demonstrate they value it and because it generates attractive long-term returns. Ultimately, our objective is to compound free cash flow per share over the long term through sustainable revenue growth and a strong margin profile, investing where we have the strongest right to win and returning capital to shareholders when that's the highest return use of capital. Q2 doesn't complete the journey, but it reinforces our conviction that we're on the right path.

With that, let me turn to our financial results. Unless otherwise indicated, all income statement figures mentioned are non-GAAP and exclude stock-based compensation, amortization of purchased intangibles, certain acquisition-related expenses, workforce reduction expenses and net losses on real estate assets. Our non-GAAP net income also includes the income tax effect of the aforementioned adjustments. In Q2, revenue increased 0.9% year-over-year to $631.5 million. Excluding Forms Wit, revenue grew 1.7% year-over-year.

On a constant currency basis, revenue excluding Form Swift increased 0.1% year-over-year. Relative to our guidance, the outperformance was driven primarily by improving core FSS trends. Total ARR was $2.56 billion, up 1% year-over-year. Excluding Form Swift, ARR grew 1.7% year-over-year or 0.2% on a constant currency basis. We exited the quarter with 18.9 million paying users a sequential increase of approximately 96,000 ahead of our expectations coming into the quarter. The outperformance was largely driven by outperformance in our simple SKU. We also saw positive teens license growth as a result of our ongoing pricing and packaging initiatives.

Average revenue per paying user was $139.6 and compared to $138.32 in the year ago quarter, driven by FX rate tailwinds and shift to more monthly plans. Gross margin was 81.6% and down roughly 60 basis points from the year ago period, primarily as a result of compute costs associated with rolling out additional AI capabilities to our team base. Operating margin was 39.7%, ahead of our guidance of 38.5% and down roughly 180 basis points from the year ago period, driven by the gross margin dynamics I just described as well as increased marketing investment within our core business, reflecting a return to more normalized spend following the targeted reductions in performance marketing we made in the year ago period.

Relative to our guidance, the outperformance was primarily driven by higher revenue as well as some timing-related savings shifted to the second half of the year for brand spend and outside services.

Net income was $170 million compared to $197.7 million in the year ago quarter. with the decrease primarily due to higher interest expense related to our term loan facility. Diluted EPS was $0.75 compared to $0.71 in the year ago quarter. based on the $226.8 million diluted weighted average shares outstanding compared to 276.7 million shares in the year ago period.

Cash flow from operations was $238.5 million compared to $260.5 million in the year ago period. The year-over-year decline primarily reflects an increase of $30 million of interest payments net of the associated tax benefit related to borrowings under our term loan facility. Capital expenditures were $3 million. Unlevered free cash flow was $283.5 million compared to $276.4 million in the year ago period. Unlevered free cash flow per share was $1.25 per share, up 25% year-over-year.

Turning to the balance sheet. We ended the quarter with cash and short-term investments of $1.114 billion. During the quarter, we completed a new $400 million revolving credit facility, further strengthening our liquidity profile. The facility remains undrawn at quarter end and provides additional balance sheet flexibility. We also announced a new $900 million share repurchase authorization reflecting our confidence in the business and reinforcing our commitment to long-term shareholder value creation.

In the second quarter, we repurchased approximately 12.6 million shares, spending approximately $315 million. As of the end of the second quarter, we had approximately $1.385 billion remaining under our existing share repurchase authorization. I'll now offer our outlook for Q3. We and our updated outlook for the full year 2026. For the third quarter of 2026, we expect total revenue to be in the range of $627 million to $630 million, excluding Form Swift, this implies roughly flat year-over-year growth at the midpoint. We are expecting a currency tailwind of approximately $6 million.

On a constant currency revenue basis we expect total revenue to be in the range of $621 million to $624 million. We expect our non-GAAP operating margin to be approximately 38.5%. And we expect diluted weighted average shares outstanding to be in the range of $223 million to 228 million shares. For the full year 2026, we expect total revenue to be in the range of 2.513 billion to $2.523 billion, an increase of $13.5 million at the midpoint of guidance. Excluding Form Swift, this implies 80 basis points of year-over-year growth at the midpoint. We are expecting a currency tailwind of approximately $31 million on a constant currency revenue basis we expect total revenue to be in the range of $2.82 billion to $2.492 billion. We expect gross margin to be approximately 81.5%. We are raising our non-GAAP operating margin guidance by 50 basis points to be in the range of 40.0% to 40.5%.

This implies an increase of approximately $18 million at the midpoint of guidance. We are also raising our unlevered free cash flow guidance, which we now expect to be at or above $1.070 billion, an increase of $15 million. We continue to expect CapEx to be in the range of $20 million to $25 million in addition to finance lease lines to be approximately 4% of rep. Finally, we expect diluted weighted average shares outstanding to be in the range of $226 million to 231 million shares. I will now provide supplemental information as it relates to guidance.

In Q2, we were pleased with our performance on paying user growth. and continue to expect positive paying user growth for 2026. For ARPU, we expect modest sequential declines throughout the rest of the year. As I mentioned last quarter, our gross margin guidance assumes modest pressure this year from embedding gas intelligence natively into Dropbox and expanding across our teams base, partially offset by infrastructure efficiencies. Going forward, our gross margin profile will continue to depend on rollout pace, customer adoption and optimization work.

So we continue to expect some quarter-to-quarter variability. We're increasing our operating margin and unlevered free cash flow guidance relative to our prior guidance as a result of Q2 performance and expected performance in the remainder of the year. As we touched on last quarter, we will continue to realize efficiencies within our R&D organization as we bring DASH and Dropbox closer together, giving our teams a shared foundation so they can build and ship faster with AI.

Additionally, we see an opportunity to evolve and improve our go-to-market team and execution, and we are in the process of rebalancing that organization to focus resources on our priority markets, segments and routes to market. which we believe will drive greater efficiency and productivity through the remainder of 2026 and going forward. Lastly, we expect our full year weighted average shares outstanding to increase to approximately $226 million to 231 million shares as a result of an increase in our 30-day trailing average share price.

With that, operator, please open the line for questions.

[Operator Instructions] Our first question comes from the line of Rishi Jaluria of RBC.

Wonderful. Thanks Nice to see some kind of sustainable potential return to growth here and Asher looking forward to working with you. Maybe 2 questions for me. First, if you think about the kind of cadence of paying users being added third consecutive quarter and kind of expect that to continue for the full year.

Can you help me understand with kind of declining ARPU, when can that start to show up in kind of the top line and drive maybe further acceleration from here? And then I've got a quick follow-up.

Yes. I think -- Rich, it's Ross. So I think, number one, the ARPU commentary was modest decline throughout the year. So there's 2 opposing forces. FX and a little bit more mix on monthly mix to go up. And then rolling off of Form Swift, which will end this year and incremental simple plan users make it come down. So when we kind of weigh that in the balance, we expect a modest decline in ARPU, not a major one. .

And on the users, I think, again, we -- as you pointed out, we've seen several quarters now of improvement there. We're seeing that on the individual side. We're also now seeing that on the team side for the first time since I think 2024 that flipped positive. So we called out that we expect to be positive for the year. we're being -- I think there's -- I'd just say there's a lot to do. Our initiatives are working. We think we can keep driving that forward but there's a lot more data points and signal we want to see before we give more specific guidance around the growth there. So I think all in all, I think we're going in the right way with respect to continued growth in net new paying users which will drive ARR growth.

Okay. Got it. Helpful. And then if I think about some of the stats you've shared on Cloud and GPT integration, can you help us understand how is that translating into the business, whether that's user adds, whether that's great or stickiness?

And then it feels like there's an underappreciated opportunity in that partnership. I think any of us has built on cloud code or Codex recognizes the value of having that connectivity to kind of a source of truth in all your content. So can you talk about what that kind of partnership and relationship and integration, how that could evolve over time and be maybe even more incremental to the business?

This is Asaf. First of all, I think, if anything, this reinforces how what we talked about in the call that AI is adding the need for storage and the ability to organize their files and find them and have a structured way for you to work. And so that's what we're seeing here. These are customers that are organically discovering Dropbox using the app. They're mainly using to fund content, free purpose and then later on storing it back on Dropbox. Our perspective is we want to meet customers where they are.

We have a lot of amazing capabilities we're launching for our customers inside Dropbox. But we'll also want to meet them where they are. So if they want to work in Cat or in Claude, we want to be able to offer them something there. And I think that's a natural extension of what we do. So think about an example where you're bringing content, trying to repurpose it, then you want to store it back. And at some point, you want to send it to someone and collaborate with the person you're sending it to, this is where we see drop-offs comes fully back into play because we offer deeper workflows at that point.

And so what we're seeing actually is very encouraging, not only that this is growing organically, but also the engagement level and retention numbers that we're seeing are pretty encouraging. And if anything, it's a validation that Dropbox has a much bigger role to play in this AI world than people appreciate.

Our next question comes from the line of Steve Enders of Citi. Steve.

Okay. Great. Astra. Good to hear from you on the call. Maybe just to start, maybe digging a little bit into the product strategy and what that looks like moving forward. I guess it would be great to kind of understand a little bit more kind of your view on what the future of the Dropbox product looks like, how you think about expanding the TAM and do some kind of more specific areas. And I think you made a comment about wanting to create a platform that others can can build on in the future. And so I would love to kind of understand what that looks like and what that entails? .

Yes, of course. I mentioned this as something that I didn't fully appreciate until recently, and this is something that we saw as we built our own Agente capabilities inside Dropbox. So I'm actually going to ground it maybe with an example and then give you how that looks differently than anything you've probably seen in other places. So today, and this is like a real live example. You could imagine your project manager trying to get a marketing campaign off and running. You're going to need to find all the files. So our capability is now enabling you to find them semantically. You can even drop in a screenshot from a peer that send to you something and say, find me that file, and I'll find it. .

You put it in a holder, it's still disorganized. You can then ask our identic capabilities to auto organize it. And then you find that the images look like most of our customers have, it's called Image 341 you can say, name it appropriately and they'll understand context and name it runner on a track or Red Car in a showroom. And so at that point, you're doing all this work and you want to actually start to loop in and others and you want to tell them what you've done, you can actually -- because we have Audit Trail, you can actually summarize the changes and send it to your peer, your management and say, here's the structure that I've created not only that because we have connectors, you can just send that e-mail as well.

Anything that happens in the product because we have a file system, you can undo so people can work safely. They can grant access to the Agent coratospecific folders. So we have a tremendous history of building something that has permissioning, version control audit trails and the ability to share securely and all these things are even more needed in a world where agents are working. So I think of it as we've talked a lot about durability of the core business. We have 18 million paid subscribers, a massive distribution network beyond amazing what Drew has built with this company.

And so I see it as we're going to bring these capabilities to provide deeper workflows in a way that saves customers a lot of time. This example that I mentioned takes hours and hours. You could do this in under 10 minutes. And so we believe that unlocks value. And this is, by the way, 1 example out of money. So you'll see us focus on engaged the most engaged customers in marketing, creative, architecture, engineering constructions that will lag on Dropbox for their work and content and you're going to see us add very focused capabilities that make their lives a lot better. And you're going to see us add deeper workflows, and I think that's a new frontier for growth for us.

And so in addition to this, as we started launching these capabilities, we realized that there might be an opportunity here for us to lay in on enabling other companies to leverage all these capabilities, and this is something we're excited to validate over time. But I think it's also very, very promising.

Okay. No, that makes sense, and that's great context. Maybe on just the constant currency revenue raise. I guess, I would like to get a little bit more, I guess, like specificity and like what are the areas that maybe got better this quarter that you have line of sight to that you're flowing through into the rest of the rest of the year? And I guess, how should we think about maybe the puts and takes on some of those components.

Stephen, it's Ross. Thanks for the question. Yes, I think pleased now 3 quarters in a row, we've been able to beat and raise our revenue guidance. The growth rates are going up. I think all of us, yourself included, we want to keep seeing them go up. And internally, we're very focused on that. So everything that we've been talking about started when I got here in December was work we were doing around individuals very comprehensively around how we attract new users, how we convert them, how we retain them better. I think that started to pay off first.

And then we talked about moving the teams as we enter this year and doing similar work around teams, and now you're seeing that reflected in the positive paying users. I'd say, just on that front of the optimization across the customer life cycle, there's things we've already put in market that we still have visibility to paying off and then there's new things to come. So that's not sort of exhausted itself. And so we are seeing improvements across both individuals and teams, again, across the life cycle, top of funnel conversion and retention -- so that's reflected. And then not yet reflected on some of the things that Astra's talking about, which is how do we ultimately ultimately get into that higher level of sustainable growth is about how we build the products, how we weave in the AI, all the DASH intelligence capabilities and just provide a lot more value for our customers.

