Dropbox shares slip as it experiences challenging quarter

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Dropbox shares were down 7 per cent in after hours trading after the cloud file sharing company released its Q4 and Full Year earnings, with CEO Drew Houston admitting that the vendor faced a number of challenges during 2023. Revenue growth was weak and the company’s guidance is soft for the year ahead. 

Houston was pleased with Dropbox’s product improvements, particularly its AI investments, but admitted that the company had taken some hits as it migrated companies that had invested in its multi-product capabilities to its new higher priced bundled ‘Teams’ offering. 

The key numbers released this week include: 

• In Q4, total revenue was $635.0 million, an increase of 6.0% from the same period last year. In the same period total ARR was $2.523 billion, a slight increase of 0.3% from the same period last year.

• Paying users in Q4 stood at 18.12 million, as compared to 17.77 million for the same period last year. Average revenue per paying user was $138.83, as compared to $134.53 for the same period last year. Paying users decreased 0.05 million quarter-over-quarter.

• For the Full Year 2023, total revenue was $2.502 billion, an increase of 7.6% year over year. Average revenue per paying user was $139.38, as compared to $134.51 in the prior year. 

Starting on a positive note, Houston said: 

In 2023, we had two main business objectives. The first was to build AI-powered product experiences centered around organizing all your cloud content. The second was to continue evolving our core FSS offering to provide a seamless product experience for our customers workflows. I'm proud of the work our team accomplished on both of these fronts.

Starting with building AI-powered product experiences. In 2023, we introduced the first iteration of Dropbox Dash, a standalone universal search product, leveraging AI and machine-learning. With more of our work spread across hundreds of tabs in a browser, knowledge workers are spending far too much time just finding what they need to do their work, particularly in this new world of distributed work.

Dash connects all of your apps, tools, and content in a single search bar, so it's easy to find everything you need in one place, regardless of where it lives. And because Dash is powered by machine-learning, it learns about you and your priorities, the more you use it.

Houston said that in 2023 Dash moved from closed-beta to open-beta and, whilst early days, Dropbox had gained valuable insights into the types of customers that are engaging with the product and features. For instance, the vendor has noticed that its existing users that are more engaged on its Dropbox File, Sync and Share (FSS) paid plans tend to adopt Dash and retain at a higher rate. 

And commenting on FSS progress, where Dropbox has been focused on evolving gathering offering to create a better product experience for customer workflows, Houston said: 

There were several highlights on this front in 2023, including the continued optimizations we made across the platform to reduce churn on a year-over-year basis, improve top of the funnel and ultimately ensure we're delivering the best product experience to our users.

Specifically, we made a number of operational enhancements, including improving the sharing experience across our mobile and web services, optimizing our payment processing to reduce churn and leveraging Google One Tap to streamline and improve the user onboarding experience. 

Given the size of our registered base, these changes impact millions of users and we believe the progress we made 2023 will strengthen our foundation, heading into 2024.

Problem areas

However, despite these positive changes, Dropbox’s guidance for Q1 2024 and for the Full Year fell short of Wall Street’s expectations, which is likely what sent its share price south. Houston admitted: 

Although I was proud of last year, Q4 was a challenging quarter, some of these challenges were expected.

For instance, we continue to see the broader economic backdrop impacted both our Teams and document workflow businesses, as customers are being more cautious with their spend and exhibiting higher levels of price sensitivity. This resulted in reduced levels of gross new licenses and upsell activity, alongside higher churn and downsell.

He added that certain Teams customers, particularly those in the tech sector, continue to reduce licenses due to spending cuts. Houston also said that the vendor anticipated headwinds stemming from strategic business decisions it made last year, which he hopes will benefit the company in the long run. 

However, there has been short-term pain. For instance, Dropbox sunset its unlimited storage and transitioned to a metered model, after it found that some customers were using it to do things like mine crypto or resell storage. Houston said: 

While this change will ultimately translate into increased profitability in the long-term, I'd like to increase funds and incremental churn for those customers seeking storage solutions that we no longer offer. We also de-emphasize our family plan, as we found that some business users were also using it as a loophole to obtain licenses at a lower cost. As we noted last quarter, this negatively impacted the number of paying users in the quarter.

Separately, Dropbox ran a number of tests and experiments across its individual plans with new trial flows and other initiatives, but these did not generate the uplift it was looking for. Furthermore, the company’s plan to shift multi-product customers to its new ‘Teams’ offering is having a short-term negative impact. Houston explained: 

The early results on our bundled offerings for Teams have been mixed. As a reminder, our approach was to offer multi-product bundles to new Teams customers at a higher price point to reflect the additional value we were adding to the plans, while our intention was to migrate existing customers to the new SKUs at their current price point.

For now, we've held off on migrating all our existing Teams customers, because while we're seeing an uptick in multi-product adoption with new customers as well as an ARPU lift from these plans, we're also seeing a reduction in top of funnel activity and conversion rates. As a result, we're revisiting our approach.

In Q1, we'll keep iterating on our pricing and packaging and will continue to improve the product experience for these customers. At the same time, we will refine our marketing approach in our self-serve engine to ensure that we were properly identifying and serving customers that are interested in FSS only SKUs versus our multi-product.

Ultimately, we're still aiming to serve those who want multi-product capabilities, as we continue to see that customers who engage with these capabilities convert and they retain at notably higher rates than storage only customers. 

My take

Some progress when it comes to product development, but it also feels like Dropbox made a couple of false starts as it continues to figure out its product mix. However, short-term pain is always preferable to long-term decline, so hopefully the lessons learned during 2023 will serve the company well in the future.