Dropbox - Earnings Call - Q1 2025

Executive Summary

• Q1 2025 delivered a modest top-line beat and a material profitability surprise: revenue $624.7M vs S&P Global consensus ~$619.8M; non-GAAP diluted EPS $0.70 vs ~$0.62; non-GAAP operating margin reached a record 41.7% on operating efficiency and timing-related spend deferrals. Bold beats: revenue and EPS; margins at all-time high. Revenue/EPS consensus values retrieved from S&P Global.*
• FY 2025 guidance raised: as-reported revenue up $10M to $2.475–$2.490B, non-GAAP operating margin up 50 bps to 38–38.5%, and unlevered FCF raised $10M to ≥$950M; Q2 2025 revenue guided to $616–$619M and operating margin ~37.5%. Prior guidance in Feb: FY revenue $2.465–$2.480B, operating margin 37.5–38%, unlevered FCF ≥$940M.
• Core business trends mixed: paying users fell ~60k QoQ to 18.16M as FormSwift marketing was eliminated; ARR $2.552B (flat constant currency), ARPU $139.26; self-serve teams/individual SKUs outperformed expectations, while Sign remained challenged and DocSend grew double digits.
• Strategic catalyst: major Dash update (multimodal video/image search, deeper Slack/Teams integrations, AI writing, GDPR/ISO27001/SOC 2) plus plan to introduce select Dash functionality into FSS plans and a self-serve motion later this year—key drivers for narrative re-rating despite near-term growth headwinds.

What Went Well and What Went Wrong

What Went Well

• Record profitability: non-GAAP operating margin hit 41.7% (vs 36.5% last year), driven by RIF benefits, lower marketing, and timing-related outside services; Q1 margin also benefited from a release of certain international tax reserves and disciplined hiring.
• Demand/engagement outperformed expectations in self-serve teams and individual SKUs, supported by onboarding improvements; desktop activations up >50% YoY and admin CSAT at all-time highs (pricing simplification reduced friction).
• Product momentum: Spring Dash release added multimodal search, connectors (Slack, Zoom, Teams, Canva, Jira), customizable data exclusions, and AI writing; compliance strengthened (GDPR, ISO27001, SOC 2), reducing sales friction and enabling international expansion.

What Went Wrong

• Paying users declined sequentially by ~60k and ARPU slipped QoQ to $139.26 on FX and mix shift away from higher ASP FormSwift; management expects ~300k decline for FY25 (roughly evenly spread), with FormSwift ~half.
• Gross margin compressed to 82.9% (non-GAAP) vs 84.6% last year due to data center refresh and a smaller depreciation benefit from the useful-life change vs 2024.
• Competitive and macro backdrop: Dash onboarding and activation cycles require further optimization; SMB price sensitivity persists, and management flagged evolving macro/geopolitical risk and potential tariffs on data center equipment (currently modeling no material impact).

Transcript

Operator (participant)

Hello, and welcome to Dropbox first quarter 2025 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star one one on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star one again. I would now like to turn the conference over to Peter Stabler. Sir, you may begin.

Peter Stabler (VP of Investor Relations)

Good afternoon, and welcome to Dropbox's first quarter 2025 earnings call. As a reminder, we will disclose non-GAAP financial measures on this call. Definitions and reconciliations between our GAAP and non-GAAP results can be found in our earnings release and our earnings presentation posted on our IR website 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 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 these risks and uncertainties are described in our SEC filings, including our most recent report on Form 10-K and our forthcoming report on Form 10-Q.

Forward-looking statements represent our beliefs and assumptions only as of the date such statements are made. We disclaim any obligation to update any forward-looking statements except as required by law. I will now turn the call over to Dropbox's CEO and Co-founder, Drew Houston.

Drew Houston (CEO and Co-founder)

Thanks, Peter, and good afternoon, everyone. Welcome to our Q1 2025 earnings call, and I'm here with Tim Regan, our CFO. I'll start with our business and product highlights, and then Tim will walk through our Q1 results and outlook for the rest of the year. Q1 revenue came in slightly ahead of our forecast. Our focus on operating efficiency, along with some timing-related expense savings, helped us achieve our highest-ever non-GAAP operating margin. As expected, we saw some sequential decline in paying users after removing FormSwift marketing and pursuing higher efficiencies in our core business, though the decrease was less than we anticipated. Now I'll share an update on our two strategic priorities for this year, which are scaling Dash and simplifying and strengthening our core FSS business. I'll start with Dash.