The cool thing is the example that Astra provided is already in Dropbox, like we're already seeing and we're using and we're starting to roll that out. We're going to roll out these capabilities to the majority of our teams base for the rest of this year. So we're going to start to get more usage and then post that, hopefully, monetization. So that's not baked in yet. But those are more legs of growth to come. So it's early -- we've got a lot that is working, but we also have a lot of work ahead and a lot to do. So we're trying to take a measured approach to how we think about guidance.

[Operator Instructions] Our next question comes from the line of Matt Balocco, Bank of America.

Awesome. And welcome Ashraf. I appreciate the color you guys provided on Phases 1, 2 and 3 of the Dropbox transformation. I guess I was hoping you could elaborate on how you think about the timing of moving between Phase 2 where we're at today to Phase III? And assuming you're able to execute against that strategy, how should we think about how that plays out across paying user and ARPU growth? And I guess maybe just a follow-up to that would be what do you think the largest gaps are? Is it in product or go-to-market to execute against that transition?

So the phases Ross outlined was 1 to prove that we can get to grow. Second 1 was to make that durable and the third 1 is to take that to the next level and expand significantly the growth rates that we have. And he highlighted that we're in the middle of Phase I think that we have a lot of signal that what we're doing is durable, and we're excited about that. And there's a lot more that we're still doing around teams formation and expansion, and that becomes foundational. I think the biggest opportunity is to get to Phase III is this deeper value for customers.

I think that the thing we have to demonstrate that we can create significantly more value within our product for our most engaged customer base. And that translates into higher willingness to pay for additional SKUs and add-ons. So something like an attach rate, you would see it in things like that. So we do expect to see it in ARPU. I expect to see it in customers converting to pay more and then the ARPU going up as well. And that's the thing we're solving for by making Dropbox much smarter with AI capabilities that we're rolling out that are focused on our most engaged and largest customer base today. So these are -- that's the Phase III. And we're -- I think we're going to be testing that out this year. We're moving fast to make better reality.

And Matt, just to add, it's Ross. We're not we're not baking that in really for this year. So -- because you asked about like timing. So it's -- we're not going to comment on like the precise timing of like Phase 2 or 3 conceptually. But I think as you're hearing from Arolike we're already putting the AI into the product, we're rolling it out this year. the application level product builds that we're already underway on that. So the stuff is happening. We're not taking risk from it this year. And as we as we move forward quarter-to-quarter, we'll talk more about how that's progressing.

Really helpful. And then just 1 more if I could.

Dropbox symbols. It's been a really nice source of upside for the past couple of quarters. Can you maybe just give us an update on the sale of that SKU than the installed base today? And what's been so effective about it, whether it's better top of funnel, preventing outright churn events from higher-priced SKU users? Just trying to understand what the source of strength has been there. .

Yes, I can start with part of the question, and Ross can chime in. This is Asaf. So simple was created on our end to make sure that we meet customers where they are and offer them the value that they expect -- so what we find with individuals specifically in mobile, actually, on our mobile app is that they wanted lower tier storage, something that they -- it's a little bit more affordable. They can just plug in their files and use that on the go.

And so we met their demand by launching the simple product really by listening to customer demand. And that's paid off, I think, allodistning to customers. And and staying close to their needs. This is a good example where we launched it and then it took off. And -- we're excited about the potential of that continuing to grow and how it even can boost the business and having that be part of a top of the funnel as well as to specific performance data led Rose.

Yes. We think about the net new paying user commentary, you remember it's a net number. So it's getting the benefit of both our improvements around top of funnel as well as retention. Simple is the largest contributor to the growth in net new paying users, but also as we talked about teams is now positive and is a contributor. But the cool thing about net new paying users is it's broad based.

So it's individuals now it's teams. It's other products that we have on the platform are also contributing and its top of funnel conversion as well as retention. So it's not like we're just relying on 1 thing to drive that. We've got a more broad-based set of inputs to help push that number.

[Operator Instructions] Our next question comes from the line of Jayden Patel of JPMorgan.

Building on the last set of remarks, with this 96,000 paying users being -- what looks like the best in about 3 years, -- can you walk us through what the upgrade path looks like for these new paying users? Let's start with 96,000 users and how that's something we're really excited about. This came from very methodical changes we made. So to give you an example, we shrank the onboarding steps from 12 to 4 when you start a team. We enabled a lot of onboarding activation. We changed the product to recommend next best actions.

So all these things were instrumental to not just get top of funnel and absolute numbers go up, but actually, the base that's already coming organically, how we activate that a little bit better with the existing product capabilities that we have. So this was a big part of what we've done to get to that number. Now as you look at what we're doing over the next several quarters, we're investing deeply in multiproduct discovery, meaning you are able to see additional products and capabilities and features as you land on the main product experience. And we want to see that tax rates go up.

So being able to sell you more, being able to, in context, say, by the way, we have a video review capability, you have a video. So you'll see us cross-sell and upsell a lot more. In terms of basic upsell path, we have a lot of optimization that we've done. So for example, when you get near quota in stores, we're doing a lot more work than we've done in the past, to tell you, by the way, you're nearing Corta, here's like options for you. We're telling people who are individuals, they exit a team like behavior.

By the way, we have a team plan for you. It seems like you're inviting people in the business domain. So these are specific examples of how we're actually upselling and cross-selling in moments. And I think that's something that I'm continuously excited about because I think this is -- when you talk about increasing ARPU, these are actual examples of where you're going to see this.

Great. And then another 1 on -- you mentioned gross margin pressure due to compute costs associated with rolling out AI capabilities. Is there a way to think about the floor for gross margins as you continue to roll out these features?

It's Ross. So for everybody, just keep in mind, there's 2 opposing forces on gross margin. One is the rollout of the AI functionality. We've been rolling out the first half of the year, but that will increase in the back half, and we expect to roll out the majority of teams in the back half. So it's not a perfect science to gauge timing of rollout and like adoption and usage and all that.

So we're making our best estimates for that. But that would obviously increase cost of goods sold and weigh down margin. But what you guys also need to know is that there's an opposing force that goes positive, which is efficiency gains. And there's not just 1 there's multiple. We have a really great infrastructure team that, number one, has great relations with the supply chain is in front of the purchases and some of the pricing, but also just how we're running and optimizing that infrastructure and the systems are running on.

So they continue to deliver results that are improving efficiency that are counterbalanced to the AI rollout. And remember, in the future, like we hope to monetize more things, including the AI product, which would be revenue on top of those costs. So I think like kind of implying your question for is like how low could it go because it's been going down. Right now, I would focus on the guidance for the year of 8.5%. As we get into next year, we'll talk more. But I just don't want people to assume that it has to keep going down because of AI costs when we do have other levers that we're pulling to help offset those costs.

Thank you. I would now like to turn the conference back to Sarah Suva for closing remarks. Madam?

Thanks, everyone, for joining us today. We're looking forward to speaking with you next quarter. This concludes today's conference call. Thank you for participating. You may now disconnect.

Good day, and thank you for standing by. Welcome to the Q1 2026 Dropbox Earnings Conference Call. [Operator Instructions]

Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today, Sarah Schubach, Chief Accounting Officer and Head of Investor Relations.

Good afternoon, and welcome to Dropbox's First Quarter 2026 Earnings Call. As a reminder, we will discuss 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 at 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 2026 as well as our expectations regarding our business, assets, strategies and the macroeconomic environment.

Such statements are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those described. Many of those risks and uncertainties are described in our SEC filings, including our most recent report on Form 10-K and 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 CEO and Co-Founder, Drew Houston.

Thanks, Sarah, and good afternoon, everyone. Welcome to our Q1 2026 earnings call. Joining me today is Ross Tennenbaum, our Chief Financial Officer. I'll start with our business and product highlights from the quarter, and then Ross will review our Q1 financial results and our outlook.

Let's get started. We delivered a strong start to the year, exceeding the high end of our guidance across revenue and operating margin with year-over-year revenue growth of 2%, excluding FormSwift, and unlevered free cash flow margin of 38%. On our Q4 call, I said that our goal in the core business is not just to maintain it, but to bend the curve back towards sustainable growth.

I continue to be very impressed by Ashraf Alkarmi, who we hired in 2024 to lead our entire core business. Ashraf is an outstanding leader who's built a strong and talented bench. And together, they've been rapidly improving the core business to drive sustainable growth.

Last quarter, we saw steady growth across our individuals business as a result of the core team's consistent execution and their focused strategy alongside funnel and product quality improvements to stabilize the Teams business with the ultimate goal of positive net license growth.

Now we're encouraged by our Q1 performance as we continue to build on that momentum. With that, I'll turn to the key drivers within the core business. Within individuals, retention remains an important near-term revenue lever.

And in Q1, we continue to focus on targeted retention interventions, including improvements to prompts for mobile users, loss aversion messaging and targeted price promotions for recently canceled customers. And given the growth of mobile as a purchasing channel, we were encouraged to see that these efforts drove our mobile churn rate down mid-single-digit percentage points.

We also made progress monetizing basic users through targeted promotions for additional storage, driving a 50% improvement in conversion among those targeted users nearing or exceeding their storage limits. For Teams, one of the clear signals we're seeing is that practical funnel improvements can drive meaningful results.

In Q1, that included continued progress on pricing and packaging simplification, a more unified checkout experience, credit card trials and onboarding and activation improvements. We also continue to make foundational improvements to the core FSS experience. We strengthened the reliability, performance and scalability of sync and uploads.

We made the experience simpler and more intuitive across desktop, web and mobile, and we're testing new media collaboration tools with streamlined review workflows, leveraging our AI-powered tools.

Taken together, these results reinforce our view that there are still meaningful levers inside the core business to steadily improve its long-term trajectory and that the changes we're making are starting to show up more clearly in our results.

Now on to Dash. Dash in Dropbox represents our evolution from file storage to AI-powered content management. We're bringing together customers' content from across Dropbox and other major cloud apps into a single content-forward experience, making it easier to find, organize and share work wherever it lives. With semantic search, AI-powered organization and Stacks for curation and sharing, Dash extends Dropbox from a file system into a system for all your cloud content.

This direction offers a more seamless product experience and upgrade path with Dash for our existing base rather than a separate surface for customers to adjust to or learn about. In Q1, we expanded the rollout of Dash in Dropbox and plan to significantly expand access to our base throughout the remainder of 2026.

And while adoption is still early, we're encouraged by repeat engagement with Dash's AI features with more than 30% of weekly engaged users using those features again the following week and more than 50% of monthly engaged users using them again in the following month. And we're seeing stable retention patterns even as we expand beyond our initial target customers and we onboard new cohorts.

Dash inside Dropbox will increasingly be our primary vehicle for scaling AI across Dropbox. As we've shared previously, we've also been evolving our stand-alone experience for customers who don't use Dropbox today. And that work has helped us refine our onboarding and activation and new features, unlocking future greenfield growth opportunities.

Dash is differentiated by its ability to bring together deep business context across work content and cloud apps paired with core AI capabilities like search and chat. To support this, we've built what we call our context engine, which is our proprietary AI infrastructure that gathers context across all your contents and apps and connects it to leading AI models to enable faster, more accurate and more useful results.

As we've expanded access, we're seeing the strongest momentum when these capabilities are integrated directly into the core Dropbox experience. As a result, we're prioritizing bringing Dash learnings and AI features into existing Dropbox surfaces. This approach improves the customer experience while also increasing focus and efficiency across our teams.

We're also increasingly excited by the signal we're seeing in our emerging data security solution, which we call Dropbox Protect. As AI adoption grows, so does concern around governance, visibility and control, and we're seeing that demand resonate clearly with IT and security buyers. That's why Protect fits naturally into our broader platform story. The same indexing and context engine we're building to improve search and knowledge work can also improve security posture and governance.

In other words, our platform investment supports both productivity and protection. And over time, that has the potential to expand our addressable market and strengthen the return on the broader platform work we're already doing as we seek to position Dropbox as a leading provider that can help customers find, organize, share and protect their content in one place.

To wrap up, Q1 was an encouraging step in our effort to bend the curve and core. The changes we've made are beginning to translate to our financial results. And in Dash and Protect, we're continuing to see healthy customer signal and learnings to reinforce our conviction in the opportunity ahead.

