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Good day, and thank you for standing by. Welcome to the Dropbox Second Quarter 2025 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Peter Stabler, Head of Investor Relations. Please go ahead.

Good afternoon, and welcome to Dropbox' Second 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 the third quarter and fiscal year 2025 and 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' CEO and Co-Founder, Drew Houston.

Thanks, Peter, and good afternoon everyone. Welcome to our Q2 2025 earnings call. I'm here with Tim Regan, our CFO. I'll start with our business and product highlights, and then Tim will walk through our Q2 results and outlook for the rest of the year. Let's dive in. Q2 capped off a solid first half of the year. Revenue came in ahead of guidance, and our continued focus on operating efficiency delivered another quarter of strong margin performance. 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. Starting with Dash. I'll walk through what's going well, highlight areas we're focused on improving, and share where we're headed. We just finished the second full quarter where Dash for Business has been in market, and it's clear the value proposition is resonating. We're seeing customers expand their license counts, which is a great early signal. Our top priority has been building a great product experience and gathering user feedback to inform future development. As we noted last quarter, in April we launched features designed to expand Dash's use cases and improve user productivity, and we're excited by the feedback and engagement gains we're seeing. Since launch, we've continued building new capabilities and most recently launched intranet features like org charts, people pages, and top-requested integrations like Workday. We've also made meaningful improvements to support faster activation and a more intuitive first-use experience as we concentrate on streamlining onboarding. With a strong feature set in place, we're now focused on fine-tuning Dash's performance to build deeper user engagement, and, although we're in early stages, recent results are encouraging. Rich media search, which is part of our April launch, now accounts for double-digit percent of total queries, and we're seeing growing adoption of Dash chat for answering questions, summarizing long documents, and providing draft writing assistance. We've also seen strong sequential growth in key cohort metrics like weekly active users and activity rates per week, which is evidence that as customers gain familiarity with Dash, repeat usage climbs. Building on this product and engagement momentum, for the second half of the year we're ramping our focus on user growth and monetization. Customer conversations and usage data have helped us to refine our ideal customer profiles across industries and team sizes, as we look to better target our outbound sales motion toward marketing, creative and technology teams in the SMB to mid- market space, which are all historically strong verticals for us. Of course, our large base of FSS customers represents a huge opportunity for Dash, since virtually all of our FSS users also have cloud content. And by bringing elements of Dash into our FSS product experience, we can accelerate awareness of Dash's functionality and ultimately help bridge our FSS users onto Dash. Finally, we remain on track to complement our outbound sales effort with a self-serve version of Dash in the coming months to address the underserved SMB space for both our current FSS customers and those using other FSS solutions. Moving on to core FSS. As a reminder, our key focus for FSS this year is strengthening and simplifying our user experience while also improving operating efficiency. This quarter, we made solid progress against both objectives and are beginning to see tangible improvement in key operating metrics. For example, we redesigned the Teams onboarding experience to make it easier than ever to get users up and running. The early signal we're seeing is that faster onboarding has improved activation and setup rates by 5% and 10%, respectively, while at the same time driving a 100% increase in desktop downloads. And this is an important metric since web and desktop cross-platform activity is associated with higher engagement and improved retention. Our new unified checkout provides frictionless multi-product purchasing, which enables customers to transact multiple purchases, including Dash, within a single purchase flow. We've also been making good progress on our retention initiatives. A good example is our redesigned cancellation flow that more clearly highlights the value we're providing. So as a result of these and other initiatives, we've seen meaningful retention gains for both Teams and Individual customers. On the infrastructure side, we continued investing in back-end improvements aimed at strengthening the usability and security of our platform. This quarter, improvements to our desktop sync engine reduced start-up times for large accounts, and we continue to drive higher adoption of important security features like multi-factor authentication with new prompts and Teams admin controls. Within the Individuals business, we continue to see good traction with our Simple plan, which is our low-price entry level plan designed for mobile-first consumers. Across our document workflow business, we continue to invest in DocSend, and we've improved document upload flows, processing speeds, and simplifying sharing and permissions. These improvements are resonating with customers, as DocSend continues to grow at a double-digit pace year-over-year. As mentioned previously, we remain focused on operating both Sign and FormSwift for maximum profitability, and both of these business lines continue to perform well against this objective. In closing, we're pleased with the progress we made on our two key objectives in the first half of this year. Our Dash offering continues to improve and we're seeing positive early signals within key engagement metrics. While we continue to optimize our outbound sales motion and improve our onboarding flows, we have a strong road map in place to unlock product-led adoption of Dash that will accelerate the adoption among our customers. I'll now turn the call over to Tim to share a recap of our second quarter financial performance as well as our updated full year outlook.