A few weeks ago, we launched our major spring update, and I'm particularly excited about how it transforms the search experience for our customers. The update delivers three main improvements. First, most search tools today are still limited to text, but as we know, our work lives extend far beyond documents to images, videos, and other rich media. Our spring update breaks this barrier. For the first time, Dash can now search across all these formats, recognizing both metadata and, increasingly, the actual content within images and videos. Imagine being able to find that specific product photo or design mockup without having to remember what you named the file. That's now possible with Dash. This capability is especially valuable for creative professionals who work with visual content all day, which is why we're seeing strong interest from the creative services industry, where Dropbox has traditionally been strong.

We also made significant performance improvements, cutting latency for Dash's summarize and answers capabilities by over 50% and introducing a redesigned search box that serves as a single entry point for finding, asking, writing, and organizing your content. Second, we responded directly to our customers' top requests by adding customizable data exclusions that give administrators control over what content gets ingested by Dash. We also rolled out full integrations with essential workplace apps, including Slack, Zoom, and Microsoft Teams, and we also added deeper integrations with creative and project management tools like Canva and Jira. Third, we expanded Dash's AI writing capabilities. Users can now use simple prompts to have Dash find and summarize content across all your connected apps and draft documents in seconds. The system supports creating templates or even having Dash draft full documents for you.

Users can adjust the tone and formality of the writing or even have Dash write in their personal voice. We've also been strengthening Dash's compliance posture. Dash has been GDPR compliant since the beginning of the year, and we've begun addressing sales opportunities in other English-speaking countries. Dash has also received ISO 27001 compliance and SOC 2 certifications, reinforcing our commitment to content access control, risk management, and incident response. Customer feedback on these improvements has been encouraging, validating our product direction and rapid response to user needs. I'll share a quick customer example. Southbase Construction, a cloud-enabled commercial construction firm, turned to Dash to modernize their operations across their distributed teams. With Dash's unified interface, search, and summarization tools, team members are saving an average of 30 minutes a day that they used to spend having to hunt for documents across different platforms.

Accurate summarization is particularly valuable for Southbase when their teams are comparing complex security and compliance documents, which they previously did manually. While a growing number of companies have deployed Dash, we still have work to do to streamline our sales, onboarding, and activation motions. Improving our outbound sales efficiency is a top priority, but we're also developing a self-serve motion for launch later this year. In the coming months, we'll also introduce select Dash functionality onto some of our FSS plans, accelerating our introduction of Dash to our large install base of FSS customers. Now let's turn to our core business. Last quarter, we outlined our goals of strengthening and simplifying our DFSS user experience while driving higher operating efficiency. This meant more focused investments, a shift that we also knew would create some growth headwinds.

In Q1, we improved mission-critical features that refined key workflows and reduced friction. As a result, we saw better-than-expected performance, particularly among self-serve teams, despite reduced investment levels. For example, we improved prompts for users to install and activate our desktop app during sign-up and early engagement. This has increased new desktop activations by over 50% year-over-year. This is an important metric because multi-surface users typically have higher engagement and retention. We also enhanced the admin console, knowing IT admins are often the purchasing decision-makers. We improved billing management, enhanced the admin dashboard, and clarified our content management capabilities, leading to all-time high CSAT scores for admins. Our pricing and packaging teams simplified our product lineup by reducing the number of SKUs and better aligning features with customer needs. This creates less friction in the buying process and clearer value propositions.

Through strategic discounting, we also accelerated migration from monthly to annual plans, which should improve retention going forward. In our document workflow businesses, Q1 performance was largely as expected. DocSend delivered solid double-digit growth year-over-year, while Sign continued to face the challenging competitive landscape. As mentioned, FormSwift saw an expected decline in paying users, but operating income and free cash flow improved significantly year-over-year. In closing, we have had a productive start to the year in addressing both of our strategic priorities. Our teams are moving with urgency, and our April Dash release was a significant step forward in solving real customer problems. We also continue to make progress in improving our FSS business.

