Dropbox(DBX) - 2023 Q4 - Annual Report

Part I Business Overview Dropbox provides a content collaboration platform for over 700 million users, with 18.12 million paying users and over 90% self-serve revenue - Dropbox aims to reduce 'work about work' by centralizing information and integrating with various tools, supporting distributed teams[25][27][29] Key Business Metrics | Metric | Value (as of Dec 31, 2023) | | :--------------------- | :--------------------------- | | Paying Users | 18.12 million | | Revenue Source | >90% from self-serve channels| - The company's Virtual First work model, implemented in October 2020, makes remote work the primary experience for employees, with offices repurposed into 'Dropbox Studios' for collaboration[87] Company Overview Dropbox, Inc. was founded in 2007 to provide universal access to information, evolving into a content collaboration and team synchronization platform - Dropbox, Inc. was founded in 2007 with the mission to provide universal access to important information from any device, evolving into a platform for content collaboration and team synchronization[23][24] - The company focuses on reducing 'work about work' by centralizing information flow and integrating with various tools, positioning itself for growth as teams become more fluid and global[25] Key Differentiators Dropbox differentiates itself through simple design, an open ecosystem, viral adoption, and robust performance and security - Dropbox distinguishes itself through simple and intuitive design, an open ecosystem that integrates with various devices and third-party apps (e.g., Microsoft, Zoom, Google), viral bottom-up adoption, and custom-built infrastructure ensuring high performance and security[27][28][29][30][31] Platform Solution Dropbox provides a unified home for content, a global sharing network, and integrated product experiences with AI investments for effective collaboration - Dropbox enables individuals, teams, and organizations to collaborate effectively by providing a unified home for content, a global sharing network, and product experiences with deep integrations and AI investments[32][35][39] Platform Capabilities Dropbox offers extensive capabilities for content creation, access, organization, sharing, collaboration, and robust security protections - Dropbox offers a broad range of capabilities including content creation (Paper, Doc scanner), access and organization (Search, Rich previews, Smart Sync, Version history, Computer Backup, Passwords, Vault), sharing (Folders, Shared links, Transfer, File requests, Watermarking, DocSend), collaboration (Comments, File activity stream, Notifications, Viewer information, Dropbox Sign, Capture, FormSwift), and robust security protections[36][37][38][40][41][42][43][44][45][46][47][48][49][50][51][52][53][54][55][56][57][58][59][60] Subscription Plans Dropbox offers a variety of subscription plans, from free Basic to paid Personal and Business tiers, catering to diverse user needs - Dropbox offers a range of subscription plans, including a free Basic plan, paid Personal plans (Plus, Professional, Essentials), and Business plans (Family, Standard, Advanced, Business, Business Plus, Enterprise) to cater to diverse user needs[62][291][292][293] Customer Base Dropbox serves a broad customer base, from freelancers to Fortune 100 companies, with 18.12 million paying users as of December 31, 2023 Customer Base Metrics | Metric | Value (as of Dec 31, 2023) | | :--------------------- | :--------------------------- | | Paying Users | 18.12 million | | Paying Business Teams | >575,000 | | Revenue Concentration | No customer >1% of revenue (2021-2023) | - Customers range from freelancers and small businesses to Fortune 100 companies across various industries and internal functions[63] Customer Support Dropbox provides customer support through a help center, online community, social media, and guided troubleshooting, with enhanced options for paying users - Dropbox provides customer support through a help center, online community, social media, and guided troubleshooting, with additional support levels for paying users[64][65] Sales and Marketing Strategy The company's marketing strategy focuses on brand awareness and its self-serve model, generating over 90% of revenue from self-serve channels - The company's marketing strategy focuses on building brand awareness and reinforcing its self-serve model, with over 90% of revenue from self-serve channels, limiting customer acquisition costs[66][67] - Conversion to paid subscriptions is driven by in-product prompts, time-limited trials, email campaigns, and lifecycle marketing, complemented by a focused outbound sales effort for organizations with existing organic adoption[68][69] Technology Infrastructure Dropbox primarily uses custom-built infrastructure in co-location facilities for high reliability and security, supplemented by AWS for global service delivery - Over 90% of user data is stored on Dropbox's custom-built infrastructure in co-location facilities (California, Oregon, Texas, Virginia), designed for reliability, security, and high data durability (99.999999999% annual)[70] - Amazon Web Services (AWS) is used for the remaining storage needs and service delivery, with datacenters in the US, Australia, Europe, and Japan for content localization[71] - The platform features multiple layers of redundancy, hourly incremental backups, daily full backups, and redundant copies of content stored in at least two separate geographic regions[72] - Dropbox is investing in AI technologies to improve existing products and develop new ones[73] Security, Privacy & Compliance Dropbox maintains strong security, privacy, and compliance measures, including data encryption, administrator controls, and adherence to global regulations - Dropbox employs strong security protections including data encryption (256-bit AES at rest, SSL/TLS in transit), administrator controls for business teams, and third-party security integrations[59][60][64][75] - The company is committed to user data privacy, complying with laws like GDPR and CCPA, and has a Data Protection Officer and robust privacy program[77] - Dropbox is subject to various laws and regulations covering copyright, content, consumer protection, anti-corruption, and export/import, with processes and policies in place to ensure compliance[78] Competitive Landscape The content collaboration market is highly