Thank you, Drew. I’ll cover our financial highlights from Q2, and then provide guidance for the third quarter and the full year 2025. We executed well in the quarter, with results coming in ahead of guidance and operating margin meaningfully exceeding our expectations. This performance reflects our continued commitment to driving efficiency within our Core File Sync and Share and document workflow businesses, as well as the stability of our Core business, which gives us the opportunity to invest in future growth opportunities. With that context in mind, let’s turn to our Q2 financial performance, starting with revenue, where we're managing through expected year-over-year revenue headwinds related to our strategic decisions to scale back our FormSwift business and to reduce the number of outbound sellers supporting our Core File Sync and Share business. In Q2, total revenue declined 1.4% year-over-year to $626 million. Constant currency revenue declined 1.3% year-over-year to $626 million. Excluding the impact of FormSwift, which acted as a 140 basis point headwind to revenue, our year-over-year revenue growth would have been flat. Total ARR was $2.542 billion, down 1.2% year-over-year, and 1.1% on a constant currency basis. FormSwift acted as a 160 basis point headwind to ARR in the quarter. We exited the quarter with 18.13 million paying users, a sequential decline of approximately 34,000 paying users. The quarter’s decline in paying users was primarily driven by our reduced level of investment in FormSwift. Excluding the impact of FormSwift, paying users would have grown nominally in the quarter. The outperformance relative to our prior paying user expectations was primarily driven by our Individual SKUs, aided by retention gains stemming from improvements to our cancellation flows. Our Simple plan also contributed modestly. Average revenue per paying user was $138.32 as compared to $139.26 in the prior quarter. ARPU declined sequentially primarily due to the impact of FormSwift as well as the continued rollout of our Simple plan. 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 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 adjustments. Gross margin was 82.2% for the quarter, down 230 basis points from the year-ago period, as we continue to support our data center refresh cycle. Operating margin was 41.5%, ahead of our guidance of 37.5%, and up roughly 560 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 a disciplined approach to hiring, as well as targeted reductions in performance marketing within our Core business as we continue to find ways to drive efficiencies within our business. Net income for the second quarter was $198 million, up 2% year over year. Diluted EPS for the second quarter was $0.71 based on 277 million diluted weighted average shares outstanding compared to $0.60 in the year-ago quarter, representing an 18% year-over- year increase. Moving on to our cash flow and balance sheet. Cash flow from operations was $261 million, an increase of 13% versus the year-ago period. Q2 also included $18 million of interest payments, net of the associated tax benefit, related to amounts drawn under our term loan facility. Capital expenditures were $2 million in the quarter, resulting in unlevered free cash flow of $276 million or $1.00 per share. In the quarter, we also added $25 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 $955 million. In the second quarter, we repurchased approximately 14 million shares, spending approximately $400 million. As of the end of the second quarter, we had approximately $470 million remaining under our existing share repurchase authorization. I'll now offer our updated outlook for Q3 and the full year 2025. For the third quarter of 2025, we expect revenue to be in the range of $622 to $625 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 $619 to $622 million. We expect FormSwift to serve as a roughly 170 basis point headwind to revenue in the third 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 269 million to 274 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 $12.5 million, now expecting a range of $2.490 billion to $2.500 billion. We are also raising the midpoint of our constant currency revenue guidance by $2.5 million, now expecting a range of $2.488 billion to $2.498 billion. We continue to expect FormSwift to serve as a roughly 150 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 50 basis points from the high end of our previously provided range, where we now expect full year operating margin to be approximately 39%. We are raising unlevered free cash flow to be at or above $970 million. We also now expect cash interest expense, net of tax benefits, of approximately $85 million, down from $90 million. We are also maintaining our CapEx guidance to be in the range of $25 million to $30 million for the full year and additions to finance lease lines to be approximately 6% of revenue. Finally, we continue to expect diluted weighted average shares outstanding to be in the range of 276 million to 281 million shares. I'll now share some additional perspective on this guidance for 2025. With respect to revenue, we are raising our guidance range as we flow through the benefit of recent FX tailwinds and as we are seeing some positive momentum across our Core business, particularly across our retention efforts. Turning to paying users, we continue to anticipate a decline of approximately 1.5%, or about 300,000 users for the full year, with the remaining decline to be fairly balanced between Q3 and Q4. We continue to expect that FormSwift 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. The remainder largely represents expected near-term downsells across our managed sales motion. Moving on to operating margins, we are raising our full year guidance by 50 basis points above the high end of our previously provided range, which largely reflects our outperformance thus far this year as we remain disciplined with our hiring and continue to find ways to optimize our marketing spend. We do, however, expect to invest further behind Dash as well as hire open roles in the second half of the year. We are also maintaining our full year CapEx and finance lease guidance. We expect cash CapEx to ramp in the back-half of the year to support certain facility restoration costs and data center build-outs. Regarding free cash flow, we are raising our unlevered free cash flow guidance, roughly inline with the increase to operating margins, largely reflecting our latest outlook on FX and the aforementioned cost savings. Our updated outlook also includes a modest expected benefit in the second half from lower cash taxes related to the One Big Beautiful Bill. Turning to WASO. Our latest WASO guidance assumes we exhaust our existing share repurchase program by the end of the year. In conclusion, we are executing well against our plans for the year. We are generating higher levels of efficiency across our Core File Sync and Share business as well as our document workflow businesses, and we are seeing stability across our Core business despite reductions in headcount and marketing spend. We've also reduced our share count substantially, thus putting ourselves in a position to drive a meaningful increase in free cash flow per share this year. And we are making progress on both our product and go-to-market efforts for Dash. We look forward to sharing further updates on our progress in future quarters. And with that, Operator, please open the line for questions.