With that, I'll turn it over to Ross.

Thank you, Drew. Q1 was a strong quarter with important proof points for the thesis I laid out on my first earnings call. Last quarter, I told you that what ultimately drew me to Dropbox was the strength of the foundation and my belief in our growth opportunities.

While our North Star is to grow free cash flow per share, restoring revenue growth remains our top priority in the near term. I point to the caliber of our new core leadership team, led by Ashraf Alkarmi and the untapped potential I saw across Core, Dash and our broader capital allocation strategy.

This quarter, we saw tangible evidence that those opportunities are real. Excluding FormSwift, revenue grew 200 basis points year-over-year. We also expanded our paying user base, maintained bottom line discipline and improved cash flow generation.

Now turning to the core business. As we have been discussing, our work in core is centered on driving sustainable growth. Those efforts include a range of initiatives to improve customer life cycle metrics while also evolving the product to deliver more value to both new and existing customers. We saw additional proof points of that work in Q1.

As Drew noted, we saw encouraging strength in both retention and conversion across the business. In individuals, targeted retention interventions and monetization efforts delivered improvement, while in Teams, pricing and packaging, checkout and onboarding changes continue to improve funnel performance. Excluding FormSwift, core trends improved year-over-year and paying users increased sequentially.

Taken together, these results further increase our confidence that we are stabilizing core and moving toward a position of sustainable growth. We also expanded the cohort of customers using Dash in Dropbox and continue to see encouraging engagement from those users, even though overall exposure remains limited today.

We are continuing to bring Dash and Core Dropbox features together into a more AI-forward product experience that we believe will create meaningful additional value for customers over time. We remain focused on a phased rollout of Dash in Dropbox across our Teams customer base throughout 2026.

To recap, the foundation I described last quarter is proving durable and the growth opportunities I identified, while still early, are beginning to materialize. That's exactly the trajectory I came here to help build. With that context, let me turn to our financial results. Unless otherwise indicated, all income statement figures mentioned are non-GAAP and exclude stock-based compensation, amortization of purchased intangibles, certain acquisition-related expenses, workforce reduction expenses and net losses on equity investments.

Our non-GAAP net income also includes the income tax effect of the aforementioned adjustments. In Q1, revenue increased 80 basis points year-over-year to $629 million, but increased 200 basis points year-over-year when excluding FormSwift, which acted as a 120 basis point headwind to revenue growth.

Constant currency revenue declined 80 basis points year-over-year to $620 million, but was up 40 basis points year-over-year, excluding the headwind from FormSwift. Relative to our guidance, revenue outperformance was driven primarily by retention improvements across our self-serve SKUs.

Total ARR was $2.56 billion, up 30 basis points year-over-year. Excluding the impact of FormSwift, which was a 100 basis point headwind, ARR was up 130 basis points year-over-year. Total ARR, excluding FormSwift, was roughly flat on a constant currency basis.

We exited the quarter with 18.09 million paying users, a sequential increase of approximately 14,000 paying users versus our prior commentary to expect a Q1 decline in paying users, we exceeded our expectations, primarily due to retention strength throughout the quarter as well as individuals gross adds outperformance.

Average revenue per paying user was $141.18 as compared to $139.68 in the prior quarter. ARPU increased sequentially primarily due to seasonal promotions on our individuals plan in Q4, which slightly depressed ARPU last quarter as well as a larger mix of monthly plans and FX rate tailwinds.

Gross margin was 81.1% for the quarter, down 180 basis points from the year ago period, reflecting increased infrastructure costs associated with the expansion of Dash in Dropbox as well as higher depreciation as a result of our hardware refresh cycle.

Operating margin was 40.1%, ahead of our guidance of 38% and down roughly 160 basis points from the year ago period. Operating margin decreased year-over-year, largely due to the gross margin dynamics I just described as well as continued investment in R&D to support both Core and Dash initiatives.

Compared to our guidance, operating margin benefited primarily from timing-related savings that we expect to be pushed to subsequent quarters as well as higher revenue and lower services spend. Net income for the first quarter was $180 million.

Diluted EPS for the first quarter was $0.76 based on 237 million diluted weighted average shares outstanding compared to $0.70 in the year ago quarter. Cash flow from operations was $205 million, an increase of 33% versus the year ago period. Unlevered free cash flow was $236 million or $1 per share, up 69% year-over-year.

This quarter also included $33 million of interest payments, net of the associated tax benefit related to amounts drawn under our term loan facility as well as $1 million in capital expenditures. The year-over-year increase in cash flow primarily reflects stronger operating performance and the absence of certain onetime cash outflows, including a $36 million payment for the buyout of our San Francisco lease and $10 million in payments related to our Q4 2024 reduction in force. In the quarter, we added $12 million to our finance leases for data center equipment.

Turning to the balance sheet. We ended the quarter with cash and short-term investments of $1.29 billion. In the first quarter, we repurchased approximately 14.3 million shares, spending approximately $367 million. As of the end of the first quarter, we had approximately $800 million remaining under our existing share repurchase authorization.

In Q1, we also drew down $700 million in the quarter to repay our March 2026 convertible notes. I'll now offer our outlook for Q2 and our updated outlook for the full year 2026. For the second quarter of 2026, we expect total revenue to be in the range of $624 million to $627 million. Excluding FormSwift, this implies 80 basis points of year-over-year growth at the midpoint.

We are expecting a currency tailwind of approximately $9 million. On a constant currency revenue basis, we expect total revenue to be in the range of $615 million to $618 million. We expect our non-GAAP operating margin to be approximately 38.5%, and we expect diluted weighted average shares outstanding to be in the range of 226 million to 231 million shares based on our 30-day trailing average share price.

For the full year 2026, we are raising our total revenue guidance by $12 million from a prior range of $2.485 billion to $2.5 billion to a revised range of $2.497 billion to $2.512 billion. Excluding FormSwift, this implies roughly flat growth year-over-year at the midpoint.

We are expecting a currency tailwind of approximately $27 million. On a constant currency revenue basis, we expect revenue to be in the range of $2.47 billion to $2.485 billion. We continue to expect gross margin to be in the range of 81.5% to 82%. We are raising our non-GAAP operating margin by 50 basis points from 39% to 39.5% to be in a new range of 39.5% to 40%.

We are also raising our unlevered free cash flow guidance, which we now expect to be at or above $1.055 billion. We continue to expect CapEx to be in the range of $20 million to $25 million and additions to finance lease lines to be approximately 4% of revenue.

Finally, we expect diluted weighted average shares outstanding to be in the range of 222 million to 227 million shares. I will now provide supplemental information as it relates to guidance. With respect to revenue, we are raising our full year revenue guidance to reflect the progress we saw in Q1. While still early, targeted retention work in individuals, along with funnel, onboarding and pricing and packaging improvements in Teams are beginning to translate into results, which gives us greater confidence in our ability to continue building on that momentum over the balance of the year.

Last quarter, we said we expected modestly negative paying user growth in Q1, followed by roughly flat paying user trends for the remainder of the year. We were pleased to see better-than-expected performance in Q1 with paying users increasing sequentially in the quarter, driven by continued progress across the initiatives I mentioned previously.

As a result, we now expect paying user trends for the full year to be modestly better than our prior year and to be slightly positive overall. For ARPU, we expect modest sequential declines throughout the rest of the year, driven by the wind down of FormSwift, lower FX tailwinds and the growth of our Simple plan, which carries a lower price. Our gross margin outlook continues to assume modest pressure this year as we scale Dash in Dropbox and expand across more of our Teams base, partially offset by ongoing infrastructure efficiencies.

While we remain confident in the long-term margin profile of these investments, the near-term cost impact will depend in part on the pace of rollout, customer adoption and the timing of optimization work. As a result, we expect some quarter-to-quarter variability in gross margin as we work through those dynamics.

We're increasing our operating margin and unlevered free cash flow guidance relative to our prior guidance as a result of Q1 performance and expected performance in the remainder of the year.

Notably, as we prioritize the Dash in Dropbox experience, we expect that bringing Dash and Dropbox closer together will create additional efficiencies as we progress throughout the year. Lastly, we expect our weighted average shares outstanding to decrease to approximately 222 million to 227 million shares, which continues to assume we exhaust the remaining balance on our share repurchase authorization. With that, operator, please open the line for questions.

[Operator Instructions] Our first question comes from Steven Enders with Citi.

This is [ Palak ] for Steven Enders. Congratulations on the great results. I think my first question is about Dash adoption. And just trying to understand how much of Dash adoption is happening within the Core versus is there a meaningful stand-alone Dash-driven customer base at this point?

Sure. Thanks for the question. So we're targeting both existing and new users with Dash, where we're investing a lot is deeply integrating Dash into the core Dropbox experience, and that's also where we're seeing that's certainly where we have our home field advantage and our 18 million subscribers and so on. So -- and there's a lot of integration work to make that seamless.

So we've seen good progress in terms of Dash within Dropbox in terms of engagement and repeat use and a lot of the signals we're looking at there, and we're continuing to roll out these integrations to a larger percentage of our Teams space. And then we're also -- we also see Dash as a way to expand to folks who aren't using Dropbox today. So you don't even need files in Dropbox.

Dash will integrate with your Google Docs and your Slack and your Salesforce, basically all of the different apps that you're using. So we do see it as a growth lever. But in the near term, the most rapid way to drive distribution is going to be with our existing base.

Perfect. That's very helpful. And the next question is on the guide, and there's like a pretty solid raise on the guide and increase in paying users. And I know a lot of it comes from the advancements within core and simplifying the product. But just trying to understand, does this account for any improvement coming specifically from Dash? Or is that not a part of the assumption?

Yes, this is Ross. I think we were pleased, number one, in Q1 that we were able to exceed our expectations on net new paying users. And as you said, we did revise upward our guide to say that we're going to modestly grow net new paying users for the year.

And that's mostly driven by individuals and teams. So individuals, including the simplified plan, Teams has exceeded our performance as well. So that's mostly driven by Core and not a lot of inclusion of Dash right now as we continue to prioritize rolling out Dash in Dropbox and focus on increasing engagement there.

[Operator Instructions] Our next question comes from Matt Bullock with Bank of America.

Jacob Gideon on for Matt Bullock. Could you help us think about the evolution of Dash in terms of like the pricing and packaging? And then like how we should think about Dash as positioned against other ecosystems like, for example, Microsoft Copilot?

Sure. So first, we see Dash as -- for our existing users, it's a natural extension of the value that we're already providing to our customers. And so -- and particularly with when you integrate Dash into the core Dropbox experience, some of the benefits include being able to talk to your Dropbox in natural language and a lot of Dropbox customers, as you'd imagine, they work with a file.

So these are often creative folks or in marketing or media companies or architecture or construction. So Dropbox's support for all those kinds of content is a big advantage versus a lot of the other AI tools, which tend to be more tech-centric against something like Microsoft Copilot or an AI integrations within any one ecosystem.

Dash is platform agnostic, similar to Dropbox itself. So that we -- it's designed to integrate with the whole universe of every ecosystem and every different platform, which is a big advantage because otherwise, you'll tend to see some siloing or your Microsoft will tend to support the Microsoft ecosystem really well, but we'll have relatively less coverage in the Google ecosystem or in other ecosystems, whereas Dash, again, similar to Dropbox supports everything by design.

We do see that our focus on content is an advantage. So -- and that dovetails naturally with our base. And so the ability within Dropbox to have multimodal semantic search is really valuable. So if you do a search for a red sunset with Dash and Dropbox, we'll be able to actually search the content of all the media into Dropbox so that it will -- whereas you used to have like red sunset in the file name to get search results, now we can -- any picture that has or any photo or image that has a red sunset in it, if someone says red sunset in a video, we transcribe the video under the hood, we index the transcripts, things like that.

So we are going deeper on workflows around finding, organizing, sharing, protecting content, which is what people use Dropbox to begin with. And so we see that as a natural advantage for us and source of differentiation in addition to being platform agnostic.

I would now like to turn the call back over to Sarah Schubach for any closing remarks.

Thanks, everyone, for joining us today. We're looking forward to speaking with you next quarter. Have a great rest of your day.

Thank you. This concludes the conference. Thank you for your participation. You may now disconnect.

Thank you for standing by, and welcome to the Dropbox Fourth Quarter 2025 Earnings Conference Call. [Operator Instructions]. As a reminder, today's program is being recorded.

