Dropbox, Inc. (DBX) Q4 2022 Earnings Call Transcript

Dropbox, Inc. (NASDAQ:DBX) Q4 2022 Earnings Conference Call February 16, 2023 5:00 PM ET

Company Participants

Karan Kapoor - Head of Investor Relations

Drew Houston - Co Founder and Chief Executive Officer

Tim Regan - Chief Financial Officer

Conference Call Participants

Rishi Jaluria - RBC Capital Markets

Michael Funk - Bank of America

Steve Enders - Citigroup

Joey Marincek - JMP Securities

Luv Sodha - Jefferies

Operator

Good afternoon, ladies and gentlemen. Thank you for joining Dropbox' Fourth Quarter 2022 Earnings Conference Call. [Operator Instructions] As a reminder, this convention telephone is being recorded and will beryllium disposable for replay from nan Investor Relations conception of Dropbox' website pursuing this call.

I will now move it complete to Karan Kapoor, caput of Investor Relations for Dropbox. Mr. Kapoor, please spell ahead.

Karan Kapoor

Thank you. Good day and invited to Dropbox' Fourth Quarter 2022 Earnings Call. Before we get started, I'd for illustration to punctual you that our remarks coming will see forward-looking statements specified arsenic our financial guidance and expectations, including our semipermanent objectives and forecast for our first 4th and fiscal twelvemonth 2023 and our expectations regarding our gross growth, profitability, operating separator and free rate travel arsenic good arsenic our expectations regarding our business, assets, products, strategies, technology, employees, users, request and nan macroeconomic environment. These statements are taxable to risks and uncertainties that could origin existent results to disagree materially. They are besides based connected assumptions arsenic of today, and we undertake nary responsibility to update them arsenic a consequence of caller accusation aliases early events.

Factors and risks that could origin our existent results to disagree materially from these forward-looking statements are group distant successful today's net merchandise and successful our quarterly study connected Form 10-Q revenge pinch nan SEC.

We'll besides talk non-GAAP financial measures, which are not prepared successful accordance pinch mostly accepted accounting principles. A reconciliation of GAAP and non-GAAP results is provided successful our net merchandise and connected our website astatine investors.dropbox.com.

I would now for illustration to move nan telephone complete to Dropbox' Co-Founder and Chief Executive Officer, Drew Houston. Drew?

Drew Houston

Thanks, Karan, and bully afternoon, everyone. Welcome to our Q4 2022 net call. Joining maine coming is Tim Regan, our Chief Financial Officer. And I'll commencement pinch a recap of 2022 and supply an overview of our strategy for 2023, past Tim will spell complete our financials for Q4 and fiscal twelvemonth 2022, springiness guidance for Q1 and afloat twelvemonth 2023 and supply an update connected our semipermanent targets.

So let's get started. While 2022 saw a much challenging macroeconomic backdrop, and we saw immoderate elevated headwinds successful Q4, of which Tim will talk successful much detail, I'm pleased pinch really our business performed for nan year. We ended nan twelvemonth pinch complete $2.5 cardinal successful ARR. We erstwhile again accrued profitability and free rate flow, and repurchased astir $800 cardinal of our stock.

We besides rolled retired caller plans for our Teams customers pinch expanded information and information protection capabilities, made advancement improving gross retention and closed acquisitions specified arsenic FormSwift and Boxcryptor, which I'll touch connected shortly.

Before we dive in, arsenic you know, past month, we shared that Timothy Young is stepping down from his domiciled arsenic President. And I really admit everything that Tim has done for Dropbox complete nan past fewer years and wish him each nan best. And I'd besides bask digging successful pinch our elder leaders to proceed leveling up our execution and to prosecute each nan opportunities we person up of us.

And complete nan past year, we've been focused connected 3 strategical objectives to thief america recognize our semipermanent vision. Our first nonsubjective has been to germinate our halfway FSS product, driving retention gains and monetization efforts done amended conversion of our free users and done pricing and packaging. Our 2nd nonsubjective has been to grow workflows beyond halfway FSS astir documents and videos. And our 3rd nonsubjective has been to thrust operational excellence and amended efficiency. And this year, we've added a 4th strategical objective, which is to move beyond files and shape each unreality contented for our customers. This has been a captious measurement successful our merchandise imagination for immoderate time, and caller advancements successful AI and instrumentality learning person a immense domiciled to play successful accelerating our plans, peculiarly successful building retired our cosmopolitan hunt and different capabilities. I'll talk this opportunity successful much item shortly.

We are already executing against these strategical objectives pinch a beardown consciousness of urgency. Q4 showed america that we're not immune to a slowing economy, and that's why I'm focused connected our velocity of execution successful 2023 and connected areas wherever we tin amended efficiency. I'll connection much specifications connected really we scheme to do that, but first, fto maine talk immoderate observations from 2022.

Starting pinch our first strategical nonsubjective astir evolving our halfway FSS business. Our attraction complete nan past fewer years has been connected improving personification experience, peculiarly connected mobile. And this is wherever a increasing number of basal users motion up for Dropbox. We've besides been focused connected adding much capabilities to amended service mini businesses and freelancers who correspond a passionate personification guidelines for Dropbox.

Regarding mobile, we observed that nan uptick successful churn from Plus individuals that we witnessed successful Q3 continued successful Q4 mostly owed to caller mobile operating strategy changes, which accrued transparency astir subscriptions. To mitigate immoderate of nan macro pressures impacting user behavior, we've identified areas wherever we tin make nan mobile workflow much seamless and reliable. And to thrust higher basal personification activity, we're focused connected improving nan onboarding experience.

This quarter, we're rolling retired Google One Tap, which will thief streamline nan sign-up travel for mobile and web users. Many of our customers, specified arsenic mini business teams and freelancers, trust connected Dropbox to shop and stock videos and different rich | media. To amended service them, we've made improvements to nan sharing acquisition of ample files, peculiarly reducing nan clip successful uploading of ample files, which we do expect to thrust improvements successful customer restitution and reduced churn.

