Tim Regan: Yes. Let me walk you through that, Pat. So as a reminder, last quarter, we did adjust our free cash flow target by the amount of the R&D tax legislation, which we now estimate to be $30 million, effectively taking our $1 billion target to a revised target of $970 million. Our guidance of 910 to 950 falls below that target, and that’s primarily driven by slower billings growth, incremental FX since we first set the target and our investments in Dash. Now while we could withhold investments in our long-term initiatives to meet the target, that would be a shortsighted approach. So that’s where this guidance reflects our continued investment in the long-term health of the business. And again, we still have time to outperform that guidance throughout the year and via product execution or identifying efficiencies within the business.
Pat Walravens: Okay. Thank you.
Operator: Thank you. [Operator Instructions] And one moment for our next question. And our next question will come from Richard Hilliker from UBS. Your line is open.
Richard Hilliker: Hi guys, thanks for taking my question. My question is on the R&D line. So I appreciate the exciting opportunity ahead, particularly with Dash and AI. But I guess what I’m wondering is, can you help me understand why we couldn’t potentially see more leverage on this R&D line, while still investing in AI and these other exciting opportunities? And then I have a follow-up? Thanks.
Tim Regan: Sure. I’ll start, Drew. Obviously, feel free to jump in. So R&D increased slightly to 25% of revenue. That’s primarily due to hiring for our longer-term growth initiatives such as Dash on that side. These engineers with an AI background typically, do command premium compensation and are located in higher-cost locations, such as the Bay Area and Seattle. So certainly, we want to make sure that we’re focused on investing in these long-term initiatives and that we’re funding them at a proper rate. So certainly contemplates an investment on that front. And then maybe just to provide some more color on our overall operating margins, that’s between 32% and 32.5%. At the highest level, what we’re doing across the business?
We will be driving increased efficiencies within our core file sync and share and document workflow businesses, again, while concurrently investing in long-term growth initiatives such as Dash. We’re also going to be investing in marketing, to drive product and brand awareness, including our partnership with McLaren Formula 1 racing that Drew alluded to. And the guidance does preserve some flexibility to invest across the business, to drive long-term growth.
Drew Houston: Yes. And I would just add that it’s a balancing act. I mean we certainly care about margins, we certainly care about efficiency. And we also don’t want to miss, these like once a decade, or once a generation platform shifts. I mean you look at the move to mobile and cloud made Dropbox 1.0 possible to begin with, and all the emergence of AI, is going to make Dropbox 2.0 possible. And ultimately, I think it’s going to be a much larger opportunity, so we don’t want to miss that. But that’s like the tension, we’re navigating. I mean, fortunately, we’re able to do a lot of these investments within the general envelope that we’ve provided. So I don’t expect there to be like massively different shaped curves. And I think another thing is we’re also been reallocating our resources away from less efficient or less promising areas and more towards things like AI and Dash. So that’s a little bit harder to see was just the aggregate R&D line.
Richard Hilliker: Okay. Thanks. And then, Tim, maybe one last one for you here. I was curious – I think you mentioned that finance lease would jump up to about 7% of revenue. And I think that’s from right around 5%. It seems like kind of a big jump. Maybe wondering if you could give us any other color to help us understand that change? Thanks so much.
Tim Regan: Yes. Sure. Good question. So, we are seeing an increase in our finance lease additions this year that’s, due to two reasons. First, we are nearing a hardware refresh cycle for equipment that’s reaching the end of its life, where we did have a similar refresh in 2019, 2020. And then additionally, we are supporting one-time quota grants to customers on our advanced plan who are using an excess amount of storage. So, we’ve grandfathered some of these customers in. And so, we need to support those customers. So that’s partly what’s driving that additions.
Operator: Thank you. Our next question will come from Mark Murphy from JPMorgan. Your line is open.
Mark Murphy: Thank you. Do you notice much of a difference in the signals you’re seeing from the very, very smallest businesses, which are more sensitive to interest rates, and banks extending credit if you compare that to your relatively midsized, and larger customers within the mix?