And now I'd like to introduce your host for today's program, Peter Stabler, Head of Investor Relations. Please go ahead, sir.

Good afternoon, and welcome to Dropbox' Fourth Quarter 2025 Earnings Call. As a reminder, we will discuss 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 at investors.dropbox.com.

We will also make forward-looking statements on this call. including statements about our future outlook for our first quarter and fiscal year 2026 as well as our expectations regarding our business, assets, strategies and the macroeconomic environment. Such statements are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those described. Many of those risks and uncertainties are described in our SEC filings including our most recent and forthcoming reports on Form 10-K. 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 CEO and Co-Founder, Drew Houston.

Thanks, Peter, and good afternoon, everyone. Welcome to our Q4 2025 earnings call. Joining me today is Ross Tennenbaum, our Chief Financial Officer who joined Dropbox in December. I'll start with a recap of the quarter and how we closed out 2025, and then I'll talk about how we're thinking about the business and our priorities going forward. Ross will then walk through our financial results and outlook.

We closed out 2025 on a strong note. Fourth quarter revenue came in above the high end of our guidance and excluding the impact of our Form so wind down, constant currency revenue was flat for the quarter and the full year, which is a better-than-expected outcome. We also made meaningful progress on efficiency. Margin performance in Q4 exceeded our expectations, and we generated over $1 billion of unlevered free cash flow. At the same time, through our share repurchase program, we produced diluted share count by more than 50 million shares in 2025.

Taken together, Q4 was a good reflection of what we're working to do consistently, which is execute well, deliver against our plans and steadily improve the underlying trajectory of the business. And in 2025, our priorities were focused on strengthening our core business, and scaling Dash in pursuit of returning to revenue growth. We're still executing on these objectives, but now have proof points that these changes are starting to work.

Coming into last year, our Core FSS business had strong fundamentals of scale, but execution velocity, product experience and our go-to-market motion had not kept pace with customer expectations. So in late 2024 and early '25, we did a leadership reset in Core FSS bringing in a new general manager and rebuilding key leadership across product, engineering and go to market. Since then, we've made significant improvements in how decisions get made, how we prioritize customers and how we deliver value. And we're beginning to see positive signals.

The team first focused on improving funnel quality, pricing and packaging, product fundamentals and retention drivers. As a result, the individuals business saw steady growth across 2025. That matters because it demonstrates that the core product can still respond to focused innovation and better retention and growth are achievable with the right execution. And so our objective for 2026 is to maintain our momentum with the individuals business and return teams to positive net license growth. Work already underway includes simplified pricing and packaging, higher intent trials, reduced onboarding and admin friction and a sharper focus on retention.

Some early tests in Q4 showed some promising signs, including improved team's trial conversion rates and higher first week engagement, and we began rolling these changes out more broadly in Q1. But in short, we're not simply maintaining our Core FSS business. Our goal is to be in the curve. In 2025, we delivered proof points and 2026 is about stealing momentum.

Our next focus area is what we call Dash and Dropbox, which represents the most important evolution of the Core FSS experience in years. Dash and Dropbox provides an AI intelligence layer directly inside our customers' everyday workflows with minimal setup and immediate relevance. In Q4, we launched [indiscernible] Dash capabilities inside our teams plans, including semantic search, chat and stacks organization and sharing, and we're rolling it out in phases to eligible Dropbox teams customers. We're seeing solid early engagement among the initial Dash and Dropbox cohorts.

In Q4, over half of these active users returned multiple days per week, which is evidence that Dash is providing value and becoming a part of user workflows. And based on these results, we've begun scaling up our rollout to additional customer cohorts. Dash and Dropbox increases the value of Core FSS, it should further improve retention dynamics and serves as a natural on-ramp to broader gas adoption. This is the most credible and immediate way that AI creates value for Dropbox FSS customers today.

Now turning to our plans to scale the Dash stand-alone opportunity. And while it's true that we've introduced different iterations of Dash experience over the last 2 years, the sequencing of our rollout was intentional to ensure we build and scale the business and products thoughtfully. First, we focused our investment on building a best-in-class Dash product experience, including investments in its underlying infrastructure and performance, then we focused on launching 2 growth motions for Dash, the sales led motion that launched in late '24 and the self-serve version that launched in Q4 of last year.

Now we're focused on engagement and adoption before we focus on monetization. The good news is we're seeing positive early signals of demand. At the same time, we're cleared that onboarding friction, time to value and the experience around connecting your apps need to improve. So in the first half of '26, we're focused on improving the new areas or experience to demonstrate connector value from First touch. We're investing in stacks as a sharing driven growth engine, and we're compressing the time between sign up and first value in your Dash experience.

Next, historically, Dropbox has been primarily a product-led growth company. And we have a sales-led motion today, but it needs a meaningful improvement given our broader product portfolio. In December, we hired Eric Webster as our new Chief Business Officer. His mandate is to evolve and improve our existing sales led motion into 1 capable of selling multiple products with the right funnel, process and enablement. That includes Core FSS, Dash, both stand-alone and bundled protect and control, DocSend and other emerging products. Protect and control is showing particular promise.

As every company works to roll out AI tool safely, admins are controlling critical security challenges with overshared content and improper use of consumer AI tools. We're in a unique position to help these customers. By complementing our Dash offering with Protective Control, we can both index customer data and use the underlying context engine to power capabilities that prevent authorized sharing and access beyond our secure perimeter. Capitalizing on this emerging demand, we closed a 6-figure international deal for Dash's protect and control features in Q4. And we expect ProtectiveControl to play an important role across our portfolio in years to come as AI data security emerges as both a stand-alone opportunity and an AI adoption enabler.

Stepping back, here's how all this comes together. Our core FSS business is stabilizing and showing credible path back to growth. Dash is both a force multiplier for core and a stand-alone AI opportunity, while sales growth and AI data security expand our addressable market. Together, these vectors give us multiple paths to drive modest but meaningful growth and enough to shift the narrative to durability and progress.

So in closing, 2025 laid the foundation. Now 2026 is about execution, scaling of working, improving consistency. We're realistic about the work ahead, but confident in the direction the team and the opportunity in front of us. Lastly, I'd like to acknowledge the many contributions of Tim Regan, our departing CFO, and thank him for making Ross' transition a smooth one.

So with that, I'll turn over the call to Ross to walk through our fourth quarter results and our outlook.

Thanks, Drew, and good afternoon, everyone. As many of you know, this is my first earnings call as CFO of Dropbox. Before I walk through our financial results and outlook, I wanted to share a brief perspective on how I think about the business and the opportunity ahead.

What I'm about to share reflects my observations for my first couple of months in the role. It's not a new operating framework, and it doesn't represent a change in how we guide the business. But I believe it's useful context as you assess Dropbox's long-term value creation potential. What initially attracted me to Dropbox was the strength of the foundation. This is a company with a strong global brand and a large and loyal customer base of roughly 18 million paying users and 575,000 paying business teams and products that are deeply embedded in everyday workflows for both individuals and teams.

That foundation is clearly reflected in the financial profile. A $2.5 billion revenue business with operating margins around 40%, approximately $1 billion of annual unlevered free cash flow and a 21% 3-year CAGR for unlevered free cash flow per share. That combination of scale, profitability and cash generation has proven to be durable and resilient over time. Our North Star is to grow free cash flow per share over time through a judicious capital allocation strategy. As CFO, my goal is to prioritize investments in the business where we see attractive returns, initiatives that drive sustainable revenue growth in March. At this time, restoring revenue growth is our top priority. When our shares trade at compelling valuations, repurchasing stock remains a disciplined and efficient use of capital, reducing share count under those conditions increases free cash flow per share and enhances long-term shareholder returns.

What ultimately drew me to Dropbox was the opportunity to grow free cash flow itself, not just optimize the denominator by growing revenue and improving margins. Let me start with our current investment priorities, growth. Naturally, since onboarding, I have been most focused on our initiatives to restore growth. While many discussions regard Dash, our opportunities to restore growth in our Core FSS business are also exciting. We recognize FSS operates in a mature and competitive market, and we're realistic about that backdrop.

At the same time, over the past year, we've taken meaningful steps to strengthen the organization and evolve the product. In late 2024, we brought in new leadership to lead the core business for our experienced operators from large-scale tech companies. I've been genuinely impressed by both the caliber of talent we've been able to attract and the pace at which they're working to evolve the business across products, pricing, packaging and go-to-market motions. Last year, we focused on simplifying and strengthening our core business, which drove improvements in monetization of retention. That work continues. At the same time, the team has been integrating Dash AI capabilities into FSS allowing customers to derive more value from the content they already store in Dropbox. From my perspective, this represents the most significant innovation to the Core FSS offering in a long time.

Looking at the top of the funnel. One of the biggest surprises to me earlier on was the magnitude of gross new ARR that Core FSS still generates each year. Today, much of that is offset by churn, but by delivering more value through innovation like Dash and Dropbox, improved pricing and packaging and better end-to-end customer life cycle workflows and I believe there is a real opportunity to improve retention and grow net new ARR over time.

Now turning to Dash. I see Dash is a genuinely valuable product and use it regularly in my day-to-day work. More importantly, nearly all Dropbox employees are weekly active users, and we're seeing strong engagement from active users in our early customer trials. We have an impressive engineering team rapidly innovating on an ambitious road map. At a minimum, I see Dash is a highly impactful evolution of our Core FSS offering and believe in addition to all our other efforts, it will help attract new customers, drive upsell and reduce churn. More optimistically, we will also drive adoption and later monetization of Dash as a stand-alone product. Regardless, anywhere along the spectrum, I see meaningful value creation potential for Dash, and our AI product strategy.

The third growth lever I'll touch on briefly is M&A. I don't view M&A as a silver bullet, and I know firsthand that not every transaction delivers as expected. But I also know that disciplined strategic acquisitions can meaningfully expand the product portfolio and contribute incremental ARR over time. Any acquisition we consider must be a high bar for strategic fit and financial return. Over time, I see M&A as a lever that can accelerate product road maps, deepen our relevance with customers and complement the organic growth initiatives already underway. Taken together, Core FSS, Dash and M&A, these were the growth vectors I evaluated when deciding to join Dropbox. And after a couple of months inside the company, I see opportunity for each.

Let me turn now to margins. The second driver of free cash flow growth is margin expansion. Should we someday decide to curtail our growth pursuits, I believe this business has the capacity to operate at margins meaningfully above current levels. That said, given the growth opportunities in front of us, we believe it's prudent to maintain our current investment levels to pursue growth. At the same time, I do believe that over time, we can be more aggressive on cost discipline. We see the potential for additional margin upside driven by scale, continued cost discipline and productivity improvements. AI, in particular, offers great potential to automate many manual people-intensive processes across all functions, not just engineering your customer support.

We believe that when employed these initiatives will drive significant productivity gains. In addition, we continue to look for opportunities to operate more efficiently through better tooling and geographic mix. shifting more work to lower-cost regions. Taken together, we believe these efforts can generate savings, which we can elect to drive margin or reinvest in growth initiatives. To be clear, these are observations for my first couple of months. There's real work ahead to translate them into execution.

So stepping back, this is how I see Dropbox today, a strong brand with a durable financial profile, significant free cash flow generation and multiple avenues for long-term value creation. And as I look at how the business is trending, we're making progress towards returning to growth while optimizing for efficiency. In that context, I see meaningful optionality in the business that I believe is underappreciated by the market, reinforcing share repurchases as an important part of our strategy.

With that, let me turn to our fourth quarter financial results and our outlook going forward. In Q4, revenue declined 110 basis points year-over-year to $636 million, but increased 40 basis points year-over-year when excluding Form Swift, which act as a 150 basis point headwind to revenue. Constant currency revenue declined 160 basis points year-over-year to $633 million, while it was roughly flat year-over-year, excluding the 150 basis point headwind from Form Swift.

Relative to our guidance, revenue outperformance was driven primarily by retention improvements across our self-serve SKUs. Total ARR was $2.526 billion, down 190 basis points year-over-year. And excluding the impact of Form Swift, which was a 160 basis point headwind and ARR was down 30 basis points year-over-year. Total ARR declined 170 basis points on a constant currency basis. We exited the quarter with 18.08 million paying users, a sequential increase of approximately 10,000 paying users. The quarter's paying user growth was primarily driven by momentum in our simple plan. Average revenue per paying user was $139.6 and as compared to $139.07 in the prior quarter. ARPU increased sequentially primarily due to FX tailwinds as well as an overall mix shift from annual to monthly plans.