And arsenic we proceed to spot nan maturation successful video-related contented stored and shared connected Dropbox, peculiarly among imaginative professionals, we've made advancement pinch our video preview capabilities by expanding size and limits and adding editing functionality. By improving this lightweight of valuable functionality, we're seeing increases successful progressive video users and clip spent per user.

Last quarter, we discussed our first afloat quarter's advancement successful rolling retired caller plans for our modular and precocious Teams customers pinch a attraction connected information and information protection. While we tin spot a nett use to ARR from these changes, we saw incremental headwinds successful Q4 from immoderate of our larger Teams customers reducing licenses. We admit that arsenic our customers knowledgeable challenges successful their businesses and measure their budgets, there's added unit to trim package spend. But we spot an opportunity to mitigate immoderate of this unit done much high-touch relationship guidance for these customers traditionally came done nan self-serve channel. We're actively moving to fortify nan alignment betwixt our business units and our go-to-market teams and spot opportunities to amended renewal activity arsenic we summation customer consciousness of nan added functionality we're adding for Teams.

We're besides continuing to put successful our information roadmap to fortify our offering for business users. In Q4, we acquired assets from Boxcryptor, a supplier of end-to-end zero knowledge encryption for unreality retention services. And complete time, we scheme to embed these encryption capabilities natively wrong Dropbox for our business users, providing them an further furniture of information by encrypting files locally connected their devices anterior to taking their contented to Dropbox.

We cognize that information is simply a apical privilege for our customers. And successful nan clip of consolidating spend, we'll proceed to place opportunities to bundle much worth for our paying users.

As we deliberation astir backing further worth into our different paid plans, we'll proceed to measure nan champion pricing and packaging strategy that champion serves our customers.

Moving connected to our 2nd objective, which is to grow our workflows beyond FSS, peculiarly astir documents and videos. I'll first stock an update connected DocSend and Sign successful 2022 and wherever we spot opportunity to standard these businesses successful 2023.

As we've noted passim nan past year, we've seen some DocSend and Sign maturation mean arsenic headwinds successful their respective markets continue. DocSend's halfway market, which is task backmost fundraising, has seen activity propulsion backmost materially from 2021 levels, which has resulted successful customers being much value sensitive. This year, we're focused connected diversifying DocSend customer base, introducing its caller geographies and extending beyond task superior and different master services specified arsenic consulting.

Sign has besides seen challenges amidst an wide slowdown successful nan eSignature marketplace and expanding competition. While we saw spot successful our Sign API offering, there's opportunity to stabilize Sign's wide maturation arsenic we leverage it nether nan Dropbox marque and thrust much sales-led maturation targeting mini businesses.

For some Sign and DocSend, our attraction successful 2023 is astir deeper integration pinch halfway Dropbox. While we've made advancement integrating definite capabilities into nan halfway Dropbox experience, for example, DocSend's analytics wrong an individual personification sharing travel and Sign's autochthonal nonstop for signature introduction constituent and PDF successful Dropbox, location are still challenges for nan extremity personification acquisition owed to aggregate systems that request to beryllium unified.

For example, customers person been required to re-log successful to nan different applications, entree aggregate position of work and checkout flows and different personification interfaces overall. We're quickly moving to region nan clash successful nan personification acquisition to make it easier for customers to try, bargain and usage these products, which is simply a captious measurement successful unlocking our level strategy. And up until now, we've mostly talked astir DocSend and Dropbox Sign arsenic cardinal pillars to our archive workflow strategy. And today, I'm excited to talk an important caller portion to this business pinch our acquisition of FormSwift.

FormSwift is simply a cloud-based work that helps customers create, complete, edit and prevention captious business forms and agreements. With FormSwift's immense room of templates, individuals and mini businesses are capable to entree hundreds of forms alternatively than spending resources drafting them from scratch. Whether it's a lease statement aliases an employment contract, FormSwift's cloud-based offering makes it elemental for customers to complete their statement workflows.

Also, it's complementary to Dropbox pinch a akin target customer, a robust self-serve go-to-market motor and capabilities that let customers to do much pinch their integer content. We scheme to merge FormSwift nether nan Dropbox marque this year, and complete time, harvester its contented room pinch our Sign and DocSend capabilities, providing a broad end-to-end statement workflow.

So pinch millions visiting FormSwift's website, we spot a earthy opportunity to thrust much top-of-funnel activity to Dropbox and its suite of products.

Outside of documents, nan different adjacent workflow beyond FSS is astir video wherever we spot important usage connected our platform. This year, we scheme to proceed our attraction connected video workflows, building connected nan caller nationalist motorboat of Dropbox Capture, a video connection instrumentality for distributed Teams arsenic good arsenic our continued advancement pinch replay, which allows teams to collaborate and edit videos each wrong Dropbox. This motorboat successful Capture to each Dropbox users successful October, we've seen this usage turn significantly. We spot an opportunity for replay to travel a akin way for wide readiness arsenic its take and retention proceed to amended pinch nan imaginative community.

By continuously iterating connected these experiences, we're excited to build a best-in-class level for creatives to administer their video content.

And arsenic I mentioned earlier, our newest strategical pillar successful 2023 is to shape each unreality contented centered astir AI and instrumentality learning. We're entering a caller era of augmented knowledge activity wherever quality and instrumentality intelligence mixed to unlock unprecedented levels of productivity. We've been moving towards a ngo of designing a much ray measurement of moving for years arsenic a proliferation of unreality devices and nan displacement to distant activity person near group pinch a much chaotic moving situation than ever before. Instead of 1 hunt box, we each person a twelve hunt boxes crossed each of our productivity devices and apps, and there's ne'er been a amended clip to thief our customers shape and simplify their moving lives.

And pinch nan caller developments successful earthy connection processing and ample connection models, Teams tin now return connected much analyzable tasks than ever before, and they're providing america nan building blocks needed to augment knowledge activity arsenic we first envision.

AI and instrumentality learning is an area wherever we've been investing for a agelong time. We position instrumentality learning to amended contented suggestions and retrieval and thief users amended hunt and shape their video content, but there's a batch much we tin do. Where nan biggest opportunities we spot is successful tackling contented fragmentation and cosmopolitan search, and I'm looking guardant to sharing much astir what we'll beryllium launching successful nan coming quarters.

