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Dropbox (DBX -15%) is getting dropped today following its grim Q1 and FY25 revenue outlook, stemming largely from its decision to hold onto FormSwift, a document-generating application. The company had plenty of steam heading into Q4 results last night, climbing by over +50% since August lows and flirting with multi-year highs reached in February 2024.

Unfortunately, the cloud-based file storage and sharing platform's momentum was abruptly halted following another round of bearish guidance. During its past rally, investors were willing to shrug off a consistent string of downbeat quarterly revenue projections, focusing on AI potential and DBX's cost-cutting initiatives, including a 20% workforce reduction in October. However, this time around, there were too many glaring weak points for investors to overlook.

• A consistent theme throughout DBX's past three quarters was a sequential uptick in paying users, jumping by as much as 63,000 in Q2. However, in Q4, paying users contracted by 15,000 sequentially, marking the first sequential drop since 4Q23. DBX attributed the decline to pressure on down-sell, churn, and team expansion activity sparked by increased pricing sensitivity.
• Making matters worse, DBX anticipates paying users to decline by about 300,000 in 2025, half of which stems from a reduced investment in FormSwift. Following a lengthy strategic review, DBX announced it would hold onto FormSwift but eliminate marketing for the product, generating paying user headwinds.
• Its decision is dragging down Q1 and FY25 revenue growth projections by 80 bps and 150 bps, respectively. The company expects Q1 revs of $618-621 mln, a 2% dip yr/yr at the midpoint, marking DBX's first quarter of yr/yr net sales compression in over five years, and FY25 revenue of $2.465-2.480 bln, a 3% drop at the midpoint.
• Moving ahead, DBX is looking at a few areas in which to reaccelerate growth. For starters, the company plans to continue optimizing its Teams business, pulling on certain levers, such as pricing optimizations and churn improvements, to offset nagging headwinds. Furthermore, DBX is turning its core business into a launchpad for Dash, its AI-powered universal search function. Management sees the majority of its File Sync and Share (FSS) subscribers, which would translate to around 0.5 mln business accounts, as good prospects for Dash.
• However, dampening the enthusiasm for Dash is the fact that DBX does not anticipate a material contribution to revenue from the product this year. Meanwhile, competitors like Sharefile (PRGS) and Box (BOX) already offer similar functions.

DBX's Q4 report was decent, maintaining its impressive streak of bottom-line upside. However, gloomy revenue guidance branching from DBX's move to keep FormSwift but allocate resources toward Dash is deflating investor sentiment significantly today. Since DBX is still in the early innings with Dash, investors are booking profits today as the company's shift in attention is expected to noticeably dent growth this year.