Before we continue with further discussion of our P&L, I would like to note that unless otherwise indicated, all income statement figures mentioned are non-GAAP and exclude stock-based compensation amortization of purchased intangibles, certain acquisition-related expenses, net gains and losses on real estate assets, workforce reduction expenses and net losses on equity investments. Our non-GAAP income also includes the income tax effect of the aforementioned adjustments.

Gross margin was 80.8% for the quarter, down 230 basis points from the year ago period reflecting higher depreciation associated with our hardware refresh and ongoing data center build-outs as well as increased infrastructure costs associated with the expansion of Dash trials. Operating margin was 38.2%, ahead of our guidance of 37% and up roughly 130 basis points from the year ago period. Operating margin increased year-over-year largely due to lower head count following our RIF in 2024 and elimination of marketing support for Formswift. Compared to our guidance, operating margin benefited primarily from revenue outperformance as well as lower outside services and marketing spend.

Net income for the fourth quarter was $174 million. Diluted EPS for the fourth quarter was $0.68 based on 254 million diluted weighted average shares outstanding compared to $0.73 in the year ago quarter. The decrease was largely due to higher interest expense.

Moving on to our cash flow and balance sheet. Cash flow from operations was $235 million, an increase of 10% versus the year ago period primarily due to payments related to our reduction in force in Q4 '24. Q4 '25 also included $26 million of interest payments net of the associated tax benefit related to amounts drawn under our term loan facility. Unlevered free cash flow was $251 million or $0.99 per share, up 44% year-over-year. Capital expenditures were $11 million in the quarter, primarily related to data center build-outs. In the quarter, we also added $34 million to our finance leases for data center equipment marking the end of elevated spend for our hardware refresh cycle.

And now I'll provide a brief update on our real estate strategy as we continue to actively pursue subleases across our real estate portfolio. Last month, we executed a sublease of all remaining available square footage in our current San Francisco headquarters, including the portion of the space we were occupying over a 3-year term. We also executed an extension and expansion of an existing sublease. As a result of these 2 subleases, we expect to generate approximately $97 million in total future cash payments over the remaining term of our lease through 2033, net of the cost to lease a smaller San Francisco headquarters, given we will vacate our current headquarters.

From a cash perspective, the 2026 impact is immaterial due to lease structure and investments we plan to make later this year in our new San Francisco headquarters. From a P&L standpoint, we expect a modest benefit in 2026. The impact of both of these new agreements have been factored into the guidance we'll provide today. As we move beyond 2026, both the cash flow and earnings benefits become more meaningful as the sublease income builds.

Turning to the balance sheet. We ended the quarter with cash and short-term investments of $1.04 billion. 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 was $700 million allocated to retire our March 2026 convertible notes.

I'll now offer our outlook for Q1 and the full year 2026. For the first quarter of 2026, we expect revenue to be in the range of $618 million to $621 million. Excluding Form Swift, this implies a 0.4% growth year-over-year at the midpoint. We are expecting a currency tailwind of approximately $8 million. On a constant currency revenue basis, we expect revenue to be in the range of $610 million to $613 million. We expect our non-GAAP operating margin to be approximately 38%. Finally, we expect diluted weighted average shares outstanding to be in the range of 241 million to 246 million shares based on our 30-day trailing average share price.

For the full year 2026, we expect revenue to be in the range of $2.485 billion to $2.5 billion. Excluding Form Swift, this implies roughly flat growth year-over-year at the midpoint. We are expecting a currency tailwind of approximately $27 million. On a constant currency revenue basis, we expect revenue to be in the range of $2.458 billion to $2.473 billion. Gross margin to be in the range of 81.5% to 82%, and non-GAAP operating margin to a range of 39% to 39.5%. We expect unlevered free cash flow to be at or above $1.040 billion. We expect cash interest expense net of tax benefits of approximately $190 million. We expect CapEx to be in the range of $20 million to $25 million in addition to finance lease lines to be approximately 4% of revenue. Finally, we expect diluted weighted average shares outstanding to be in the range of $227 million to 232 million shares.

I'll now share some additional perspective on this guidance for 2026. Excluding FormSwift, we are guiding to a flat revenue year in 2026, while continuing to invest. That reflects a disciplined approach as we validate execution, refined go-to-market motions and ensure that improvements translate to measurable results. Our guidance reflects that balance. We see long-term opportunity but we are pairing that conviction with near-term prudence.

Regarding revenue, following the elimination of marketing support for FormSwift at the beginning of last year, the business has experienced gradual user decline each quarter and will continue to be a modest headwind this year. Further, we have made the decision to sunset forms it by the end of the year. For paying users, last year, we offered directional commentary because of strategic decisions we made, including the wind down of the FormSwift business. Looking ahead to 2026 we expect modestly negative net new paying users in Q1, largely due to seasonality and FormSwift headwinds with roughly flat paying user growth for the remainder of the year.

On gross margin, we expect modest pressure this year as we scale Dash trials, partially offset by ongoing structural infrastructure improvements. For operating margins, as we mentioned last quarter, we do not expect this to be a year of margin expansion. We remain confident in our ability to execute and believe it is prudent to invest in near-term growth opportunities. Our margin outlook reflects material investment in Dash as we expand trials across both new customers and a larger segment of our FSS user base. We expect these investments to be partially offset by ongoing cost discipline and efficiency initiatives.

Regarding finance leases, this quarter marks the end of elevated spend for our latest hardware refresh cycle and as a result, we expect materially lower infrastructure investment this year with finance lease activity more heavily weighted toward the second half. As a reminder, we typically refresh our infrastructure every 5 years.

Regarding CapEx, we expect a slight increase in CapEx as a result of a onetime incremental investment related to the build-out of our new San Francisco headquarters. Excluding that investment, CapEx will be down year-over-year as we have completed our hardware refresh cycle. Our unlevered free cash flow guidance reflects a benefit this year from lower cash taxes related to the One Big Beautiful Bill Act, along with the absence of onetime cash outflows we had in 2025 related to the San Francisco lease buyout and reduction in force.

Our interest expense outlook assumes we draw the remaining balance on our term loans, 1 strong total outstanding term loan debt will equal $2.7 billion. Lastly, we expect our weighted average shares outstanding to decrease to approximately 227 million to 232 million shares, which assumes we exhaust the remaining balance on our share repurchase authorization.

With that, operator, please open the line for questions.

[Operator Instructions] Our first question comes from the line of Mark Murphy from JPMorgan.

This is Jaiden Patel on for Mark Murphy. It was great working with you, Tim, and welcome, Ross. You've talked about Dash for a few quarters now with goal and pipeline building. Can you give us any quantitative framework around Dash attach rates or ARR contribution at this point? And then looking forward to the guide, again, we've heard some of these strong proof points and very much understand that the focus is first on adoption, but would love to hear any assumptions you're baking into the guide. .

Sure. I can start. And well, I'll start just like the conceptual framework. I mean we start by focusing on product quality and building the capabilities of the infrastructure. to index the known universe of SaaS apps and build a private search index and all the other things that go into building a product like Dash. But then we focus on engagements and make sure onboarding is good and that there's repeat use, then we scale it up to our user base and focus on driving adoption and then monetization. .

So we'll be able to share more specific metrics and targets and so on as we continue on that progression. I'd say where we are right now, as I shared in my remarks earlier, is that we spent a lot of last year really building that experience and focusing on product quality and building those integrations, the AI integrations natively into the Dropbox experience. and also building the self-serve version of Dash, which we need to reach our self-serve Dropbox FSS customers and beyond. And then now we're focused on -- and we've seen a good early signal there. So good repeat use of the integrations within Dropbox, lots of -- where we're focusing on tuning up the onboarding experience and then now we're turning towards driving adoption in the first half by scaling up the integrations to more of our Dropbox business customers, so the Dash integrations and then rolling out the dashed products more broadly in the first half. And then the second half will start to phase in more around monetization.

So probably second half would be a better time to share more of the specifics around attach rates and ARR contribution and things like that.

I just wanted to add, I agree with everything Drew said. We are excited for what we're doing around the core business and our ability to do things that drive us to a growth posture as well as for what we can do with Dash. And we are focused very much on engagement adoption this year and to your guidance question, we leverage all information we have in front of us. And just given the size of the core business, you can assume that, that has the most weighting on influence on how we think about our guidance for the year.

Our next question comes from the line of Rishi Jaluria from RBC.

Wonderful. Maybe to start with, I want to continue pulling on the thread of Dash. Look, I'm in total agreement that you have to drive utilization and ultimately, customer value before we can really worry about monetization in a big way. And you've given us bits and pieces over the years. But maybe what sort of metrics can you give us around engagement with Dash, whether that's anything like people spending more time in Dash percentage of paying business users using it even like what impact does this have on gross retention. Any sort of mentions you can give us around like engagement and adoption and feedback around Dash would be helpful. And then I've got a quick follow-up. .

Rishi, it's Ross. I'll start here. I just -- I know coming on, I'm looking at how all this has played out, and I know we've been talking about Dash for a while, and we've been very focused on investing in building the product, which I think is a great product that gives me a lot of value. I think that what we're focused on now is like just remember, we launched this in Q4 to the Dash and Dropbox solution into our core. We think that, that is a tremendous evolution of our core product set. It drives a lot of value for our users. We launched it to a small number of users, and we've seen some really good results from that in terms of those core users adopting and using Dash and returning to continue to use Dash week over week. And those results exceeded our expectations and has given us the confidence to go forward and accelerate our rollout of Dash to more of our users in this year.

So I think we're seeing some nice results on that side. And again, I think that Dash is a significant enhancement of our core product line and something that we can use to drive value for our users. And then on the self-serve side, and Drew talked about this in his prepared remarks, we've seen some good results in top of funnel in our Q4 launch. There is work that we need to do to just showcase time to value faster for these customers, and we're working on that. But overall, I think we're pleased with where we are with adoption. It's allowing us to accelerate that rollout to our core business. And as we see more adoption and get into monetization phase, we will talk about it more, and we'll introduce metrics as appropriate to help you track it better.

All right. No, that's really helpful. And then maybe just continuing on Dash, but I want to think about a broader kind of more medium-term strategy. Drew, I know the idea of having kind of this connectivity of knowledge and content has been -- I think you've been focused on for a very long time. and Dash totally fits in with that. Maybe what is the longer-term opportunity for you to not only leverage kind of this idea of universal search and knowledge attainment, but even get that a little bit more workflow integrated and turn Dash into maybe being more of a platform where more power users have the ability to actually build content-specific agents on top of Dropbox that can automate a lot of that workflow and actually get a lot of work done given kind of the content you have system of record. Maybe how are you thinking about your opportunity and investments there?

Sure. I think it's a great question and something we're very focused on. So we talked a lot about building Dash itself, but I think in a lot of ways, what we've really been building and why this investment has been over many years instead of a couple of quarters is because we're building -- or we've built a completely new generation of technical infrastructure that we internally call our context engine. And so what that is, is shifting the value we're providing at the platform level from basically like really scaled and cost-effective storage to building this context layer for AI that index is the known universe of SaaS applications, builds kind of a private search engine and then connects basically formats all of that content in a way that a language model or an agent can work with it. .

And we've -- and to your question, like, well, are we going to shift from sort of informational use cases like search or chat to helping people get the work done you're starting to see us do that across the portfolio beyond Dash. And we'll do it within a 2, but just to give a couple of examples, part of what really resonates with customers with the Dash integrations in the Dropbox is for the first time, they can talk to their Dropbox in natural language and it kind of blows their mine. So if they want to find a photo of a red sunset, it doesn't have to be called Red sunset.jpg anymore. If someone says red Sunset and a video that search can find it. And increasingly, we'll be shifting on all of our surfaces from kind of informational queries like that to actually automating workflows and helping you get stuff done.

Security is another example that I talked about. So every company is trying to figure out how do we roll out AI safely and confront a lot of new issues. The first is overshared content. So to some extent, every company has documents floating around with a broader permission set than it should. And while that's -- and customers have been talking to us about that problem for a few years. And in response, we -- that's 1 of the reasons why we bought a company called Mera last year and have been building on that sense with what we now call Protect & Control. But we find that customers are really struggling and how do we deal with the Sovershare content. And that might have been a theoretical problem a few years ago, but with enterprise search with these AI tools suddenly, employees can literally just ask for sensitive or bad stuff and find all of it making it a lot more dangerous.