I judge we're operating from a position of spot fixed our standard and our level neutrality and nan millions of group and businesses that already usage Dropbox for activity and entrust america to shop their astir valuable content. I'm moving very intimately pinch our merchandise teams connected our roadmap and I couldn't beryllium much excited astir what Dropbox tin do to leverage each these caller technologies to unlock important levels of productivity for millions of our customers and yet creation a much enlightened measurement of working.

In closing, 2022 was a coagulated twelvemonth contempt expanding challenges from nan macro environment. We're making important changes wrong our business to amended position america for nan agelong word and proceed to attraction connected improving our execution arsenic we navigate what is apt to beryllium different difficult twelvemonth for our customers.

But challenging times tin beryllium transformative for immoderate business. We launched Dropbox during nan awesome financial crisis, and I've learned that operating nether much difficult environments tin consequence successful producing our champion work. While we're not immune to a worsening economy, we're good positioned fixed our scale, our trusted brand, our patient financial floor plan and our beardown equilibrium sheet. We stay focused connected operational excellence, identifying areas of ratio and capitalizing connected emerging maturation opportunities to put successful our future.

And pinch that, I'll manus it complete to Tim to locomotion done our financial results.

Tim Regan

Thank you, Drew. Before turning to our quarterly results, I'd for illustration to commencement pinch a reminder of our financial strategy. We are continuing to prosecute sustained maturation and profitability successful a disciplined and thoughtful mode while remaining committed to our longer-term financial targets. We besides stay focused connected allocating superior to maturation initiatives that we judge will thrust early revenue, some organically and done acquisitions, while besides returning a important information of our free rate travel to shareholders successful nan shape of stock repurchases.

As Drew highlighted, we are seeing much signs of macro-related weakness impacting our business. And today, I'll locomotion done our guidance for 2023, which takes nan existent situation into consideration. I'll besides supply an update connected our financial targets for 2024. But first, fto maine talk our 4th fourth and afloat twelvemonth 2022 results.

Total gross for nan 4th fourth accrued 5.9% year-over-year to $599 million, beating our guidance scope of $592 cardinal to $595 million. Foreign speech rates supply an approximate $19 cardinal headwind to growth, successful statement pinch our erstwhile guidance. On a changeless rate basis, gross grew 9.2% year-over-year.

I'll statement that our Q4 gross was inclusive of a partial period of gross from our acquisition of FormSwift, which we closed connected December 15. Total ARR for nan 4th grew 11.2% year-over-year for a full of $2.514 billion. On a changeless rate basis, ARR grew by $83 cardinal sequentially and 11.8% year-over-year. More than $50 cardinal of this ARR was driven by nan acquisition of FormSwift pinch an further publication from our pricing and packaging changes to our Team plans that we announced successful June. As a reminder, we see nan ARR related to acquired companies successful our full ARR successful nan play of nan acquisition.

We exited nan 4th pinch 17.77 cardinal paying users and added astir 230,000 nett caller paying users successful nan 4th quarter, pinch complete 200,000 of these paying users stemming from our acquisition of FormSwift. As pinch ARR, we see each paying users of an acquired institution wrong our full paying users and play of nan acquisition.

Excluding FormSwift, additions to paying users fell beneath our expectations driven by 2 main factors. First was nan churn of a ample acquisition customer wherever I'd statement that these customers person a very debased ARPU and, hence, an immaterial effect to our full ARR base. The 2nd facet was softness astir our Plus and Teams plans arsenic we proceed to spot expanding macroeconomic headwinds, arsenic Drew mentioned. Specifically, we proceed to spot softness successful our Plus SKU, peculiarly connected mobile. And we began to spot accrued value sensitivity to our Teams plans.

Average gross per paying personification for Q4 was $134.53, up somewhat compared to Q3, pinch nan use from our Teams pricing initiative, partially offset by FX headwinds and nan continued operation displacement towards Family plan, which is comprised of six seats, and therefore, carries a little ARPU profile. We besides saw an ARPU headwind from nan acquisition of FormSwift arsenic we admit nan full paying personification count, but only half a period of revenue.

Before we proceed pinch further chat of our P&L, I would for illustration to statement that unless different indicated, each income connection figures mentioned are non-GAAP and exclude stock-based compensation, amortization of purchased intangibles, definite acquisition-related expenses, impairments of our existent property assets and nett gains connected equity investments. Our non-GAAP nett income besides excludes nan income taxation use from nan merchandise of a valuation allowance connected deferred taxation assets and includes nan income taxation effect of nan aforementioned adjustments.

I'll now supply a little update connected our existent property strategy wherever we person been taking steps to de-cost our existent property portfolio arsenic a consequence of our modulation to a virtual-first model. We made advancement against our subleasing goals successful 2022, and a immense mostly of our abstraction extracurricular of San Francisco office has now been subleased. However, while we proceed to actively activity subleases and see buyouts of our San Francisco headquarters, caller downsizing and reductions successful firm needs passim nan San Francisco existent property marketplace person resulted successful a much challenging subleasing situation than we had primitively anticipated. Given nan existent firm existent property market, we are nary longer assuming that we participate into further subleases successful San Francisco successful nan adjacent fewer years. As a result, we person revised our subleasing assumptions, resulting successful an further write-down of our accommodation and different related assets of $162 cardinal successful nan 4th quarter. This brings our cumulative impairment complaint to $604 million. This revised subleasing presumption besides reduces our expected rate travel use complete nan adjacent fewer years.

Additionally, successful Q4, our GAAP nett income was favorably impacted by a $420 cardinal onetime income taxation use from nan merchandise of a valuation allowance connected our U.S. deferred taxation assets. This is simply a consequence of our improved profitability successful nan U.S., starring america to reason that our valuation allowance connected these deferred taxation assets is nary longer necessary.

I would besides statement that location is nary rate effect associated pinch this onetime benefit, and it is excluded from our non-GAAP nett income.

