Dropbox (DBX) Q1 2026 Earnings Transcript

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DATE

Thursday, May 7, 2026 at 5 p.m. ET

CALL PARTICIPANTS

• Chief Executive Officer — Drew Houston
• Chief Financial Officer — Ross Tennenbaum

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TAKEAWAYS

• Revenue -- $629 million, up 0.8% year over year, with 2% growth excluding FormSwift and a 1.2 percentage-point revenue growth headwind from FormSwift documented.
• Unlevered Free Cash Flow -- $236 million, a 69% year-over-year increase, described as "$1 per share."
• Operating Margin -- 40.1%, exceeding 38% guidance, but down 1.6 percentage points from the prior year, due to increased infrastructure costs and R&D investment.
• Gross Margin -- 81.1%, down 1.8 percentage points year over year, with the decline attributed to Dash infrastructure expansion and higher hardware depreciation.
• Paying Users -- 18.09 million, up 14,000 sequentially, contrary to prior guidance for a decline; growth attributed to retention and Individuals segment strength.
• ARR (Annual Recurring Revenue) -- $2.56 billion, up 0.3% year over year, or 1.3% excluding a 1 percentage-point headwind from FormSwift.
• ARPU (Average Revenue Per User) -- $141.18, up from $139.68 in the previous quarter, primarily driven by fading seasonal promotions, mix shift, and FX.
• Cash & Short-Term Investments -- $1.29 billion at quarter-end, after $367 million in share repurchases and a $700 million drawdown for note repayment.
• Guidance Raised -- Full-year revenue guidance increased by $12 million to a new range of $2.497 billion to $2.512 billion; non-GAAP operating margin guidance raised by 0.5 percentage points to 39.5%-40%.
• Q2 Outlook -- Revenue expected between $624 million and $627 million (with $9 million FX tailwind), constant currency revenue $615 million to $618 million, and non-GAAP operating margin approximately 38.5%.
• Share Repurchases -- About 14.3 million shares repurchased during Q1, $800 million authorization remains at period-end.
• Individuals Retention Interventions -- Reductions in mobile churn rate by "mid-single-digit percentage points" reported from targeted engagement initiatives.
• Conversion Improvements -- "50% improvement in conversion" among Basic users nearing storage limits through targeted storage promotions described by Houston.
• Dash Adoption and Engagement -- More than 30% of weekly Dash users repeated use the following week and over 50% of monthly engaged users repeated the following month, with retention stable as access expands.
• CapEx -- $1 million in the quarter, with full-year CapEx expected between $20 million and $25 million, plus finance leases at approximately 4% of revenue.

SUMMARY

Dropbox (NASDAQ:DBX) management reported sequential growth in paying users and highlighted that retention and Individual segment performance drove upside to prior guidance. Management's statements indicate that the improved results primarily stem from targeted product and pricing initiatives in the core business, not from Dash, which remains in a phased rollout with growing but early engagement metrics. Share repurchases, note repayment, and increased cash generation reflect active capital allocation, with management raising both full-year revenue and margin guidance following outperformance against prior forecasts. Forward guidance communicates continued revenue headwinds from FormSwift and expectations for modest sequential ARPU decline due to product mix, FX, and planned plan expansion. Ongoing infrastructure investment to support AI and Dash, as well as prioritization of integrating AI features within the main Dropbox platform, mark strategic priorities that could shape market expectations for expense and product rollout timing.

• Management stated that Dash's integration strategy aims to deliver a "content-forward" experience leveraging proprietary AI infrastructure, with Dash designed to operate across multiple ecosystems, unlike platform-specific competitors.
• Houston highlighted that emerging demand for Dropbox Protect, a data security solution, "resonate clearly with IT and security buyers." as AI adoption increases, suggesting the company is positioning for security-driven growth in the broader platform.
• Tennenbaum clarified that "paying user trends for the full year to be modestly better than our prior view and to be slightly positive overall," indicating an upward revision in user base expectations for 2026.
• Tennenbaum said, "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," explicitly addressing gross margin variability risk in coming quarters.

INDUSTRY GLOSSARY

• FormSwift: A previously acquired Dropbox document solution referenced as a revenue growth headwind due to its wind-down.
• Dash: Dropbox's AI-powered content organization and search platform, integrating core and external cloud applications for enhanced workflow and semantic capabilities.
• Dropbox Protect: A data security and governance feature within Dropbox aimed at IT and security buyers.
• FSS (File Sync and Share): Core Dropbox functionality enabling synchronization and sharing of files across devices and platforms.

Full Conference Call Transcript

Drew Houston: Thanks, and good afternoon, everyone. Welcome to our Q1 2026 earnings call. Joining me today is Ross Tennenbaum, our Chief Financial Officer. I will start with our business and product highlights from the quarter, and then Ross will review our Q1 financial results and our outlook. Let us 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 toward 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 has built a strong and talented bench. Together, they have 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 are encouraged by our Q1 performance as we continue to build on that momentum.

Within Individuals, retention remains an important near-term revenue lever, and in Q1, we continued to focus on targeted retention interventions, including improvements to prompts for mobile users, loss aversion messaging, and targeted price promotions to recently canceled customers. Given the growth of mobile as a purchasing channel, we are 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 clearest signals we are 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, strengthen the reliability, performance, and scalability of sync and uploads, and make the experience simpler and more intuitive across desktop, web, and mobile. We are 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 are making are starting to show up more clearly in our results. Now on to Dash.

