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DI

DROPBOX, INC. (DBX)·Q3 2025 Earnings Summary

Executive Summary

  • Q3 delivered beats on revenue and EPS with expanding non-GAAP margins: revenue $634.4M vs $623.6M* consensus; non-GAAP diluted EPS $0.74 vs $0.649* consensus. GAAP and non-GAAP operating margins rose to 27.5% and 41.1%, respectively, with beats driven by better retention and disciplined spend.
  • FY25 guidance raised across revenue (to $2.511–$2.514B) and non-GAAP operating margin (~40%); unlevered FCF now “at or above” $1B; Q4 margin guided to ~37% as investments ramp for Dash.
  • Strategic progress on AI: launched self-serve Dash at $19/user/month with 50% first-year discount for existing plans; began native Dash integration inside Dropbox; early engagement strong (60% of managed Dash WAUs use ≥2 days/week).
  • Offsets: YoY revenue (-0.7%) and ARR (-1.7%) declines; paying users fell 64k q/q; gross margin pressure from data center refresh and infrastructure investments for Dash; managed sales downsell remains elevated.

Note: Items marked with * reflect S&P Global consensus.

What Went Well and What Went Wrong

  • What Went Well

    • Beat and raise: Revenue exceeded guidance on stronger retention in individuals/teams; FY25 revenue, non-GAAP OM, and unlevered FCF guidance raised. “Constant currency revenue came in comfortably ahead of guidance… Non-GAAP OM up meaningfully YoY.”
    • AI execution: Self-serve Dash launched; integrated into Dropbox; pricing set at $19/user/month with 50% first-year discount for existing customers; 60% of managed Dash WAUs use ≥2 days/week.
    • Efficiency and cash: Q3 non-GAAP OM 41.1% vs 36.2% LY (up ~490 bps), aided by delayed hiring and lower marketing/outside services; unlevered FCF strong at $314M in Q3.

  • What Went Wrong

    • Topline pressure: Revenue down 0.7% YoY; ARR down 1.7% YoY (1.5% ccy). FormSwift remained a headwind; TTM ARR declined q/q by $6.1M.
    • User metrics: Paying users 18.07M, down ~64k q/q; managed sales downsell elevated and expected to persist near-term.
    • Margin mix: GAAP/non-GAAP gross margin compressed (79.8%/81.4%) on higher depreciation from the data center refresh and infrastructure investments for Dash.

Financial Results

Headline metrics (oldest → newest)

MetricQ1 2025Q2 2025Q3 2025
Revenue ($M)$624.7 $625.7 $634.4
GAAP Diluted EPS ($)$0.51 $0.45 $0.47
Non-GAAP Diluted EPS ($)$0.70 $0.71 $0.74
GAAP Gross Margin (%)81.3% 80.2% 79.8%
Non-GAAP Gross Margin (%)82.9% 82.2% 81.4%
GAAP Operating Margin (%)29.4% 26.9% 27.5%
Non-GAAP Operating Margin (%)41.7% 41.5% 41.1%
Net Cash from Ops ($M)$153.8 $260.5 $302.1
Free Cash Flow ($M)$153.7 $258.5 $293.7

Key KPIs (oldest → newest)

KPIQ1 2025Q2 2025Q3 2025
Total ARR ($B)$2.552 $2.542 $2.536
Paying Users (M)18.16 18.13 18.07
ARPU ($)$139.26 $138.32 $139.07
Cash + ST Investments ($M)$1,180.0 $954.7 $925.3

Consensus vs Actuals (S&P Global; oldest → newest)

MetricQ1 2025Q2 2025Q3 2025
Revenue Actual ($M)$624.7 $625.7 $634.4
Revenue Consensus ($M)$619.8*$618.6*$623.6*
EPS Actual (Non-GAAP) ($)$0.70 $0.71 $0.74
EPS Consensus ($)$0.622*$0.632*$0.649*

Values retrieved from S&P Global.

Guidance Changes

MetricPeriodPrevious Guidance (Q2 call)Current Guidance (Q3 call)Change
Revenue ($M)Q4 2025—$626–$629 New quarterly guide
Non-GAAP Operating Margin (%)Q4 2025—~37% New quarterly guide
Diluted WASO (M)Q4 2025269–274 256–261 Lower
Revenue ($B)FY 2025$2.490–$2.500 $2.511–$2.514 Raised
Revenue (ccy $B)FY 2025$2.488–$2.498 $2.508–$2.511 Raised
Gross Margin (%)FY 2025~82% ~82% Maintained
Non-GAAP Operating Margin (%)FY 2025~39% ~40% Raised (+100 bps)
Unlevered FCF ($B)FY 2025≥$0.97 ≥$1.0 Raised
Cash interest (net of tax, $M)FY 2025~$85 ~$85 Maintained
CapEx ($M)FY 2025$25–$30 $20–$25 Lowered
Finance lease adds (% rev)FY 2025~6% ~6% Maintained
Diluted WASO (M)FY 2025276–281 273–278 Lower