With that, let's proceed pinch nan 4th fourth P&L. Gross separator was 82% for nan quarter, representing an summation of 1 percent constituent connected a year-over-year basis. The betterment successful gross separator was chiefly driven by ongoing efficiencies successful our information halfway infrastructure.

Fourth 4th R&D disbursal was $174 cardinal aliases 29% of revenue, which accrued compared to 26% of gross successful nan 4th fourth of 2021. We person seen our R&D disbursal arsenic a percent of gross emergence complete this past twelvemonth arsenic we person been investing successful cardinal initiatives crossed our halfway record sync and share, Dropbox successful and DocSend businesses while besides investing successful our cosmopolitan hunt and AI roadmap that Drew discussed. This has coincided pinch attrition rates falling to grounds lows, which has resulted successful nan accrued levels of R&D walk comparative to 2021.

Fourth 4th income and trading disbursal was $96 cardinal aliases 16% of revenue, which decreased compared to 17% of gross successful nan 4th fourth of 2021. Fourth 4th G&A disbursal was $43 cardinal aliases 7% of revenue, which decreased compared to 8% of gross successful nan 4th fourth of 2021. In total, we earned an operating profit of $179 cardinal successful nan 4th quarter, representing an operating separator of 30%, successful statement pinch nan 4th fourth of 2021.

Net income for nan 4th fourth was $141 million, which is simply a 12% alteration versus nan 4th fourth of 2021. This alteration successful nett income is driven by nan important summation successful our taxation disbursal successful 2022 owed to nan effect of nan R&D capitalization taxation authorities effective successful 2022 and fixed that we person now afloat utilized our NOLs for non-GAAP taxation purposes.

Diluted EPS was $0.40 per stock based connected 354 cardinal diluted weighted mean shares outstanding, successful statement pinch $0.41 per stock based connected 386 cardinal diluted weighted mean shares outstanding for nan 4th fourth of 2021.

Moving connected to our rate equilibrium and rate flow. We ended nan 4th pinch rate and short-term investments of $1.3 billion. Cash travel from operations was $195 cardinal successful nan 4th quarter. I'll statement that arsenic portion of our acquisitions of FormSwift and Boxcryptor successful Q4, we paid a full of $33 cardinal of cardinal worker retention holdback to escrow, which decreased our rate travel from operations. Capital expenditures were $13 cardinal during nan quarter. This resulted successful quarterly free rate travel of $182 cardinal compared to $161 cardinal successful Q4 of 2021.

In nan quarter, we besides added $53 cardinal to our finance leases for information halfway equipment. As we had guided connected our past call, we had planned for this important step-up successful Q4 leases arsenic portion of nan build-out of a caller information halfway going into work successful Q1 of 2023.

Let's move to our stock repurchase activity. In Q4, we continued executing against nan $1.2 cardinal authorization that was approved earlier successful 2022 by repurchasing 8 cardinal shares, spending astir $174 million. As of nan extremity of nan 4th quarter, we person astir $748 cardinal remaining nether nan existent authorization.

Now let's move to our afloat twelvemonth 2022 results. Total gross for 2022 was $2.325 billion, representing 7.7% year-over-year growth, beating our guidance scope of $2.318 cardinal to $2.321 billion. On a changeless rate basis, comparative to nan mean rates crossed 2021, year-over-year maturation was 9.4%.

Gross separator was 82% for nan year, up 1.5 percent points from 2021. Operating separator was 31% for 2022, which was up 1 percent constituent from 2021. Net income was $574 cardinal for nan year, which is simply a 6% alteration from 2021, driven by nan important summation successful our taxation disbursal successful 2022, arsenic I've mentioned previously.

Diluted EPS was $1.58 per stock based connected 363 cardinal diluted weighted mean shares outstanding, up from $1.54 per stock for nan afloat twelvemonth 2021 based connected 396 cardinal diluted weighted mean shares outstanding.

Cash travel from operations for 2022 was $797 million. Capital expenditures for nan afloat twelvemonth totaled $34 million, which resulted successful free rate travel of $764 cardinal aliases 33% of revenue. Our free rate travel for 2022 came successful somewhat beneath our guidance of $770 cardinal to $790 cardinal owed to nan $33 cardinal successful FormSwift and Boxcryptor acquisition-related holdbacks that we paid to escrow successful Q4. We do not expect further payments related to these holdbacks for FormSwift and Boxcryptor. These amounts will beryllium expensed complete clip arsenic they're earned by nan respective cardinal employees.

In 2022, we besides added $106 cardinal to our finance lease lines for information halfway instrumentality aliases astir 5% of revenue. Net of repayments, our finance lease equilibrium decreased by $22 million.

Finally, we repurchased astir 36 cardinal shares, spending $795 cardinal successful 2022.

I'd now for illustration to stock our 2023 first 4th and afloat twelvemonth guidance wherever I will besides supply immoderate discourse connected nan reasoning down this guidance.

For nan first 4th of 2023, we expect gross to beryllium successful nan scope of $600 cardinal to $603 million. On a changeless rate gross basis, we expect gross to beryllium successful nan scope of $616 cardinal to $619 million. We are assuming a rate headwind of astir $16 cardinal successful nan first quarter, which translates to astir a 300 ground constituent headwind to growth.

And arsenic a reminder, location are 2 less subscription days successful nan first 4th of 2023 arsenic compared to nan 4th fourth of 2022.

We expect non-GAAP operating separator to beryllium astir 26.5%. As a reminder, location is immoderate seasonality pinch first 4th operating margins arsenic payroll taxes reset astatine nan commencement of each year. This besides includes astir 100 ground points of headwind from FX and 60 ground points of headwind from FormSwift.