Tim Regan: Yes. Hi Mark, I think this is all part of what we’re seeing on the macro side, where, as you know, most of our teams plans are in the SMB space, where we do continue to see a challenging demand environment there. Again, as Drew has talked about, some of that is due to heightened price sensitivity, and we’ve seen that since our price increase in 2022. And again, as Drew has also touched on, some of that also pertinent to SMBs seeing down sell pressure as teams trim their license counts, following whether that’s layoffs, or budget cuts, those sorts of things. So our guidance factors in a continuation of these trends.
Mark Murphy: And I wanted to ask as well, you described this as a unique period. What do you think has to happen through the course of the year? If we’re going to look back on it as kind of a troughing out period for growth, there’s no real price increase as a driver. You’re taking some intentional actions, which are minor headwinds. And you had foreshadowed a lot of this coming off the Q3 call. The new products haven’t ramped yet. We still have tech companies that are out there doing incremental layoffs. Is it a bit of a perfect storm this year where that kind of alignment of all these factors might be marking a troughing out period?
Drew Houston: Yes. So with last year, we had to make some difficult decisions with layoff of our own and then kind of weaning ourselves off of things that I didn’t find sustainable like price increases or inefficient sources of growth, or inefficient marketing spend or sort of over investments in areas that weren’t going to bear as much fruit and then reallocating a lot of resources towards the future and things like AI and Dash. So, I’m hopeful there are like a lot of more difficult decisions are behind us and winning this year would look like finishing the swing on that, rotating away from things like price and monetization experiments, to areas of the funnel, especially on our teams business where that have been overlooked.
So I mentioned a few of them in my prepared remarks, but things like – we see a lot of opportunity to improve the team onboarding experience. There’s a lot of friction. A lot of friction, I would see is unnecessary, like too many steps or things that are confusing to customers, when you actually sit down with customers and watch them go through that process. We’ve identified plenty of things that we continue to make that better, and make some more improvements to the ones we’ve made on the individual side of the business, where over the years, we’ve been able to really chip away a churn. And as we’ve improved the user experience on things like sharing, we see more engagement, more sharing, more viral sign-ups and just more – focusing more on the fundamental levers of engagement and virality more so than monetization.
So, I think stabilizing the core business and like – and getting after some of those levers where we’ve been underinvesting around team onboarding, team expansion, sharing in general. And then the other main goal is getting Dash to true product market fit. So getting it to be a great product experience, great retention, smooth onboarding and bridging from individual use cases like search and organizing your stuff to sharing. And a lot of this is the playbook that, made Dropbox 1.0 successful, and we’re doubling down on a lot of those things.
Mark Murphy: Thank you.
Operator: Thank you. And our last question will come from Brent Thill from Jefferies. Your line is open.
Eylon Liani: This is Eylon Liani on for Brent Thill. Thanks for taking my question. My first question is just at a high level. Was the demand environment better, worse, or in line with what you saw in 3Q? And I have a follow-up after.
Tim Regan: Yes, great question. I’d say it was in line. I have not seen an improvement in macro trends. We’ve talked a bit about, what we saw in our teams business, which stayed rather consistent. We talked about FormSwift, which sees a seasonal low point in the fourth quarter, and then tends to rebound in the first quarter as we enter tax season. And then we saw consistent pressure across DocSend and our eSignature categories. DocSend, in particular, continue to see headwinds in the fundraising space. So a lot of consistency in what we have been seeing. And that has all been extrapolated into our guidance, for next year as far as a continuation of those trends.
Eylon Liani: Super helpful. And then the second part of my question is just in terms of the monetization of Dropbox Dash. I know it’s still early days. But should we expect it to be embedded in the more premium SKUs of the platform? Or would they be priced as a separate SKU? Just like a high level, how should we think about it?
Drew Houston: Yes, it will be both. So Dash will be available as a stand-alone subscription and then there will also be different add-on and bundle options over time. So – and we’re still pretty early in terms of signal on monetization, we’re focusing on finding on driving adoption right now.
Eylon Liani: Thanks, super helpful.
Operator: Thank you. And this does conclude today’s conference call. Thank you for your participation. You may now disconnect. Everyone, have a wonderful day.