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

This is Jaiden Patel on for Mark Murphy. You talked about Dash having a positive early signals with key engagement metrics. Can you discuss qualitatively some of the retention or even downgrade prevention lift you've observed among early Dash adopters versus existing cohorts?

So with Dash, I mean, the first thing we've -- talking about momentum we're seeing with customers and just early adoption, I mean, our first focus is building a great product experience and product quality. And so things like our launch in April, we're really proud of what we launched in April with things like image and media search. We really think that breaks new ground in our category. And we're seeing good engagement, double-digit engagement -- or double-digit percent of users engaging with image and media search. And then we look at a number of onboarding metrics, as you'd imagine, like getting the percentage of licenses provisioned up, making sure that people are having a good first experience with the product, making sure that week 2, week 3, week 4 retention is healthy, and we've made big progress in each of those areas. And so those are some of the leading indicators we look at just to make sure that we're retaining new customers as we turn on the faucet for user growth and attaching to the Dropbox space.

Got it. And then can you talk a bit about the cancellation flow? What sort of uplift or improvement did you see due to this change?

Sure. I think it's an example. We're looking across the funnel at different sources of voluntary and involuntary churn. And we saw that there's a number of -- we're stacking up a lot of small wins, but an illustrative example might be -- or is in the cancellation flow as we better articulate the value that we're providing with Dropbox or like all the things that are in your Dropbox. Often we find that customers might not be fully aware of how deeply they're using the product or the value they're getting, and so better messaging around that we've shown to be accretive. So lots of things like that. And then as you'd imagine, things like billing optimizations and other things on involuntary churn are examples of the kinds of things that we've been tightening up.

And our next question comes from the line of Steven Enders of Citi.

This is [ Palak ] for Steven Enders. So my first question was, I think you had much better churn than expected for the second quarter in a row, yet you maintained the 300,000 guide. So is FormSwift declining at a slower pace than was expected? Or what is going well, which is contributing to improved churn in the first half?

Sure. With respect to paying users, yes, we do continue to anticipate a decline of about 1.5% or about 300,000 users for the full year, expect that to be fairly balanced between Q3 and Q4 and continue to expect that FormSwift will represent roughly half of that decline. FormSwift is performing well so far in the year, but still expect the same roughly half of that 300,000 impact from FormSwift for this year. And then the remainder largely represents expected near-term downsells across our managed sales motion. And then as far as churn, Drew just touched on a lot of factors that the team is focused on, seeing some positive momentum on that front, and that's part of why we're able to raise our guidance for the full year, we're seeing some strong performance as far as the team working on retention. So good signals on churn and pleased to see that flow through the results.

Perfect. And my next question is on Dash. So just curious, like you mentioned the self-serve motion. And what would be the time frame for the self-serve motion this year? And what are the key areas of investment you're looking at in Dash going forward? And what would be the monetization expectations for next year?

Sure. So for Dash, we plan to launch a self-serve version of Dash, so basically a version anyone can download and start using similar to what we did with Dropbox 1.0. And we believe that's going to unlock both the large population in general and then also unlock the Dropbox self-serve base because, if you look at it or if you think about it, we've got 0.5 million self-serve business accounts on Dropbox, and to best drive adoption of Dash, we need a self-serve version of the product. So that's a big area of focus for us for the second half of the year. And then second is integrating Dash into the Dropbox FSS experience. And so you can think of Dash as both a stand-alone product that allows us to reach a new audience of people beyond our file syncing audience, and it's also the AI layer across Dropbox FSS for our existing customers. And so to that end, we expect that these are the way -- our plan is to have Dash be something that you add on top of FSS to be able to get AI or be able to interact in natural language with your files. We'll have a lot more share on the specifics of that and specifics of pricing and packaging, but how we monetize Dash overall for non-FSS users, it will be a separate product and separate subscription. And then we'll have different packages for people who are existing FSS customers to also adopt Dash. And as you'd imagine, we'll be experimenting and iterating on pricing and packaging specifically in different bundling and discount approaches.