Earnings Call Themes & Trends

TopicPrevious Mentions (Q1 2025)Previous Mentions (Q2 2025)Current Period (Q3 2025)Trend
AI/Dash strategyImproving Dash UX; Spring launch added video/image search and deeper integrations. Refining ICP; ramping for self-serve; engagement gains; rich media search double-digit share of queries. Self-serve launched at $19/user; 50% first-year discount for existing plans; native integration into Dropbox; 60% WAUs use ≥2 days/week. Accelerating productization and GTM
Core FSS retention/downsellsFocus on operating efficiency. Retention gains from redesigned cancellation flows; FormSwift drag; managed downsell expected. Better retention drove beat; managed sales downsell remains elevated. Retention improving; managed downsell persists
Pricing/packaging—Simple SKU traction; unified checkout. Simple plan aiding paying user outlook; Dash discount for existing plans. More tailored SKUs, bundling
Gross margin/infraData center refresh compressing margins; lower depreciation benefit YoY. Non-GAAP GM down YoY on refresh. GM pressure from higher depreciation (refresh) and Dash infra investments. Near-term pressure; efficiency still high
Capital allocation—Repurchased ~$400M; $955M cash+ST. New $1.5B buyback authorization; $390M repurchased in Q3; term loan amended to refinance 2026 converts; $925M cash+ST. Aggressive buybacks; balance sheet flexibility
Interoperability/API—Slack API changes manageable; maintained access. Slack remains a partner; bilateral relationships + customer demand drive openness. Stable access; competitive advantage in integrations

Management Commentary

  • “We delivered a strong Q3, exceeding our revenue guidance and expanding operating margins as we continue to drive efficiency across the business.” — Drew Houston, CEO.
  • “We launched the self-serve version of Dash… priced at $19 per user per month, with a 50% first-year discount for existing plan customers… native Dash integration inside of the Dropbox app is rolling out.” — Drew Houston.
  • “Operating margin was 41.1%, ahead of our guidance of 37%… benefited from delayed hiring, lower outside services and marketing spend, as well as some one-time benefits.” — Tim Regan, CFO.
  • “We are raising the midpoint of our as-reported revenue guidance… and expect unlevered free cash flow to be at or above $1 billion.” — Tim Regan.

Q&A Highlights

  • Dash monetization and adoption: Focus remains on adoption first; self-serve launched; additive to raised guide mainly via core outperformance; 60% of managed Dash WAUs use Dash ≥2 days/week.
  • Pricing/packaging: Self-serve Dash at $19/user/month; 50% first-year discount for existing Dropbox Advanced/File/Think/Share plans.
  • Managed sales channel: Downsells remain elevated; expected to persist into Q4; self-serve teams retention improving with cancellation flow changes.
  • Capital allocation: New $1.5B buyback; repurchased ~$390M in Q3; intention to continue reducing share count; WASO guidance lowered.
  • Interoperability: Maintains Slack access; emphasizes bilateral partnerships and customer demand for open data access.
  • 2026 outlook: Focus on scaling Dash; do not foresee 2026 as a year of margin expansion given investment plans.

Estimates Context

  • Q3 beats: Revenue $634.4M vs $623.6M*; Non-GAAP EPS $0.74 vs $0.649*.
  • Q2 and Q1 also beat on both revenue and non-GAAP EPS vs consensus.
  • Implication: Street models likely move higher on FY25 revenue/OM/FCF after raised guidance; near-term Q4 OM ~37% tempers the magnitude of upward EPS revisions.

Values retrieved from S&P Global.

Key Takeaways for Investors

  • Beat-and-raise quarter with improving structural retention and disciplined spend; FY25 revenue/OM/FCF all moved up.
  • Dash commercialization is now tangible (self-serve live, native integration), with encouraging early engagement; SMB self-serve is the core GTM vector.
  • Topline still faces offsets (FormSwift headwind, managed sales downsell), but ARPU and individual SKUs are stabilizing the core; paying user decline outlook improved.
  • Gross margin pressure from data center refresh and Dash infra spend persists near term; Q4 OM guided to ~37% as investments ramp.
  • Capital allocation remains shareholder-friendly (new $1.5B buyback, term loan for convert retirement), supporting WASO reduction and FCF/share growth.
  • 2026 set up: management prioritizes Dash scale over OM expansion next year; expect investment-led narrative until adoption/monetization inflect.
  • Trading lens: Positive sentiment catalysts include Dash adoption updates, continued retention gains, and progress toward ≥$1B unlevered FCF; watch for managed sales downsell normalization and gross margin stabilization.