As expected, we're still evolving our go-to-market engine and optimizing our Dash sales and onboarding motion, but we know what steps to take, and in the coming months, we'll augment our Dash sales effort with a product-led self-serve option. The macro landscape is still fluid, but we believe our subscription business, our strong profitability, and our broad customer diversification position us well to navigate this current market uncertainties. We're focused on what we can control, and we'll continue refining our execution as we pursue the Dash opportunity. Now I'll turn it over to Tim to cover our financial results and our updated outlook.

Tim Regan (CFO)

Thank you, Drew. I'll cover our financial highlights from Q1 and then provide guidance for the second quarter and the full year 2025. As a reminder, our financial objectives this year are aimed at positioning our core file sync and share and document workflow business lines for increased efficiency by driving higher levels of operating margins and free cash flow from these areas. We are then leveraging this profitability and the strength of our balance sheet to reduce our share count, thereby driving growth in free cash flow per share. Concurrently, we are investing in areas where we see opportunities to return to positive revenue growth, most notably with Dash. The first quarter was a solid step forward in executing against this strategy.

Starting with our financial highlights from Q1, as a reminder, we recently eliminated our marketing spend behind our FormSwift business, and we reduced the number of outbound sellers supporting our core File Sync and Share business. As expected, these factors pressured our year-over-year revenue growth. Total revenue for Q1 declined 1% year-over-year to $625 million. Constellancy revenue declined 60 basis points year-over-year to $628 million. FormSwift acted as a 70 basis point headwind to revenue on a year-over-year basis. Total ARR was $2.552 billion, down 20 basis points year-over-year, and flat on a constellancy basis. FormSwift acted as a 120 basis point headwind to ARR in the quarter. We exited the quarter with 18.16 million paying users, down approximately 60,000 paying users on a sequential basis. Average revenue per paying user was $139.26, as compared to $140.06 in the prior quarter.

The quarter's sequential decline in paying users was driven largely by our reduced level of investment in FormSwift. Our ARPU declined sequentially due to both FX as well as a mix shift away from FormSwift, where these subscriptions carry a higher average selling price. Despite these collective metrics declining year-over-year, in part due to our strategic decisions, we outperformed our expectations for the quarter. This outperformance largely stemmed from our self-serve teams and individual SKUs. 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 purchase intangibles, certain acquisition-related expenses, net gains and losses on our real estate assets, workforce reduction expenses, and net losses on equity investments. Our non-GAAP net income also includes the income tax effect of the aforementioned adjustment.

Gross margin was 82.9% for the quarter, down 170 basis points from the year-ago period, as we continue to support our data center refresh cycle. I would also note that we saw a smaller depreciation benefit from the change in useful life of our servers vs the year-ago period. Operating margin was 41.7%, ahead of our guidance of 38.5%, and up more than 500 basis points from the year-ago period. Operating margin increased year-over-year largely due to our headcount reduction from our RIF last fall and lower marketing spend following the strategic shift away from FormSwift. Compared to our guidance, operating margin benefited primarily from delayed outside services and marketing spend that we expect to incur later this year, a release of certain international tax reserves, and a disciplined approach to hiring. Net income for the first quarter was $207 million, up 5% year-over-year.

Diluted EPS for the first quarter was $0.70, based on 296 million diluted weighted average shares outstanding, compared to $0.58 in the year-ago quarter, representing a 21% year-over-year increase. Moving on to our cash balance and balance sheet, cash flow from operations was $154 million, a decrease of 12% vs the year-ago period. As a reminder, this quarter included a $36 million payment for the third and final tranche of our San Francisco lease buyout that we executed in 2023, as well as $10 million of severance and benefits payments related to our reduction in force. Q1 also included $21 million of interest payments related to our December 2024 term loan transaction. We had immaterial capital expenditures in the quarter due to a shift in timing for certain facility restoration costs and delivery timelines for data center buildouts.

Q1 unlevered free cash flow was therefore $174 million, or $0.59 per share. As a reminder, we define unlevered free cash flow as free cash flow, excluding the impact of interest payments associated with our term loan net of their associated tax benefit. In the quarter, we also added $44 million to our finance leases for data center equipment as we continue to invest in refreshing our data centers. We ended the quarter with cash and short-term investments of $1.2 billion. In the first quarter, we repurchased approximately 18 million shares, spending approximately $500 million. As of the end of the first quarter, we had approximately $870 million remaining under our existing share repurchase authorization. I'll now offer our updated outlook for Q2 and the full year 2025. For the second quarter of 2025, we expect revenue to be in the range of $616 million-$619 million.