Second, as companies have CEOs or companies have encouraged AI adoption and tried to hurry that up. What they're also seeing is that something 30% or 40% of queries -- or that first employees are using consumer AI tools like ChatGPT to answer these questions or at work, and like 30% to 40% of those queries have people pacing PDFs of really sensitive customer or company IP or just sensitive material that they shouldn't be sharing and customers have no way of dealing with that. And then to your point about agents, on the 1 hand, this whole coding revolution, AgentiCoading revolution that we saw last year is really not only itself kicking in overdrive, but when you look at things like Open claw or cowork or others.

Now there's a lot of excitement about -- or can we bring this paradigm to knowledge work in general -- but what you see there is that opens up a whole new -- that kicks the security concerns and to overdrive at an even bigger level. And so these are all big opportunities for us beyond just the basics of AI search and chat. And we're trying to strike the right balance because on the one hand, we're as excited as everybody else about all the transformative things you can do with AI, as you give it more agency -- at the same time, the median -- when I talk to sort of the median Dropbox customer, their biggest pain points are like are still more basic where it's like I have 10 search boxes when I really want 1 -- or like, yes, I'm using AI, but when I use ChatGPT, it doesn't know anything about me or my company or my work.

And so there's still a lot of low-hanging fruit and just providing these kind of more basic levels of value in addition to the more workflow oriented and like workflow automation pieces on top. But this and a bit of a longer answer to sort of address the spirit of some of the prior questions, too, is that like we've really been building a new generation of infrastructure that built on top of 10-plus years of infrastructure before that, which is really tuned to storage. But as a result, when you look at our price points for Dash or other things, we're able to provide a product that really no one else has been able to provide, where it's unlike some enterprise search competitors or similar folks in the space. Typical Dropbox customer wants to adopt 1 of those things. They usually are facing a $50,000 setup fee. They have to provision their own custom cloud infrastructure to run it. It's like a 3-month pilot. It's still a lot of friction.

And so both the opportunity and the challenge we've had today is like how do we box all that up and put it in a package that anyone can just download with an app and be up and running in a few minutes. And it's really exciting that we're really close to the finish line there. And this half is when we'll really start scaling that up. So really building a next generation of technical infrastructure, lots of manifestations at the application level from better FSS to Dash to security. But I think it's an important kind of framework for how to think about these investments.

And our next question comes from the line of George Karasawa from Citi.

I'm on for Sanders. It was good to see a I think you alluded to some improvements in retention. I'd just like to double-click on -- what do you feel like drove some of those improvements and how we should think about kind of sustainability and maybe further improvements you can make going into this year?

Sure. Well, as I said in my prepared remarks, I mean, the first thing that has really driven these improvements in more fundamental ways is bringing in a new generation of scaled leadership and who have in turn really elevated each of their functions and leadership teams as well. And I think the -- what you saw in Q4 is a reflection of a lot of that work starting to pay dividends. So the improvements have been across the funnel. I think last year, you've seen us really continue to drive steady improvements in retention and just improvements across the funnel. The individual business has done well. and you've seen steady growth across 2025. And I think what -- but the bigger picture of what you see there in addition to the specific gains obtained from funnel metrics is really that we -- with the right execution and the right leadership, we can demonstrably drive sustained improvements in retention and growth.

And then turning to '26. A lot of our focus is on the team's business where we faced various downsell pressure over the last couple of years since we launched a price increase a few years ago. But there's a lot of improvements we've been making there, too. So everything from basic stuff like improving churn and down sell directly by redesigning cancellation flows and better communicating the value we're providing sort of no regrets, things like that. improvements to conversion. So the pricing -- we're investing a lot in simplifying our plans and tuning pricing and packaging, improving our trial flow. And so we've seen that paired with improving conversion rates on the way in.

On the onboarding experience of setting up a new team, reducing just a lot of, again, common sense stuff, like just taking -- sanding down all the rough edges and reducing steps and friction and getting your team up and running, that's been paying dividends. But as you imagine, one of the things we're most excited about is just building a better product experience and taking the FSS products, a new generation ahead with the integration of all these capabilities from Dash and being able to talk to your Dropbox and being able to automate a lot of the work that you're already doing there. So we see a lot of room to continue improving across the funnel and across the portfolio and its pended to see some of those proof points. become stronger in Q4.

Great. That's helpful color. I also wanted to ask about ARR in the last few quarters, we've seen revenue show good signs of stabilization seems like ARR seems to be diverting a little bit weaker, a little bit of a divergence there. Can you just talk us through the mechanics of why we might be seeing that? And how we should think about those -- the delta between those 2 metrics this year?

Yes. Sure, George, this is Ross. I'll take it. I think it's a astute observation. -- we had some Q4 positives around paying users and ARPU and revenue and ARR was a little bit lighter. I think that they should be moving in the same direction. But I would just let everybody realize that we're talking about like a slight divergence around a neutral middle line. So it's not very far off in either direction around 0. So I think ultimately, the thing -- the ARR should move in the same direction. I think in any given quarter, there are some discrepancies in particular in Q4, your ARPU and your ARPU metric has FX positives embedded where ARR is on a constant currency basis. And there's also some timing-related differences that impacts those metrics definitely. So ultimately, we're optimistic about the business and return to a growth posture and would expect that those start to move together in the future. .

And our next question comes from the line of Matt Bullock from Bank of America.

I wanted to ask about paying user growth assumptions embedded in the guide this year. It's encouraging to hear that we're targeting teams license growth this year, but -- maybe help us think about what's embedded in terms of the full year paying user guidance, how we should expect that to evolve throughout the year across individuals and teams plans and with the sun setting of FormSwift as well, that would be helpful.

Yes. Thanks, Matt. I mean -- and just to reiterate for everyone, what we said is Q4, we are very pleased with the result of having positive net new paying users. And I think that, that's because it's a net number is driven by both the improvements we put into place around retention, which we hope will continue this year. And also we're also targeting the whole customer journey and improvements for gross adds as well as upsell in addition to retention. So we're very pleased with the vote -- and as we look forward into 2026, I said earlier that we should expect some seasonality in Q1 such that net new paying users will decline in Q1. That's our expectation. .

And then for the full year, we expect it to be flat year-over-year in net new paying users, which I think compared to the last several quarters and years, is a positive result. And I think, again, that is a reflection of what Drew talked about. Really what I'm most excited about is like we've got a great team in core, and they're rapidly iterating on some really cool initiatives are intended to drive better retention and improvements across the customer journey to return the core FSS business into a growth posture, and we're excited about Dash. And so I think that's reflected in the guidance around net new paying users.

In terms of how it goes by quarter, I would just focus on -- we expect to be negative and then make it up for the rest of the year to be flat for the year. I don't want to get too specific on each quarter thereafter.

Understood. And then one quick follow-up, if I could. I wanted to ask about the potential M&A strategy. Which key areas would you potentially be evaluating opportunities to expand the product portfolio. Just trying to think through potential bolt-ons here going forward.

Sure. I can start. So I mean M&A has been a really valuable tool in our kit for scaling the company since the beginning and ranging from bringing in talent to bringing in early-stage products like things like Nera that I mentioned earlier and scaling them up to bring in established businesses like LSI or [indiscernible]. So we've had success across all 3. And we have -- and we continue to be very active in looking for opportunity -- M&A opportunities. And I think Nir is a good recent example. There have been others on the talent front where we've been able to bring in some really great AI talent folks like Mobius Labs who have really deep capabilities in multimodal understanding, so like processing, they're using AI to process large quantities and images and video and audio. I imagine, is very relevant for us.

And then looking ahead, it kind of dovetails with what I said before. We've got this really powerful -- we see the big bottleneck in AI generally as this gap between AI tooling in your company's context. We've been missing -- building that missing context layer for AI. We built on new generation of technical infrastructure to facilitate that. as the world starts turning towards more agentic capabilities or people having their own agents, then there's a lot of new opportunities for that context engine to help make those agents actually able to connect to your work context like to connect to your email and your sales force and your Dropbox and everything else, not just the local files and your computer, which is the current limitation for a lot of these things.

And then security, like securing that building a secure perimeter around your company for rolling out AI safely and agent safely, particularly in areas around content. So across both the infrastructure and the application layer, there's a lot of interesting opportunities, and we'll have more to share as the year progresses.

This does conclude the question-and-answer session of today's program. I'd like to hand the program back to Peter Stabler for any further remarks.

Thanks, everyone, for joining us today. We look forward to speaking with you next quarter. Have a great afternoon. .

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.

Good day, and thank you for standing by. Welcome to Dropbox's Third Quarter 2025 Earnings Conference Call.

[Operator Instructions]

Please note that today's conference is being recorded.

I will now hand the conference over to your speaker host, Peter Stabler. Please go ahead.

Good afternoon, and welcome to Dropbox's Third 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 in our earnings presentation posted on our IR website at investors.dropbox.com.

We will also make forward-looking statements on this call, including statements about our future outlook for our fourth quarter and fiscal year 2025 as well as our expectations regarding our business, assets, strategies and the macroeconomic environment. Such statements are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those described. Many of those risks and uncertainties are described in our SEC filings, including our most recent and forthcoming reports 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 CEO and Co-Founder, Drew Houston.

Thanks, Peter, and good afternoon, everyone. Welcome to our Q3 2025 earnings call, and I'm here with Tim Regan, our CFO. I'll walk through our business and product highlights, then Tim will cover our Q3 results and our outlook for the rest of the year.

Our teams executed well this quarter. Constant currency revenue came in comfortably ahead of guidance, driven primarily by better-than-expected retention across our individual and self-serve teams plans. Non-GAAP operating margin was up meaningfully year-over-year, reflecting our focus on operational efficiency, along with some timing-related spending shifts that Tim will cover.

Now let's dive into our 2 strategic priorities, which are scaling Dash and simplifying and strengthening our Core FSS business.

We'll start with Dash. Our industry is spending trillions of dollars on AI models that can explain quantum physics but can't find your Q2 board deck. This is the problem that we're solving with Dash. Specifically, the issue with today's tools is that they don't understand your context at work. Consumer AI tools don't know about your company, Copilot can't see your Slack, Gemini can't see your Salesforce. You're always starting from 0, cutting and pasting and uploading documents one at a time. Meanwhile, SMBs are either overlooked by enterprise search tools or are stuck using consumer tools that weren't built for business and create real security risks around data leakage.

Dash solves this by connecting to all your work apps from Microsoft, Google, Slack, Notion, everything you use. You get one search box instead of 10. You get AI that actually sees your full picture, not just one ecosystem slice. And unlike consumer AI, Dash is built for business from the ground up with the security and admin controls that IT teams actually need.

In Q3, we made the Dash product significantly better. Search latency dropped by 75%, while quality actually improved. For creative professionals, a core segment for us, Dash now transcribes videos, lets you chat with them and can search text within images and scans. We also brought on the Mobius Labs team to push our multimodal capabilities even further. They're building AI models that are optimized for large-scale multimedia processing, opening up entirely new workflows for teams working with video. And we upgraded Stacks, our intelligent content collections with ranked answers and simpler sharing. Dash is the only AI tool for SMBs that goes beyond search and chat to actually help organize and share content across your entire company.

We're seeing strong early engagement, so 60% of our managed Dash weekly active users are now using Dash at least 2 days a week, which tells us that the product is becoming part of their daily workflow and security remains critical. IT admins need to protect their company's content. So this quarter, we shipped automated protection for high-risk sharing. Admins can now enforce policies that automatically detect and fix issues like public links or inappropriate external access.

And finally, we made 2 important announcements during our fall launch a couple of weeks ago. First, we launched the self-serve version of Dash in the U.S. so you can now go to dropbox.com/dash and get your team up and running. No multi-month deployments, no $50,000 setup fees, just sign in with your work e-mail, connect your apps and go. This lets us reach the many SMB customers that enterprise-focused companies can't. We're starting by pricing it at $19 per user per month and current and advanced File, Sync and Share plan customers are eligible for a 50% first year discount. Second, for our Dropbox business customers, we started rolling out native Dash integration inside of the Dropbox app. This brings Dash's search, chat and stacks directly into the FSS experience our customers already know. You can ask questions of your files in natural language, get summaries and find related content.