Finally, we expect diluted weighted mean shares outstanding to beryllium successful nan scope of 351 cardinal to 356 cardinal shares based connected our trailing 30-day mean stock price. For nan afloat twelvemonth 2023, we expect gross to beryllium successful nan scope of $2.475 cardinal to $2.490 billion. On a changeless rate gross basis, we expect gross to beryllium successful nan scope of $2.510 cardinal to $2.525 billion. We now estimate a afloat twelvemonth 2023 rate headwind of astir $35 cardinal aliases astir 150 ground points headwind to growth, pinch nan FX headwinds moderating each 4th arsenic we thigh nan headwinds of past year. We besides expect FormSwift to lend astir 2.5 points of growth. We expect gross separator to beryllium astir 81% to 82%. As a reminder, we made infrastructure investments related to a caller information center, which conscionable went unrecorded this quarter, resulting successful somewhat little afloat twelvemonth gross separator than 2022.

We expect non-GAAP operating separator to beryllium astir 30%. This is inclusive of an astir 50 ground constituent headwind from FX arsenic good arsenic a 50 ground constituent headwind from our FormSwift acquisition. We expect free rate travel to beryllium successful nan scope of $825 cardinal to $855 million. This includes astir $23 cardinal successful rate outflows for nan 2023 installments of acquisition-related woody information holdbacks for DocSend and Command E. Additionally, our free rate travel guidance is inclusive of an approximate $50 cardinal headwind arsenic a consequence of nan R&D taxation legislation, which I will elaborate connected shortly.

As related to our superior expenditures, we expect our summation to finance leases to beryllium astir 5% of revenue, and we expect rate CapEx to beryllium successful nan scope of $25 cardinal to $35 cardinal successful 2023. We expect 2023 diluted weighted mean shares outstanding to beryllium successful nan scope of 346 cardinal to 351 cardinal shares.

I'd stock immoderate further discourse connected this guidance. As related to revenue, we saw incremental headwinds from nan deteriorating macro situation crossed each lines of our business successful nan 4th quarter. We proceed to spot our mobile Plus users move astatine higher levels, and we saw our Teams users cautiously measure their licence counts.

In addition, while we are still seeing a nett affirmative effect from our pricing and packaging changes to our modular and precocious Teams plan, we did spot elevated churn comparative to Q3. While we person seen nan mostly of Teams customers travel up for renewal nether nan higher value point, we are now expecting a little incremental publication from nan pricing alteration complete nan adjacent 2 quarters for those that person not yet seen nan pricing alteration successful ray of these caller trends.

In summation to nan softness that we're seeing wrong our record sync and stock halfway business, we besides proceed to spot incremental macro headwinds and crossed our Sign and DocSend businesses. We are factoring each of these caller trends into our gross guidance for nan year.

As related to operating margin, we are expecting operating margins of astir 30%, somewhat beneath our 2022 margins. We expect Q1 to correspond nan trough of nan twelvemonth arsenic a operation of factors, including nan resetting of payroll taxes, FX and nan acquisition of FormSwift are pressuring operating margins beneath our caller trend. For nan afloat year, we expect FX and nan acquisition of FormSwift to correspond astir a 100 ground constituent headwind to margins.

Additionally, our guidance contemplates nan annualization of nan hiring we did successful nan 2nd half of 2022, peculiarly wrong R&D. We are intimately monitoring nan ratio of nan walk to guarantee that we are being prudent and expect our R&D arsenic a percent of gross to inclination little done nan twelvemonth pursuing Q1.

As related to afloat twelvemonth free rate flow, our guidance includes a $50 cardinal rate taxation headwind arsenic a consequence of nan rule that now requires R&D costs to beryllium capitalized for taxation purposes. While location is simply a anticipation that nan existent authorities whitethorn beryllium amended aliases repealed, we are including this effect successful our guidance until specified clip that it is repealed, which brings maine to our semipermanent financial targets of delivering gross margins of 80% to 82%, operating margins of 30% to 32% and $1 cardinal of yearly free rate travel by 2024.

We proceed to run wrong our semipermanent separator range, and we person made important advancement increasing free rate travel since we introduced our target 3 years ago. However, changes to R&D taxation authorities and deteriorating FX rates comparative to nan rates we utilized erstwhile initially issuing our free rate travel target presently correspond a mixed headwind of complete $75 cardinal successful 2024. While these and different factors person introduced unit connected our expertise to execute our $1 cardinal free rate travel target by 2024, we proceed to person aggregate ways to execute this target. Thus, while nan way has go much challenging, it is excessively early to make immoderate changes to our semipermanent financial targets astatine this time.

In conclusion, contempt nan macro headwinds we observed successful nan 4th quarter, we stay optimistic astir our strategy and nan opportunities successful beforehand of us, including our multiproduct efforts, our caller acquisitions and our plans to shape our users' unreality content. We will stay focused connected our customers, operating nan business efficiently and driving semipermanent worth for our shareholders.

With that, I'll now move it complete to nan usability for Q&A.

Question-and-Answer Session

Operator

[Operator Instructions] Our first mobility comes from nan statement of Rishi Jaluria of RBC Capital Markets.

Rishi Jaluria

First, I want to possibly deliberation astir FormSwift. And what is nan customer overlap wrong that customer guidelines look like? So successful different words, not only what is nan cross-sell imaginable for you to waste FormSwift to nan existing Dropbox customer guidelines and merge nan asset, but possibly are location nett caller customers that you person nan expertise to waste Dropbox -- nan halfway Dropbox into and grow your reach? And past I've sewage a speedy follow-up.

Drew Houston

Sure. So acknowledgment for nan question. And I'd opportunity short reply is yes to each nan above. I mean I think, first, a batch of overlap aliases complementary fresh betwixt FormSwift and Dropbox successful position of a akin target customer, akin self-serve go-to-market and addressing nan contented life rhythm and past there's fresh successful nan different direction. So each -- aliases often contracts that you nonstop retired for signature originate successful nan shape of a template wherever if you deliberation astir getting an NDA done aliases immoderate agency lease aliases something, that mightiness commencement pinch a Google hunt and you onshore connected a tract for illustration FormSwift to find a template. So it's complementary successful some directions. And FormSwift has its ain assemblage of millions of visitors each twelvemonth that are imaginable Dropbox customers. So we spot a batch of synergies successful each directions.