We are expecting a currency headwind of approximately $1 million. On a constant currency revenue basis, we expect revenue to be in the range of $617 million-$620 million. We expect FormSwift to serve as a roughly 150 basis point headwind to revenue in the second quarter. We expect our non-GAAP operating margin to be approximately 37.5%. Finally, we expect diluted weighted average shares outstanding to be in the range of 279 million-284 million shares, based on our 30-day trailing average share price. For the full year 2025, based on current foreign exchange rates, we are raising our previous guidance range for reported revenue by $10 million to $2.475 billion-$2.490 billion. Our full year constant currency revenue guidance is unchanged at $2.483 billion-$2.498 billion. We continue to expect FormSwift to serve as a 150 basis point headwind to revenue this year.

Our gross margin outlook is unchanged. We are raising our outlook for non-GAAP operating margin by 50 basis points to be in the range of 38%-38.5%. We are raising unlevered free cash flow by $10 million to be at or above $950 million. We are also maintaining our CapEx guidance to be in the range of $25 million-$30 million for the full year, in addition to finance lease lines to be approximately 6% of revenue. Finally, as a result of our recent repurchase activity, we are now expecting diluted weighted average shares outstanding to be in the range of 276 million-281 million shares, down 7 million shares from our original guidance. I'll now share some additional perspective on this guidance for 2025.

We had a solid start to the year, in particular executing against our objective of driving higher levels of efficiency across our core file sync and share and document workflow businesses. Despite this, we are facing an uncertain macroeconomic environment that could introduce some volatility to our results. While we have not yet seen any meaningful impact to our customer demand, and are optimistic that our diversified customer base will help insulate us from near-term volatility, it is too early to estimate the impact of the evolving geopolitical dynamics. We also continue to navigate the uncertain pacing of revenue stemming from the elimination of our marketing investment in FormSwift, as well as the nascent state of Dash. We are therefore maintaining our constant currency revenue guidance for the year. However, we are flowing through the benefit from the improvement in FX rates to our as-reported revenue guidance.

Regarding paying users, and in light of the aforementioned perspective, we are maintaining our initial commentary and expecting paying users to decline by roughly 1.5% or 300,000 users, with these declines to be roughly evenly spread throughout the year. We continue to expect that Form-swift will represent roughly half of the paying user decline this year, where these plans also carry a higher average selling price, and thus this decline will also introduce some pressure to our ARPU trends. Moving on to operating margins, we are raising our full year guidance by 50 basis points, which largely reflects our latest outlook on FX. While we outperformed on operating margins in Q1, some of this outperformance was due to delayed spend that we expect to incur later this year, as we plan to invest in headcount and marketing behind Dash.

We are also maintaining our full year CapEx and finance lease guidance. While we are monitoring the macroeconomic conditions closely and assessing mitigation plans to the extent tariffs are applied to equipment needed for data centers, we are currently assuming no material impact to cash CapEx or to our finance leases. We are also raising unlevered free cash flow in line with our raise to operating margins. In conclusion, we're off to a good start to the year. We are executing well against our strategy of generating higher levels of efficiency across our core file sync and share and document workflow businesses as we outperformed against our expectations for the first quarter. We also reduced our share count via our share repurchase program, thus putting ourselves in position to drive a meaningful increase in free cash flow per share this year.

While we are pleased with the start and the progress we are making on Dash, we are also keeping a close watch on the evolving macro environment for any potential impact to our business. We look forward to sharing further updates on our progress in future quarters. With that, Operator, please open the line for questions.

Operator (participant)

Thank you. Ladies and gentlemen, as a reminder to ask the question, please press star one one on your telephone, then wait for your name to be announced. To withdraw your question, please press star one one again. Please stand by while we compile the Q&A roster. Our first question comes from the line of Steve Enders with Citi. Your line is open.

Steve Enders (Equity Research Analyst)

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

Drew Houston (CEO and Co-founder)

Sure. I can start and Tim can add on. We're making progress on a lot of our priorities in the core business. In particular, we're focused on the Teams business, which has higher retention rates, higher ARPU, has a good attached potential for Dash. The improvements have really stemmed from product performance improvements. We've been focused on making onboarding easier and reducing friction and streamlining that experience. We've seen some of that pay off from leading indicators like the number of desktop activations. People that successfully install and get up and running on the desktop app, that number has increased 50% year-over-year. We've made similar efforts and improvements on team expansion. We continue to iterate on pricing to get the price value equation right.