Trial users also get the stand-alone version of Dash for deeper capabilities and the ability to connect all of the rest of your work apps beyond your files. Dash within Dropbox is starting to roll out to Dropbox FSS teams on the web with mobile and desktop coming in the next few months. And to ensure a great experience, we're rolling it out in stages over the coming quarters, starting with a waitlist for U.S.-based FSS customers. This launch represents a significant milestone. It broadens access and introduces Dash to our massive FSS user base and to new SMB customers. Early cohorts are showing good engagement, particularly with search, and we're gathering feedback, improving the product daily and laying the groundwork to convert trials to paid licenses.

Turning to Core FSS, where our focus remains on simplifying and strengthening the user experience while driving efficiency. We continue to make progress on retention and downsell, driven by better value communication and better optimizing our cancellation flows. And with improved Sharing, Sync and Storage management tools, our individuals business just posted our highest ever CSAT scores. We're also focused on trial conversion. This quarter, we started testing better localization with region-specific value messaging and landing pages, expecting conversion gains over time.

We're also testing a low-friction import tool for Google Drive and OneDrive users, making it easier to switch providers right in the sign-up flow. Our new unified checkout brings FSS, Dash and add-ons into a single streamlined purchase flow for team trials, including an Apple Pay option coming later this quarter. Early results show conversion gains, and we'll extend this to individual trials later this quarter.

For IT admins, we launched a storage management dashboard showing team data usage and trends, which addresses a top customer request and helps drive our highest ever IT admin CSAT score. DocSend had another solid quarter with double-digit revenue growth, driven by a 17% increase in total account creations and strong engagement. The DocSend team is applying learnings from Core FSS to drive retention gains and Sign and FormSwift modestly exceeded expectations. It's been an eventful quarter. And just like we took the cloud the last mile in 2007 by giving you a folder that's synced everywhere, with Dash, we're taking AI the last mile by connecting it to your actual work.

With Dash self-serve live and Dash and Dropbox rolling out, we're building awareness, driving trials and turning early users into advocates. Our core team is making real progress strengthening and simplifying FSS while operating more efficiently. The momentum is energizing, and we look forward to updating you on our progress in the coming months. I want to thank everyone on the Dropbox team for all their hard work this quarter.

I'll now turn it over to Tim to cover our Q3 financial performance and Q4 outlook.

Thank you, Drew. I'll cover our financial highlights from Q3 and then provide guidance for the fourth quarter and the full year 2025. We executed well against our objectives this quarter with results coming in ahead of our expectations. Our core team is making progress stabilizing our self-serve File, Sync, and Share business areas while concurrently driving meaningful operating leverage. This is giving us the opportunity to invest in new growth bets such as Dash, which are also making progress as we now have several go-to-market motions up and running to help take advantage of the large market opportunity in front of us. We're also reducing our share count substantially, thus putting ourselves in a position to drive a meaningful increase in free cash flow per share this year.

With this in mind, I'll now turn to our Q3 financial performance. In Q3, total revenue declined 70 basis points year-over-year to $634 million. Constant currency revenue declined 120 basis points year-over-year to $631 million. Excluding the impact of FormSwift, which acted as a 150 basis point headwind to revenue, our year-over-year constant currency revenue was slightly positive, driven by relative strength in our individual SKUs. Total ARR was $2.536 billion, down 1.7% year-over-year and 1.5% on a constant currency basis. FormSwift acted as a 160 basis point headwind to ARR in the quarter.

We exited the quarter with 18.07 million paying users, a sequential decline of approximately 64,000 paying users. The quarter's decline was primarily driven by downsell within our managed account base as well as a reduced level of investment in FormSwift. Counteracting this, we are seeing positive traction from our simple SKU, our lower-priced, lower storage plan targeted to mobile-first users. Average revenue per paying user was $139.07 as compared to $138.32 in the prior quarter. ARPU increased sequentially primarily due to FX rate tailwinds as well as shifts to both higher-priced and monthly plans.

Before we continue with further discussion of our P&L, I would like to note that unless otherwise indicated, all income statement figures mentioned are non-GAAP and excludes stock-based compensation, amortization of purchased intangibles, certain acquisition-related expenses, workforce reduction expenses and net gains on equity investments. Our non-GAAP net income also includes the income tax effect of the aforementioned adjustments. Gross margin was 81.4% for the quarter, down 260 basis points from the year ago period, reflecting higher depreciation stemming from our data center refresh cycle as well as investments we are making in our infrastructure for Dash.

Operating margin was 41.1%, ahead of our guidance of 37% and up roughly 490 basis points from the year ago period. Operating margin increased year-over-year largely due to headcount reductions from our RIF, the elimination of marketing spend for FormSwift and targeted reductions in core performance marketing. Compared to our guidance, operating margin benefited primarily from delayed hiring, lower outside services and marketing spend as well as some onetime benefits. Net income for the third quarter was $197 million, up 3% year-over-year. Diluted EPS for the third quarter was $0.74 based on 265 million diluted weighted average shares outstanding compared to $0.60 in the year ago quarter, representing a 23% year-over-year increase.

Moving on to our cash flow and balance sheet. Cash flow from operations was $302 million, an increase of 10% versus the year ago period. Q3 included $21 million of interest payments, net of the associated tax benefit related to amounts drawn under our term loan facility. Capital expenditures were $8 million in the quarter, resulting in unlevered free cash flow of $314 million or $1.19 per share, up 39% year-over-year. In the quarter, we also added $45 million to our finance leases for data center equipment as we continue to refresh our data centers, though we are nearing the end of this refresh cycle.

As related to capital allocation, in September, we amended our existing credit agreement to add $700 million in delayed draw secured term loans under similar terms as our initial term loan from December of 2024 with no interest expense for undrawn amounts in 2025. We expect to draw these funds early next year to retire our March 2026 convertible notes. As a result, we will not incur incremental interest expense this year related to this transaction. As of the end of the quarter, we have $1.15 billion drawn and $1.55 billion available to draw under our term loans. We ended the quarter with cash and short-term investments of $925 million.

Concurrent with our September capital raise, our Board also authorized a new $1.5 billion share repurchase program. In the third quarter, we repurchased approximately 14 million shares, spending approximately $390 million. As of the end of the third quarter, we had approximately $1.58 billion remaining under our existing share repurchase authorization.

I'll now offer our updated outlook for Q4 and the full year 2025. For the fourth quarter of 2025, we expect revenue to be in the range of $626 million to $629 million. We are expecting a currency tailwind of approximately $3 million. On a constant currency revenue basis, we expect revenue to be in the range of $623 million to $626 million. We expect FormSwift to serve as a roughly 170 basis point headwind to revenue in the fourth quarter. We expect our non-GAAP operating margin to be approximately 37%. Finally, we expect diluted weighted average shares outstanding to be in the range of 256 million to 261 million shares based on our 30-day trailing average share price.

For the full year 2025, we are raising the midpoint of our as-reported revenue guidance range by $18 million, now expecting a range of $2.511 billion to $2.514 billion. We are also raising the midpoint of our constant currency revenue guidance by $17 million, now expecting a range of $2.508 billion to $2.511 billion. We now expect FormSwift to serve as a roughly 130 basis point headwind to revenue this year. Our gross margin outlook is unchanged at approximately 82%. We are raising our outlook for non-GAAP operating margin by 100 basis points to approximately 40%. We expect unlevered free cash flow to be at or above $1 billion.

We continue to expect cash interest expense net of tax benefits of approximately $85 million. We are also lowering our CapEx guidance to be in the range of $20 million to $25 million for the full year, and we are maintaining our outlook for additions to finance lease lines to be approximately 6% of revenue. Finally, we now expect diluted weighted average shares outstanding to be in the range of 273 million to 278 million shares.

I'll now share some additional perspective on this guidance for 2025 and provide some early thinking on 2026. With respect to revenue, we are raising our full year revenue guidance to reflect our outperformance this past quarter as well as stronger structural retention trends across our self-serve SKUs that we expect to continue through the remainder of the year.

Turning to paying users. We now expect a full year decline of roughly 250,000, an improvement from our prior outlook of 300,000 paying users. Our better-than-expected results on paying users is driven by strong retention with our self-serve File, Sync and Share SKUs and the early success of our lower-priced Simple plan. We expect this outperformance to be partially offset by softer results within our managed sales motion, where we continue to see near-term downsell activity. Consistent with our prior commentary, FormSwift is expected to account for roughly half of the total decline this year.

Moving on to operating margins. We are raising our full year guidance by 100 basis points, primarily driven by more disciplined hiring, efficiencies within performance marketing, lower outside services spend and some onetime benefits. At the same time, we anticipate some incremental investment in headcount and marketing next quarter to support Dash. We're lowering our full year CapEx guidance as we've rightsized our data center investments for the rest of the year, consistent with our disciplined approach to managing spend across the business. We're lowering our full year weighted average shares outstanding outlook, reflecting the additional capacity under our share repurchase program and our commitment to reducing share count over time.

And finally, we are raising our unlevered free cash flow guidance roughly in line with the raise to operating margins where we now expect unlevered free cash flow to be at or above $1 billion. Surpassing $1 billion in unlevered free cash flow will mark a milestone for the company, representing both a level we've been building towards for many years as well as a testimony to the strength of our business model. We're proud of the progress we've made on this front and look forward to continuing the momentum.

I'll wrap with some early thoughts on 2026. With respect to revenue, our strategy next year will largely reflect the continuation of our goals for this year with a significant focus on scaling Dash and strengthening our self-serve Teams business, all with the aim of returning to revenue growth. However, we expect to continue to face near-term revenue headwinds from our strategic decisions to exit the FormSwift business as well as to reduce our investments in our managed sales motion and performance marketing for our core business.

With respect to operating margins, we'll be lapping the reduction in force we made in October of 2024 and thus will not have this margin expansion tailwind heading into next year. Additionally, 2026 will be an important year for Dash. With expanded go-to-market motions and increased marketing investment, we will aim to drive higher trial usage, engagement and conversion. As customer traction builds, we'll retain flexibility to invest further in growth. Consequently, we don't currently foresee 2026 to be a year of margin expansion.

Having only launched our Dash self-serve motions a few weeks ago, we are just now seeing true customer signals on these motions, and thus, we'll be refining our expectations and plans over the coming months as we gain more insight. Therefore, we will have more to share on our expectations for 2026 during our February earnings call.

With that, operator, please open the line for questions.

[Operator Instructions]

Our first question coming from the line of Palak Chandak with Citi.

This is Palak for Steve Enders from Citi. Congratulations on the great quarter. So my first question was, so with Dash in self-serve now, just was curious as to what you're hearing on early feedback on Dash. And [indiscernible] progress? I know it's not going to be a big part of your revenue, but is any portion of the raised guide including Dash monetization?

I can start with on the Dash front and the self-serve launch. So it's early days. The launch was a couple of weeks ago, but more broadly with Dash, the basic value props are resonating. Customers appreciate the ability to search across all their different apps. They appreciate having an AI system that actually knows about them, their company and then some unique features of Dash, things like stacks, which are smart collections that allow you to organize content across any platform and beyond just files. And then lastly, protect and control, which helps IT admins identify and remediate any oversured content, like those are the pillars of value that are all resonating.

And then we're focused on driving the adoption of Dash stand-alone and also driving the integration into the FSS product. So we'll have a lot more to share on specifics there.

And I'll turn it to Tim as far as guidance.

Sure. As far as the raise in guidance, I attribute it more to our outperformance from our individual SKUs, and we also saw some continued improvements in churn and downsell for teams following changes to the cancellation flow that we implemented last quarter. Sign and FormSwift also performed slightly ahead of expectations and DocSend also grew double digits due to the success of our advanced data room plans. So those are more of the factors, though Dash is also a contributor.

Perfect. And my follow-up is, so one of the comments is, I think, about delayed hirings. I was just curious as to -- when it comes to backfilling the RIF and your investments in Dash, which areas are you going to be focusing on hiring for Q4 and for FY '26?

Yes, sure. So we're always looking to add talent to the company with respect to Dash. We will be investing in headcount, AI folks in particular. Also, we'll be investing in marketing to further the engagement and adoption of Dash. And we're always also looking for M&A that can accelerate our product road map. We've acquired promoted Dot AI and Mobius Labs in recent quarters that are accelerating our capabilities when it comes to Dash. We are also backfilling some open roles across the company, but Dash with those investments in headcount and marketing, those are the primary investments both in Q4 and in 2026.

Our next question coming from the line of Rishi Jaluria with RBC Capital Markets.