Dash in Dropbox, Inc. represents our evolution from file storage to AI-powered content. We are bringing together customers' content from across Dropbox, Inc. 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, Inc. 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, Inc., and plan to significantly expand access to our base throughout the remainder of 2026. While adoption is still early, we are 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 the following month. We are seeing stable retention patterns even as we expand beyond our initial target customers and onboard new cohorts. Dash inside Dropbox, Inc. will increasingly be our primary vehicle for scaling AI across Dropbox, Inc.

As we have shared previously, we have also been evolving our standalone experience for customers who do not use Dropbox, Inc. today. That work has helped us refine our onboarding and activation, and new features are 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 have built what we call our context engine, which is our proprietary AI infrastructure that gathers context across all your content and apps and connects it to leading AI models to enable faster, more accurate, and more useful results.

As we have expanded access, we are seeing the strongest results when these capabilities are integrated directly into the core Dropbox, Inc. experience. As a result, we are prioritizing bringing Dash learnings and AI features into existing Dropbox, Inc. surfaces. This approach improves the customer experience while also increasing focus and efficiency across our teams. We are also increasingly excited by the signal we are 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 are seeing that demand resonate clearly with IT and security buyers. That is why Protect fits naturally into our broader platform story.

The same indexing and context engine we are 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. Over time, that has the potential to expand our addressable market and strengthen the return on the broader platform work we are already doing as we seek to position Dropbox, Inc. 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 in core. The changes we have made are beginning to translate to our financial results.

In Dash and Protect, we are continuing to see healthy customer signal and learnings to reinforce our conviction in the opportunity ahead. With that, I will turn it over to Ross.

Ross Tennenbaum: 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, Inc. 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 pointed 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, our work in core is centered on driving sustainable growth. Those efforts include a range of initiatives to improve customer lifecycle 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 on 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, Inc. 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, Inc. 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, Inc. across our Teams customer base throughout 2026.

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 Individual 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, Inc., 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 one-time 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 to repay our March 2026 convertible notes. For Q2 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 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 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, 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 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 view 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, Inc. and expand across more of our Teams base, partially offset by ongoing infrastructure efficiency. 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 are 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, Inc. experience, we expect that bringing Dash and Dropbox, Inc. 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: We will now open the call for questions. To ask a question, please press 11 on your telephone and wait for your name to be announced. To withdraw your question, please press 11 again. One moment for questions. Our first question comes from Steve Enders with Citi. You may proceed.

Analyst: Hi. This is Paula for Steve Enders. Thank you so much for taking our questions, and 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 whether there is a meaningful standalone Dash-driven customer base at this point.

Drew Houston: Sure. Thanks for the question. We are targeting both existing and new users with Dash. We are investing a lot in deeply integrating Dash into the core Dropbox, Inc. experience, and that is certainly where we have our home-field advantage with our 18 million subscribers. There is a lot of integration work to make that seamless. We have seen good progress for Dash within Dropbox, Inc. in terms of engagement, repeat use, and a lot of the signals we are looking at, and we are continuing to roll out these integrations to a larger percentage of our Teams base. We also see Dash as a way to expand to folks who are not using Dropbox, Inc. today.

You do not need files in Dropbox, Inc.; Dash will integrate with your Google Docs, Slack, Salesforce—basically all of the different apps that you are using. 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.

Analyst: Perfect. That is very helpful. And the next question is on the guide. There is a pretty solid raise with the increase in paying users, and I know a lot of it comes from the advancements within core and simplifying the product. Does this account for any improvement coming from Dash, or is that not a part of the assumption?

Ross Tennenbaum: Hi. Thanks. 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 grow net new paying users for the year. That is mostly driven by Individuals and Teams—Individuals including a simplified plan, and Teams has exceeded our expectations as well. So that is mostly driven by core, with not a lot of inclusion of Dash right now as we continue to prioritize rolling out Dash in Dropbox, Inc. and focus on increasing engagement there.

Analyst: Got it. Perfect. Thank you so much.

Operator: Thank you. As a reminder, to ask a question, please press 11. Our next question comes from Matt Bullock with Bank of America. You may proceed.

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

Drew Houston: Sure. First, for our existing users, Dash is a natural extension of the value we are already providing. When you integrate Dash into the core Dropbox, Inc. experience, some of the benefits include being able to talk to your Dropbox, Inc. in natural language. A lot of Dropbox, Inc. customers work with big files—often creative folks or teams in marketing, media companies, architecture, or construction. Dropbox, Inc.'s support for all those kinds of content is a big advantage versus many other AI tools, which tend to be more tech-centric. Against something like Microsoft Copilot or AI integrations within any one ecosystem, Dash is platform agnostic, similar to Dropbox, Inc. itself.

It is designed to integrate with the whole universe—every ecosystem and platform—which is a big advantage, because otherwise you tend to see siloing. Microsoft will support the Microsoft ecosystem really well but have relatively less coverage in the Google ecosystem or others, whereas Dash supports everything by design. We also see our focus on content as an advantage that dovetails naturally with our base. The ability within Dropbox, Inc. to have multimodal semantic search is really valuable. For example, if you do a search for a red sunset with Dash in Dropbox, Inc., you will be able to search the content of all the media in your Dropbox, Inc.

Where you used to need "red sunset" in the file name to get search results, now any photo or image that has a red sunset in it will surface. If someone says "red sunset" in a video, we transcribe the video under the hood and index the transcripts. We are going deeper on workflows around finding, organizing, sharing, and protecting content—which is what people use Dropbox, Inc. for to begin with. We see that as a natural advantage and source of differentiation, in addition to being platform agnostic.

Analyst: Very helpful. Thank you.

Operator: I would now like to turn the call back over to our speaker for any closing remarks.

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

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

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