I think we both made progress on those fronts, and we still have headroom in each of those areas too. Ultimately, one of the best things we can do for core retention is to complement it with Dash so that the value we provide extends from syncing your files to organizing all your cloud content and providing an intelligence layer over everything and doing that safely.

Tim Regan (CFO)

Hey, Steve, it's Tim. As Drew talked about, we did see some outperformance on our individual and Teams cues relative to expectations. As related to the full year, while we did outperform in the first quarter, certainly mindful of the evolving macro environment. That is why we're maintaining our initial commentary in expecting paying users to decline by roughly 300,000 users. Still expect that FormSwift will represent about half of the paying user decline. We expect that decline to be roughly evenly spread throughout the year.

Steve Enders (Equity Research Analyst)

Okay, great. That's helpful. Maybe just on Dash, I guess any kind of change in your view since, I guess, over the past 90 days since we last talked around the monetization potential or how you expect the rollout and the sales initiatives back into the base to play out from here?

Drew Houston (CEO and Co-founder)

Nothing major. I think the things I'm most excited about are things like our recent product release a couple of weeks ago. Our spring release for Dash breaks a lot of new ground in being able to support images and video, for example, whereas a lot of other products are focused on text and documents. We've closed a lot of, or we've been responsive to a lot of key customer requests, particularly on some of our connector coverage with adding connectors for apps like Slack and Teams and Zoom and Canva, which are some of our most heavily requested. More broadly, the basic value prop continues to resonate in our existing customers. Certainly see this as a natural evolution of what we do.

We've got 500,000 paying businesses on Dropbox who also need to organize their cloud content and need to roll out AI safely. And it's also been good, just the progress we've been seeing in building pipeline and getting our pilot customers up and running. I mean, I think we've had some expected friction. Just there's opportunities for us to just compress the cycle times of getting customers up and running and making onboarding easier and making team setup and education easier. So those are the kinds of things we're iterating on. But overall, no major changes and pretty excited about the opportunity.

Steve Enders (Equity Research Analyst)

Okay, awesome. Great to hear. Thanks for taking the questions.

Drew Houston (CEO and Co-founder)

Thanks.

Operator (participant)

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

Rishi Jaluria (Managing Director)

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

Drew Houston (CEO and Co-founder)

Sure. One is, as we expected, things like just the basic AI search resonates. We have actually also seen that the features around organizing and sharing content, specifically Stacks, resonate with a lot of our early users. Our customers have challenges not just around search, but around organizing and sharing all their content in a cross-platform way. If you think about it, getting ready for a board meeting or working on a project and you have a Google Doc and a video file and an Airtable or something, there is not really a common container until Stacks. I think customers get really excited about the possibilities, especially when you combine that with the multimodal support, so being able to organize images and video.

You think about especially the sort of the Dropbox customers' skew, or we have a lot of adoption in the creative community or people that work with big files and video. Dash is pretty unique in how we support that. Also on the IT side, protect and control really resonates. When you think about rolling out AI within a company or search, but really AI of any kind, one challenge is it makes it a lot easier for employees to access content that should not have been shared in the first place. Protect and control really helps you identify improperly shared or sensitive content across every platform, which is unique, and then actually lets you remediate it at its source. It allows you to identify overshared content, mass unshare it, and set policies to keep that in line going forward.

That is something that, again, is unique to Dash and a really resonating part of the value prop beyond search.

Rishi Jaluria (Managing Director)

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

Drew Houston (CEO and Co-founder)

Yep. In our world, consumer adoption often in our context means a mixed personal and work use case. That is important because a lot of our individual subscribers are often using Dropbox for something like 80% of our users are using Dropbox or of our subscribers are using Dropbox for either entirely a work use case or a mixed personal and work use case. A lot of that subscriber base has been with us for a long time. In that context, Dropbox is a pretty mission-critical thing. The reason that people stay on Dropbox is because their most important information is on there, and they have this whole sharing network set up in both personal and work contexts.