Rishi Jaluria

Wonderful. That's really helpful. And then, Tim, erstwhile you're talking astir benignant of nan elevated churn that you've seen, possibly tin you springiness america a small spot of colour successful position of what you're seeing connected nan churn? Are these customers conscionable going retired of business aliases shutting down astatine nan debased end? Are they going to possibly larger platforms wherever they're consolidating their spend, beryllium it pinch nan Microsoft aliases Google? And possibly alongside that, what's happening connected nan user broadside of nan business, which -- last, I deliberation you disclosed astir 20% of full paying customers?

Tim Regan

Sure. So we did spot our churn complaint summation this past 4th mostly owed to nan deterioration successful nan macro economy, and we proceed to spot churn from our Plus customers, peculiarly connected mobile devices. And we besides saw heightened value sensitivity amongst our Team customers where, successful particular, we saw a greater grade of churn from customers taxable to our Teams pricing and packaging changes than we saw successful nan 3rd quarter.

Now that each said, our wide churn complaint is presently successful nan debased teens, and that's an betterment from wherever it was conscionable a mates of years ago. So improving retention continues to beryllium a attraction for us. And of course, our gross guidance factors successful each of these latest trends.

And arsenic acold arsenic what's happening connected nan user broadside of nan business, I wouldn't opportunity there's been immoderate worldly deviation successful those trends arsenic acold arsenic nan 80-20 divided that you referred to.

Operator

Our adjacent mobility comes from nan statement of Michael Funk of Bank of America.

Michael Funk

So conscionable a couple, if I could. So connected nan ARPU change, you mentioned a fewer different factors there, family for one, obviously. The alteration successful pricing has besides been a facet and past FormSwift. Can you deconstruct nan alteration successful ARPU for america based connected those different factors?

Tim Regan

Sure. So we ended Q4 pinch ARPU astatine $134.53, which was down astir $0.25 year-over-year. So a fewer cardinal factors there. So FX was a $4.20 headwind. And continuing headwinds from a operation displacement to Family scheme are besides a facet there. Now this was offset by benefits from our Teams pricing initiative, which we launched successful June. And past FormSwift represented a mini headwind, astir $0.25, because we admit each of FormSwift users, but only a half a period of revenue.

Now looking forward, we don't formally guideline to ARPU. But again, location are immoderate factors that will effect our trends adjacent year. Again, nan Teams pricing change, that will beryllium a tailwind to ARPU. FormSwift, we expect FormSwift to beryllium a tailwind to ARPU arsenic good adjacent twelvemonth arsenic its monthly scheme is astir $40 per seat. FX, we expect that to beryllium a headwind, but that to mean passim 2023, assuming existent leasehold. And past again, Family plan, arsenic a reminder, that SKU is simply a headwind to ARPU arsenic this scheme includes six licenses for friends and family.

Michael Funk

Got it. And past besides connected nan call, you mentioned immoderate incremental gross headwinds baked into nan '23 guidance. You gave america a fewer different things, churn and mobile personification count, elevated churn comparative to 3Q, what you're experiencing there. Can you conscionable break this down for america arsenic good -- you already talked astir ARPU, but successful position of gross group expectations versus churn expectations that are portion of nan incremental headwind, are you besides expecting to person less gross additions? Or is nan mostly of nan alteration connected nan churn side?

Tim Regan

Sure. I'll springiness you immoderate discourse connected our nett caller paying personification additions. So again, we added 230,000 nett caller paying users successful nan 4th quarter, a mostly of that did travel from FormSwift. And past excluding FormSwift, nan summation to paying users did autumn beneath our expectations, arsenic I touched on. Now location were a fewer factors to that. First was nan churn of a ample university, which did transportation a debased ARPU. This had an immaterial effect connected ARR. And past 2nd was nan softness crossed our Plus and Teams plans arsenic we proceed to spot expanding macro headwinds.

Now arsenic acold arsenic what we expect going guardant from a nett caller paying personification perspective, I would expect that our nett caller paying users going guardant to beryllium a spot little than nan tally complaint that it was successful nan first half of 2022. And while we don't firmly guideline to nett caller paying users, conscionable arsenic we navigate nan pricing and packaging changes successful nan existent macro environment, I'd expect thing successful nan vicinity of astir 100,000 nett caller paying users per quarter, pinch ARPU description being much pronounced adjacent year.

Michael Funk

Okay. That's really adjuvant successful reasoning astir nan portion parts of trying to exemplary retired nan maturation for nan year. So 100,000 nett caller per quarter. And conscionable 1 much speedy one, if I could. Just connected nan impairment related to existent estate, specifically San Francisco. Did you research different options specified arsenic early exit from nan lease, simply negotiating possibly a -- from a stronger position pinch nan landlords? Or I'm assuming you astir apt research each options present alternatively than simply taking that disconnected of nan anticipation for subleasing.

Tim Regan

Sure. We've been actively exploring each options here. We person really executed a fewer subleases successful years past successful San Francisco. We were comparatively speedy to marketplace pinch our subleasing plans, but nan marketplace has deteriorated pinch galore companies reducing their existent property footprint. And there's surely been an summation successful proviso of existent property for sublease, which has pushed retired our anticipated clip to lease. And truthful we primitively anticipated we would sublease San Francisco successful mid-2023. Now we expect we won't statesman subleasing until mid-'25. We've besides lowered nan rates we expect to receive.

So we've surely been active, and we proceed to beryllium progressive successful partnering pinch our landlord and successful searching for subleases. But astatine this constituent successful time, this is our revised presumption conscionable fixed what we're facing astatine this moment.

Operator

Our adjacent mobility comes from nan statement of Steve Enders of Citi.

Steve Enders

I conjecture possibly conscionable to start, I deliberation would emotion to get a small spot much item connected really you're reasoning astir benignant of early packaging and pricing levers to perchance propulsion and really you spot FormSwift coming into nan remainder of nan portfolio and really you're reasoning astir benignant of early monetization and pricing pinch picking and buying suite location going forward?