Just to also briefly add on as far as the monetization expectations, I'd say our guidance certainly reflects our expectations and incorporates this self-serve rollout. I do think it will take time before Dash contributes meaningfully to our revenue growth given the size of our ARR base. And so again, refer to our guidance for our expectations for this year.

And our next question comes from the line of Patrick Walravens of Citizens.

This is Nick on for Pat. Just one for me. We've seen Slack and others tighten API access, really limiting third-party indexing and message history. Has Dash been affected by these changes? And how are you navigating kind of this environment of limitations?

So yes, for color, as you said, the Slack has been changing some of their APIs or sunsetting certain integrations, creating other ones. And so that forces all their partners to adapt to the new APIs. And so we've certainly been doing that. Importantly, we still have access to Slack and a good partnership with them. And so we're still able to provide the basic value of the product. I mean some things around the edges might be a little bit more onerous from a technical perspective or results might not be as exhaustive as we'd like. But I think that one world that would be concerning is if partners -- if we're in a world where partners were cutting off API access, we don't see that as likely, mainly because customers, as you'd imagine, they put their data into these services and a service that locks out these integrations, I mean it's a pretty customer hostile thing to do. So I think it's like a difficult stance for a company to take in the long run. We know different companies are going to play with different knobs and dials with access. But we feel good both from a business and partnership standpoint because Dropbox also has a lot of content and integrations with other services. And so we provide value to folks that integrate with us. So there's a good kind of business foundation there. And then there are also technical measures that you can take to improve coverage and ultimately give customers access to their data regardless of what services it's in. And actually, to that end, our ability to integrate more deeply and leverage some of these technical measures could be a competitive advantage for Dash. So we feel good about the trajectory of supporting Slack, although, yes, it's been a winding road.

[Operator Instructions] and our next question comes from the line of Matt Bullock of Bank of America.

I wanted to ask about the strategy going forward for attacking the free base of 700 million-plus registered users. I know over the years, you've pushed a little bit harder on converting those users, but maybe help us think about the strategy going forward, if there's potential to accelerate or maybe be a little bit harsher on creating some more prepaid conversion. And then I have one follow-up.

Yes. So we're tackling this in a number of directions. I think the most important is continuing to provide more and more value so that people get a lot of value and then they pay for that value. So Dash is a good example of providing a lot of new value to our existing free users beyond files, right? Because all of those free users have cloud content as well and are a good fit for Dash. And then since the beginning, our free users are sort of the top of the funnel for our eventual paid users. Virtually every subscriber started out as a free user in some form. So the free users are an important part of the engine. That said, there's tons of optimizations we continue to do. So I mentioned, for example, we launched a Dropbox Simple plan targeted at our mobile-only customers, where we were able to provide an entry point that's more affordable to folks who are more price sensitive without cannibalizing the rest of our base. And so that's a way to capture some of the demand that otherwise would be unwilling or unable to subscribe to a higher price plan. And then, to your point, as you're alluding to, we've had success with just getting the balance of the free value we provide and making sure that's in balance with the premium subscriber value that we provide. Over the years, we've put in different -- or phased in different things like device limits for free users so that extremely engaged users aren't getting too much value for free. And we continue to iterate on all aspects of pricing and packaging to improve the balance of like we want to drive adoption and broad adoption, and it's a big advantage that we have this free top of funnel, but we obviously don't want to either under-monetize or over- monetize at the expense of one lever or the other.

Super helpful, Drew. And then just one quick follow-up on Dash, obviously, the self-serve launch coming later this year. How should we be thinking about metrics and disclosures around Dash? We know how you're evaluating it internally, but how should we be thinking about modeling or even evaluating key metrics like users, et cetera?

Sure. Yes. As we mature, as we get further along the life cycle, we'll obviously have more to share in principle, and we start with just the quality of the experience, as I said, then we focus on onboarding success, then we make sure the experience is retentive, that people are expanding and the viral loops are working, that monetization is working, that paid retention is working. And we don't focus on them completely in series, but that's sort of the general path. Sometimes it's noisy as we, like, open up to a large new audience and there's fluctuation in those metrics. But we'll certainly provide more color on the different funnel metrics as we get more signal as we scale it up.

I'm showing no further questions at this time. I'll now turn it back to Peter for closing remarks.

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