We have also just observed that while there are the general trends, I think we are all keeping an eye on the macro environment, and we have not really seen major changes in these trends. Some of what we have seen around, we have seen price sensitivity with SMBs, but both in our SMB segment and consumer segment or individual segment, we have not really seen major new changes to leading indicators that indicate some big impact on the macro environment. I mean, obviously, that can change, but it is not something we have seen yet.

Tim Regan (CFO)

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

Rishi Jaluria (Managing Director)

Got it. Thank you so much, guys.

Operator (participant)

Thank you. Our next question comes from the line of Matt Bullock with Bank of America. Your line is open.

Matt Bullock (Equity Research Associate)

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

Tim Regan (CFO)

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

Matt Bullock (Equity Research Associate)

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

Drew Houston (CEO and Co-founder)

One area where we're really focused is building a self-serve version of Dash, which was important for unlocking the potential of our self-serve base. If you think about the more than 500,000 business customers on Dropbox, the vast majority of those are self-serve. Having a version of Dash that you can just kind of get up and download and get up and running on your own is really important. We also have a lot of historical strength, which we'll leverage again in the self-serve and viral motion and things like stacks and sharing, really accelerating growth. Really building that connectivity between FSS and Dash and then making it so it's really easy for folks, both existing customers, to get up and running on Dash in a seamless way. Also for new customers, we think that's going to be a big accelerant.

I’d just say another part is just touching on the competitive comment before is in our sweet spot, which is largely SMBs and mid-market, we really do not see a lot of competition. When I talk to customers and prospects, most of them have not even heard of some of the enterprise-focused competitors. We see this as a lot of white space for Dropbox, which is another reason why we are really focused on building from strength in our home field.

Matt Bullock (Equity Research Associate)

Got it. Thanks, Drew.

Operator (participant)

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

Alex Nguyen (Equity Analyst)

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

Drew Houston (CEO and Co-founder)

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

Alex Nguyen (Equity Analyst)

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

Tim Regan (CFO)

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

Alex Nguyen (Equity Analyst)

Thank you.

Operator (participant)

Thank you. As a reminder, ladies and gentlemen, that's star one one to ask the question. Our next question comes from the line of Patrick Walravens with Citizens. Your line is open.

Patrick Walravens (Managing Director)

Oh, great. Thank you. Congratulations on the better-than-expected results in the quarter. I actually have sort of a product-related question, Drew. You're talking about connectors for Slack and Teams and Zoom and Canva. How hard is it to build those connectors? What's involved?

Drew Houston (CEO and Co-founder)

It's pretty challenging. It sort of sounds easy, but is deceptively difficult and requires a pretty significant R&D investment to do it properly. In a lot of ways, what we're really talking about is a new form of sync where we have obviously a lot of experience. This is a pretty mission-critical capability where it needs to operate at Dropbox's scale. It needs to be totally reliable. It needs to be completely permissions aware. We have to be good partners in terms of consumption and making sure that we're making an appropriate number of API calls and handling rate limits.

Anyway, there's a very long tail of technical considerations. Just as some color, early on, we experimented with using some of these third-party integrations as a service-type partners, but we found that they had significant scalability and engineering correctness and reliability issues. We both, just to safeguard our customers' data, felt the responsible choice was to bring this in-house. We also see that as a potential part of our moat and a technical advantage to really make the experience as seamless and performant as possible. It is an important investment.

Patrick Walravens (Managing Director)

Yeah, I agree. My follow-up is when you rolled out the Spring 2025 release, you sort of summarized the four areas as search across video, audio, images, Kickstart content creation, number three, connect to even more of the tools. We just discussed that. Number four, more control over what your team can and can't, right? Which of those is the most expensive and time-consuming for you? Is it what we just talked about?

Drew Houston (CEO and Co-founder)

I think they're all big investments with somewhat different shape. I think certainly when you're supporting images and video, that's really on the one hand, that is an expensive capability and requires a lot of storage and compute. That said, certainly for the Dropbox customers, we're already handling the storage at scale and doing it really efficiently. While on the one hand, it is a big technical lift, on the other hand, it's much easier for us to support these use cases efficiently and profitably than a smaller-scale competitor. We're drafting off of a lot of the technical investments we've made over the last 18 years.

Patrick Walravens (Managing Director)

Awesome. All right. Thank you.

Drew Houston (CEO and Co-founder)

Yep. Thanks.

Operator (participant)

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

Peter Stabler (VP of Investor Relations)

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

Operator (participant)

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