Drew Houston

Sure. Well, FormSwift is simply a bully example. It's complementary to a batch of our different usage cases, and we've been building towards supporting archive workflows end-to-end passim nan full life cycle. So for example, a statement that originates arsenic a template. Now we tin -- we person nan apical of nan chimney covered. And past arsenic you nonstop retired a draught for reappraisal aliases iteration, you mightiness usage DocSend and past nonstop it retired to signature and motion and past person nan signed type archived connected Dropbox.

So we've been building towards this connected our roadmap for a agelong time, and there's a batch of -- arsenic acold arsenic pricing and packaging, arsenic you'd imagine, building that much integrated experience, bundling these experiences together, having a broader portfolio of products, each these things lend to monetization. And pinch them zooming retired from archive workflows, our accuracy successful wide has been to adhd much worth to adhd caller features to our halfway products. So past twelvemonth examples see a batch of caller information features. And past arsenic we adhd beyond a capable period of value, accrued prices. And truthful you saw america do this past twelvemonth pinch our 20% value summation for Teams customers. So that accuracy will -- that will still hold. That said, arsenic we're each monitoring nan macro environment, each institution is looking to -- looking astatine budgets and consolidating spend. You person to -- we person to beryllium mindful of what customers are going done and what they want. And truthful value -- it mightiness beryllium little astir conscionable consecutive value increases and much astir bundling aliases looking astatine our customer -- our stock customers and talking to them astir if they're utilizing immoderate abstracted eSignature instrumentality to bargain a bundle that includes Sign and FSS instead.

So I'd opportunity what customers are willing is shifting, and we person to beryllium mindful of nan equilibrium of continuing to summation monetization and ARPU while besides being -- monitoring churn and what our customers want.

Steve Enders

Okay. Got you. That's adjuvant context. And I conjecture possibly for nan outlook here, I guess, peculiarly arsenic we deliberation astir nan '24 outlook connected free rate flow. Understand there's nan $75 cardinal headwind there. But I cognize you mentioned that there's immoderate further levers that you could perchance pull. I conjecture really are you reasoning astir what nan imaginable -- biggest areas are to perchance propulsion there? And really are you reasoning about, I guess, nan wide benignant of hiring situation and outlook arsenic you deliberation astir trying to thrust towards that free rate travel target?

Tim Regan

Sure. So we proceed to person aggregate ways to execute our target. We person respective integrated initiatives, including improving our record sync and stock business, expanding our multiproduct capabilities and organizing unreality contented that tin thrust gross growth. We besides person inorganic opportunities we tin pursue, which tin contribute. We're besides actively looking astatine ways we tin thrust much ratio successful nan business. And of course, it's imaginable that exogenous factors specified arsenic R&D capitalization and FX tin move successful our favor.

So while nan way has surely go much challenging, it's excessively early to make immoderate changes to our semipermanent targets astatine this time.

And past arsenic related to hiring, we are alert that galore different companies are facing hiring challenges and taking restructuring measures successful nan manufacture correct now. We did spot an elevated effect of nan macro system connected our business successful nan 4th quarter. So we're not immune to those pressures. We're intimately reviewing nan ratio of our walk to guarantee that we are seeing a capable level of return. And we will stay thoughtful and disciplined successful making due decisions for nan semipermanent wellness of our business.

Operator

Our adjacent mobility comes from nan statement of Joey Marincek of JMP Securities.

Joey Marincek

Drew, you mentioned expanding title successful nan eSignature market. So I'm curious, really do you deliberation Sign stacks up comparative to competition? And what assumptions are baked into nan guideline connected wide request for Sign successful 2023?

Drew Houston

Sure. So I mean I deliberation successful nan competitory environment, we're seeing surely tons of different activities wherever different products are adding eSignature aliases different caller benignant of pricing and packaging approaches from different folks. So successful general, we spot Sign arsenic having a very complementary mobility to Dropbox. So we're self-serve, somewhat much SMB focused. We deliberation that conception is comparatively little addressed than -- successful nan endeavor pinch higher-end customers.

Certainly, 1 of our large advantages is our existing assemblage of tens of millions of Dropbox FSS subscribers. So we're doing a batch to amended merge Sign and DocSend and our products -- I'd adhd FormSwift to that list, attaching it to our base. And I'd opportunity we're beautiful early successful position of our pricing and packaging and bundling optimizations there. And past erstwhile you benignant of zoom retired from conscionable nan eSignature to conscionable nan full end-to-end workflow, arsenic I said, we person a batch of different parts that we're stitching together and I deliberation that our expertise to supply a seamless and integrated end-to-end acquisition starting from, again, that Google Search to find a template pinch FormSwift each nan measurement down to signature and archival.

We are -- that's an advantage being capable to person each those pieces of nan puzzle, whereas pinch a batch of nan competing constituent solutions, you person to for illustration log in, log out. There's a batch of clash that is successful that wide experience. So arsenic you tin see, we've been building -- our large root of differentiation is building nan end-to-end experience, and we're comparatively early innings successful position of driving take among our guidelines and beyond.

Joey Marincek

That's very helpful. And tin you springiness america immoderate much specifications astir Timothy's departure? How are you reasoning astir replacing him? Do you consciousness for illustration you person nan chair already? Or would you perchance look extracurricular nan company? Any thoughts location would beryllium helpful.

Drew Houston

Sure. Yes. So conscionable for color, Timothy -- aliases past month, we announced that Timothy was stepping down. He's still astatine nan company. He'll beryllium present done March, and he contributed a lot. So I really admit everything he's done for us.

As acold arsenic nan go-forward activity structure, thing for illustration preannounced here. We'll support everybody posted. But it's been awesome for maine to get person to our operating leaders fixed each nan opportunities we person successful beforehand of america and to attraction connected continuing to amended our execution.

Operator

Our adjacent mobility comes from nan statement of Brent Thill of Jefferies.

Luv Sodha

This is Luv Sodha connected for Brent Thill. Maybe 1 for you, Drew. I conjecture arsenic you position arsenic nan semipermanent maturation imaginable of this business, really should we deliberation of nan semipermanent maturation potential? And what are nan main levers that you person to thrust growth, some organically and inorganically?