Maybe just 2 for me here. First, I wanted to maybe double-click a little bit on M&A philosophy from here. I know you -- can you just referred to a recent acquisition you've made. As you think throughout the history of Dropbox, right, there's been some acquisitions that I'm sure you'd say, hey, these have been great, including Command E, which later became or helped, you've launched Dash. Some maybe have been a little less successful like FormSwift, which has been obviously a headwind on growth.

As we think about kind of the history of Dropbox's M&A, can you maybe talk a little bit about what learnings you've had from them and how you can use those to kind of inform you as you contemplate future M&A opportunities, especially just given your cash generation and especially just given the opportunity to use M&A to accelerate what you're doing on the AI front? And then I've got a quick follow-up.

Sure. Yes, great question. So we've learned a lot. Broadly, we've had a lot of success with M&A in terms of being able to accelerate our product road map and expand the business. And so certainly, a lot of our new products have been seeded by acquisitions, things like Nira and Command E are good recent examples of opening access to new markets and speeding us up. And DocSend is another -- so I think one of the lessons is the importance of like buying leadership in categories. So DocSend is an example of a category leader that's done well. I think there's probably some acquisitions I wish I did and then others I'm glad I didn't. So I think it's -- we've had -- we've been disciplined on valuation, and that will continue.

And we're open to more transformative acquisitions, but we're going to continue to maintain that disciplined approach. So yes, those are a few of the lessons and M&A continues to be an important lever for growing the company.

That's very helpful. And then maybe just continuing a little bit on Dash. Look, it's good to see some kind of early signs of success, continue to broaden it out. Maybe if we were to fast forward, call it, 2 to 3 years, and we're having this same call, what would, in your mind, be the proof points of, hey, our vision for Dash has been successful. I mean, is that something that shows up in meaningfully accelerated growth? Is that something that shows up more in you've now expanded the aperture of customers you can go after and therefore, your TAM is larger. Maybe can you just walk us through how you're thinking about from a multiyear perspective because I'm willing to be patient, just thinking about benchmarking the success of Dash over time.

Sure. First, we'd be measuring it to the usual KPIs around adoption and revenue growth and such. But I think the bigger picture is there's a big gap between AI's potential at work and what people actually experience. And as I said earlier in my remarks, our industry is spending trillions of dollars to train these models that can teach you quantum physics, but can't find your Q2 board deck. And similar to the cloud, when we started, there was this gap between what was possible with this new infrastructure and these new technical capabilities and people's lived experience.

And there was a lot of important design and technical work to kind of take the cloud the last mile, and we think there's some really -- we believe and we see there's a lot of important technical and design work that we're doing with Dash to take AI the last mile at work because part of why you see these reports of 95% of AI pilots failing and things like that is because the AI assistant or tools you're using aren't connected to your context. And so success looks like closing that context gap. There are not a lot of shortcuts to closing that gap entails integrating to basically the entire known universe of SaaS applications in every productivity ecosystem and building a deep index and understanding of people's context at work. And then from -- so I think from an industry standpoint, that's really Dropbox's unique contribution to AI is being able to gather all the context, assemble it and then provide and assemble it in a format that an AI model can understand.

And then from a business perspective, one of the -- it's an example I've used a few times, but I keep going back to Netflix's transition when they went from DVD mailing to streaming, where it turned out the best thing they could do for their DVD mailing business was layer in streaming and what that did for them was twofold. So one is it took what otherwise was viewed as a business with like limited future growth opportunities. And then it extended the customer lifetime indefinitely because as people -- as they were able to bridge DVD mailing subscribers to streaming, they both kept Netflix on your credit card statement and even more important for the existing users. And so the core business end up being a lot more valuable than you might have otherwise calculated. And then second, it unlocked a TAM that was 10 or more times order or 2 of magnitude larger with streaming than they had with DVD mailing.

So we see that -- we see parallels. It's not the exact same situation, but we see parallels between our File, Sync business and organizing all your cloud content. and connecting AI to your work context, we see both a natural evolution of the value we're already providing to our core users and then we're able to unlock new generations of Dropbox users who, for one reason or another, aren't using files in Dropbox today.

Our next question coming from the line of Matthew Bullock with Bank of America.

Congrats on the solid quarter here. Drew, maybe if you could just help us think about what you're hearing in terms of feedback from the Dash sales reps out there selling into the Teams installed base? What's causing friction and what's working well in the cycle? And then now with the self-serve motion kind of up and running, how should we think about self-serve contribution versus managed sales for Dash over the next couple of years?

Sure. So the feedback we've been getting, I shared a bit of it earlier. So I mean, most importantly, the fundamental value propositions around AI that's connected to your work context, around universal search, around stacks, around protective control, those are all resonating as expected. And then we're seeing healthy signs of frequency and depth of engagement. So 60% of users are using Dash multiple times per week. That's the kind of thing we want to see. And then that said, I think there's structural challenges with the enterprise business in that it's pretty crowded and noisy. If you think about it, there's -- every CIO has got a long line of AI start-ups and big companies pitching them on AI things.

And I think there's been a fair amount of disappointment or customers feeling burned by broken promises or having bad experiences with things like Copilot. So I think that you just have a fatigued audience there. And then the situation is just completely different in SMB, which is exactly where we have our home field advantage. So we see no scaled competitors that do anything similar to Dash. We've got 575,000 paying business already on Dropbox. It's a very natural evolution of the value we already provide by starting with your files and then extending with Dash to everything else. And we can follow a lot of the same playbook as Dropbox 1.0.

And you might ask like, well, okay, if SMB is such a big opportunity, why hasn't -- why isn't there more competition? And the answer is it's because it's a very difficult technical problem and it can be expensive to solve, especially if you're using the public cloud. So other start-up competitors or enterprise-focused competitors, I mean, the customer conversation starts with like a $50,000 setup fee and a multi-month deployment process. That's going to be unachievable or it's going to rule out a lot of SMB adoption. And a lot of our engineering effort has gone into a lot of the same kinds of efficiencies and really getting the design in the UX right to turn Dash into a product that you can just download, be up and running in a few minutes. just wire up your -- connect your apps and go.

So -- and then lastly, the efficiency that we have with our technical infrastructure is a huge enabler here. So we're able to also offer the service at a much lower price point or at least lower cost structure than competitors because we're able to drive the kinds of -- when you look at our gross margins and margin expansion over the years, a lot of that comes from a really efficient infrastructure. And so we're able to take advantage of that and then extend it into new areas to basically provide a product that few others can match when it comes to being able to have a self-serve product to begin with and then also a lot of the innovation that we've done as far as going beyond documents and text to supporting images and video. And so we see these as having compounding advantages. And you have to have a lot of these parts all coming together to be able to launch a product like Dash for our -- into the SMB segment and have a successful self-serve product.

Got it. And then just a quick follow-up, if I could here. Just on managed sales channel downsells, how did that trend in the third quarter relative to expectations? And then how should we think about quantifying any headwinds from those downsells in the fourth quarter?

Sure. So over the past couple of quarters, we have seen some self-serve teams turn and downsell. We've seen that improve actually following continued work around cancellation flows to better demonstrate the value we're providing to our users. On the managed sales side of things, we do still see some elevated downsell levels across our managed sales motion following our decision to reduce our investments in this motion following our RIF last year. So that was part of the numbers of paying users this past quarter. And we still expect some elevated levels of downsells across the managed sales business in the fourth quarter as well.

Our next question coming from the line of Mark Murphy with JPMorgan.

This is Jaiden Patel on for Mark Murphy. We just have one. You've got exposure to both consumer and small business customers that ultimately tie back to the health of the consumer. How would you characterize end user behavior today? And are you seeing any incremental pressure or stabilization in consumer-linked cohorts?

Sure. So from our perspective, trends have been pretty stable. I mean you see ongoing price sensitivity, but that's -- I wouldn't say there's anything particularly new there. And then we also see with our customers, Dropbox tends to be a pretty mission-critical thing for a small business that's using it. I mean all their most important information is there. So it's relatively less cyclical than some other areas, but I wouldn't say there's been major changes to the trends we've been seeing.

[Operator Instructions]

Our next question coming from the line of Patrick Walravens with Citizens Bank.

Great. This is Kincaid on for Pat. Congratulations on a great quarter and really excited to hear that Dash is going so well. I was curious if you could provide any color on what specific integrations are performing well with Dash customers? And I have a quick follow-up.

Sure. So it's a lot of the ones you'd expect. I mean, certainly, the all the top productivity apps, so the Office Suites, communication tools like Slack and then the rest of the most common apps, so things like Salesforce and Workday and which added HubSpot and we'll add others. So we've long been at a point where we feel like we have good connector coverage and can deliver on the promise of actually connecting AI to your work context.

And then...

Yes, keep going.

No, that is my follow-up. Please continue.

Sorry. So I mean that -- sorry, I just want to make sure I answered your question. Did I miss anything?

No, I think that's what I was looking to hear. The follow-up is related in that we asked last quarter about this API access limitations that Slack had implemented. And I was just really curious your perspective on kind of the competitive landscape there, if you're still seeing conversations around limiting access. And then conversely, if a competitor was launching a product that wanted to access Dropbox data, how do you think about something like that?

Sure. So to date, we've been able to maintain access to the major platforms and Slack is a partner, and we integrate well with them. And I think part of it is having these bilateral relationships with companies, and I think it helps that Dropbox is also an important content repository for a lot of customers. And so we're able to set up business relationships well and have a good balance of trade. I think the biggest -- and then our view is that there's going to be a lot of -- any 2 large tech companies are going to have a lot of surface area and we'll compete on the margins. But ultimately, we want to deliver a good experience for our shared customers.

And so we keep our eyes on the horizon and make sure there's not some fragmentation or restriction of access to customers' data. But I think the biggest force in favor of interoperability is really customers want to get more value out of their data, and they don't appreciate it when you try to lock them out of their data or charge them twice for access to their own data. So I think that kind of gravitational pull is really important. And from our perspective, we tend to be interoperable.

Our next question coming from the line of Kash Rangan with Goldman Sachs.

This is Selina on for Kash. I was wondering if you can talk a little bit about how the pricing and packaging initiatives have resonated with customers so far as well as any learnings you've had from the pricing for Dash and how that might evolve going forward?

Sure. So we continue to optimize pricing and packaging in the core business. We've done -- you've seen things like our Simple SKU, which is performing well in -- for folks who are, for example, mobile customers or price sensitive. So that gives us a more affordable entry point on the way to becoming a full subscriber. So that's worked well. And then with Dash, I mean, we have a starting point that we're excited about. And as I mentioned before, our -- the efficiencies we're able to get with our technical infrastructure allow us to come in at a much more affordable price point than our competitors.

It's early days and it's early days, though. So we'll learn a lot from our customers in the coming quarters. But we think it's a really attractive offer, and we also are able to offer a pretty significant discount to existing Dropbox users to help drive adoption. So our fundamental cost structure and business model, we see as a major strength and something that's hard for -- certainly for start-ups to replicate.

Our next question coming from the line of Seth Gilbert with UBS.

I guess, first, I know it might be a little bit early, but I was wondering if you're expecting -- maybe not looking for a quantifiable answer, but are you expecting any meaningful contribution on the revenue side from Dash next year? Or is that maybe still a little bit too early?

Well, certainly -- our first focus is on driving adoption. So that is where the vast majority of our attention is going. So both attaching Dash to the hundreds of thousands of existing business teams on Dropbox business accounts. And then we're also going to start -- then we're also working on monetization, especially as we start to get the adoption flywheel going. Now there's some trade-offs or decisions to make about how much do we kind of turn the dial more towards gaining share and driving adoption or driving near-term monetization. We think it's in our interest to err on the side of gaining share and attaching users and driving engagement, but we'll be getting a lot more signal on both in the coming year. And as far as materiality or what that signal looks like, we'll share a lot more in the coming quarters and as we guide for '26.

Got it. And then just as a follow-up, you've been pretty active on the buyback front. And I was just curious if, generally speaking, plans to continue at the like -- or sorry, $400 million to $500 million level per quarter.

Sure. So we remain very committed to our share repurchase program, which, of course, aims to reduce share count over time. I'd look to our weighted average share count forecast for our expectations on the pacing of repurchases for this year, and I'd expect that to be relatively similar heading into next year.

And there are no further questions in the queue at this time. I will now turn the call back over to Peter for any closing remarks.

Thanks, everyone, for joining us today. We look forward to speaking with you next quarter. Hope you all have a good evening.

This concludes today's conference call. Thank you for your participation, and you may now disconnect.