Drew Houston

Sure. So galore maturation levers, I mean, starting pinch conscionable integrated levers, truthful continuing to optimal halfway business, which is astatine scale. And optimization is there. There's still a batch of returns to those. Second, we've been building retired our broader portfolio of maturation shape businesses for illustration Sign and DocSend. And we besides person a pipeline of newer products for illustration Capture and Replay and Backup. And past there's M&A we've done successful nan past astir things for illustration Command E and cosmopolitan search.

And past looking ahead, arsenic I shared connected nan telephone and successful erstwhile calls, I'm really excited astir nan opportunity to move beyond files and shape each of our customers' unreality contented because if you look complete nan past decade aliases so, a batch of workloads person shifted from files to unreality tools, but there's a missing organizational furniture there, and there's a batch of customer symptom points. Search is 1 that is benignant of obvious. Like what utilized to beryllium 1 hunt container and benignant of nan record successful PC era is now dozens of hunt boxes successful nan unreality era. And we spot Dropbox is very good positioned to thief reside customer symptom points and acquisitions for illustration Command E bringing successful a institution that was already moving connected immoderate of these problems and investing much down it has been a large inaugural for us.

So there's a batch connected nan integrated front, and I deliberation this is -- this will yet beryllium a bigger marketplace than FSS. I deliberation everybody, they're -- nary 1 is solving these challenges astir organizing unreality content. There's a full batch of room for betterment successful that experience, and we're investing very heavy there. And it besides dovetails pinch a batch of nan caller advances successful AI and instrumentality learning. So we're very excited astir nan imaginable of having a self-organizing Dropbox aliases to beryllium capable to bring earthy connection successful nan acquisition for hunt aliases workflow aliases different areas. And these are areas we've been investing for a agelong time, and we're doubling down present moreover further. So there's a batch connected nan integrated front, and we're continuing -- also, location are a number of maturation levers connected nan M&A front. And moreover conscionable nan past quarter, we were really happy pinch immoderate of nan acquisitions we made pinch FormSwift and Boxcryptor. And truthful we'll proceed to beryllium connected nan lookout there, too.

Luv Sodha

Got it. And a speedy follow-up for Tim, if I may. Just, Tim, conscionable wanted to excavation deeper into nan gross guideline for adjacent year. Could you conscionable locomotion done your assumptions? Are you deliberation -- are you embedding a worsening macro? Or are you expecting macro -- conscionable immoderate colour successful position of churn and -- some nan macro environment. And past you mentioned R&D efficiency. How should we deliberation of that arsenic a lever, particularly arsenic you look astatine your medium-term separator outlook of 30% to 32%?

Tim Regan

Sure. Good question, Luv. So we are baking in, I'd say, an due level of conservatism fixed nan evolving macro landscape. We person assumed that cardinal trends specified arsenic nan accrued levels of value sensitivity that we saw successful nan 4th fourth will proceed passim 2023. And truthful we are factoring successful nan latest signals and not assuming a turnaround successful nan system successful our guidance for 2023.

Now accordant pinch our humanities approach, we do facet successful maturation initiatives erstwhile we person capable awesome connected their performance. And arsenic we spot further information complete nan people of nan year, we will revise our guidance arsenic needed.

And past arsenic acold arsenic R&D ratio arsenic a lever, conscionable fixed our medium-term separator guideline of 22% -- aliases sorry, 30% to 32%, we surely will beryllium looking astatine our R&D ratio and intimately reviewing nan output that we're getting comparative to that investment, and we'll proceed to negociate this business pinch subject arsenic we make our decisions going forward.

Operator

Our past mobility comes from nan statement of Mark Murphy of JPMorgan.

Unidentified Analyst

This is [Puneet Kaur] connected for Mark Murphy. First, I conscionable wanted to inquire if you could locomotion america done immoderate changes that you're seeing successful nan competitory scenery for Dropbox. Given Dropbox' standard and reputation, funny if there's an opportunity to benignant of summation stock fixed immoderate of nan macro pressures whitethorn beryllium weighing connected smaller vendors pinch little runway.

Drew Houston

Sure. I'd opportunity our competitory dynamics person been beautiful stable. And I deliberation you tin spot this successful a -- while location were macro headwinds successful Q4, I deliberation broadly retention has been beautiful stable. Margins person been beautiful unchangeable and truthful on. We haven't seen awesome changes successful nan environment. I'd opportunity nan dynamics are possibly a small spot by business by business aliases Sign and DocSend person immoderate different factors than nan halfway business -- aliases erstwhile fundraising comes down, that affects DocSend disproportionately things for illustration that. But I'd opportunity overall, it's been beautiful stable.

And past arsenic we look ahead, particularly arsenic you deliberation astir organizing each unreality content, particularly arsenic you deliberation astir things for illustration AI and instrumentality learning and having a caller procreation of smart devices and products, we consciousness we're good positioned fixed our standard and our marque astir spot and privateness and our level neutrality. And we've already been investing a batch successful instrumentality learning and AI for a agelong time. So compared to start-ups, a batch of our accumulated advantages time off america good positioned. So beautiful stable, but we're evidently continuing to show nan environment.

Unidentified Analyst

Great. That's very helpful. And past arsenic a speedy follow-up, I conscionable wanted to inquire astir immoderate of nan changes and enhancements you've made pinch your archive workflow-oriented products, are location immoderate early indications connected nan connect rates aliases first impervious points for immoderate of these circumstantial features that you've added that look to beryllium resonating much profoundly pinch customers?

Drew Houston

I don't person immoderate further stats to stock correct now, but we person been making accrued advancement successful cross-selling Sign and DocSend successful to our guidelines and things for illustration nan rebrand from HelloSign to Dropbox Sign person been helpful. And past we're -- we've made -- we proceed to make advancement successful building tighter integration points betwixt record sync and share, our halfway Dropbox merchandise and nan broader portfolio. So we spot a batch much upside there, some successful position of amended integration and past continued long connected pricing and packaging and bundling.

Operator

Thank you. This concludes today's convention call. Please disconnect your lines astatine this time, and person a awesome day.