competitive, with Dropbox facing rivals in cloud storage, content collaboration, and e-signature services - The content collaboration market is competitive, with Dropbox competing in cloud storage (Microsoft, Amazon, Apple, Google, Adobe, Box) and content collaboration (Microsoft, Atlassian, Slack, Google), and e-signature (Adobe, DocuSign)[79] - Key competitive factors include user-centric design, ease of adoption, user network scale, features, performance, brand, security, accessibility, third-party integration, customer support, innovation, pricing, AI investments, and macroeconomic trends[80] Intellectual Property Dropbox protects its intellectual property through patents, trademarks, copyrights, trade secrets, and licensing, holding over 1,750 issued patents - Dropbox protects its intellectual property through patents, trademarks, copyrights, trade secrets, and licensing agreements, holding over 1,750 issued patents and 250 pending applications[81][82][83] Human Capital Management Dropbox manages its human capital with a 'Virtual First' model, a reduced workforce, and competitive compensation and benefits for its 2,693 employees Employee Metrics (as of Dec 31, 2023) | Metric | Value (as of Dec 31, 2023) | | :--------------------- | :--------------------------- | | Full-time Employees | 2,693 | | US Employees | 2,226 | | Non-US Employees | 467 | - In April 2023, Dropbox reduced its global workforce by approximately 16% to streamline operations and support long-term growth and profitability[86] - The company operates under a 'Virtual First' work model since October 2020, emphasizing remote work, flexible arrangements, and in-person collaboration at 'Dropbox Studios' or 'On-Demand Spaces'[87] - Compensation includes competitive packages with base salary, bonuses, 401(k) match, and equity awards, alongside comprehensive benefits focusing on health, wellness, and family support[88][89] Corporate Information Dropbox, Inc. was incorporated in 2007, headquartered in San Francisco, California, with Class A common stock listed on Nasdaq under 'DBX' - Dropbox, Inc. was incorporated in May 2007 as Evenflow, Inc., changing its name in October 2009. Its headquarters are in San Francisco, California, and its Class A common stock is listed on Nasdaq under 'DBX'[94] Available Information The company uses its website, investor relations site, and blog for disclosing material non-public information and SEC filings - The company's website (www.dropbox.com), investor relations website (investors.dropbox.com), and blog (blog.dropbox.com/topics/news) are used for disclosing material non-public information and SEC filings[94] Risk Factors Investing in Dropbox Class A common stock involves significant risks related to business operations, financial performance, legal compliance, and stock ownership - The business depends on retaining and upgrading paying users; any decline in renewals or upgrades could adversely affect future results[97] - Unauthorized access to data or user content, including through security breaches, could damage the business, reputation, and lead to liability[105] - The company's revenue growth rate has declined and may continue to slow due to market penetration, competition, and macroeconomic factors[112][184] - The multi-class stock structure concentrates voting control with pre-IPO stockholders, potentially depressing the trading price of Class A common stock and limiting other stockholders' influence[228] Business and Operations Risks Operational risks include user retention, cybersecurity threats, declining growth, market competition, and reliance on key personnel and third-party integrations - Risks include dependence on user retention and upgrades, challenges in attracting new paying users, potential damage from unauthorized data access or security breaches, and declining growth rates if new product initiatives (including AI) fail[97][100][105][112][113] - The business is vulnerable to general economic, political, and market conditions, intense competition, failure to adapt to rapid technological changes, and reliance on interoperability with third-party devices and applications[117][118][124][128] - Other risks involve service disruptions, dependence on key personnel, uncertainties of the Virtual First work model, limited outbound sales force, and challenges in international expansion[131][139][143][146][151] Financial Performance Risks Financial risks include declining revenue growth, potential for continued net losses, debt servicing challenges, and quarterly fluctuations from revenue recognition and foreign exchange - The company's revenue growth rate has declined and may continue to slow, and it has a history of net losses, with no guarantee of future profitability due to increasing expenses and investments[184][185][186] - Servicing convertible notes (2026 and 2028) requires significant cash flow, which may not be sufficient, and quarterly results can fluctuate significantly due to various factors[187][188] - Revenue recognition over subscription terms means downturns are not immediately reflected, and foreign currency exchange rate fluctuations can adversely affect reported results[192][193] Legal and Regulatory Compliance Risks Legal risks stem from U.S. and international laws (copyright, privacy, export controls), potentially leading to claims, fines, and increased operating costs - Dropbox is subject to various U.S. and international laws (copyright, content, consumer protection, anti-corruption, export controls) that could lead to claims, increased costs, or harm to the business[202][203][205][206] - Failure to comply with privacy, data protection, and information security laws (e.g., GDPR, CCPA, CPRA, DSA) could result in investigations, fines, litigation, and reputational harm[208][209][213][215] - Changes in internet access policies (e.g., net neutrality) or laws governing the internet could disrupt services and increase operating expenses[218][219][220] Class A Common Stock Ownership Risks Risks include stock price volatility, concentrated voting control by pre-IPO stockholders, and potential dilution from future stock sales - The trading price of Class A common stock may be volatile due to market fluctuations, company performance, analyst coverage, and competitive announcements[225] - The multi-class common stock structure concentrates voting control with pre-IPO stockholders, particularly Mr. Houston, limiting other stockholders' influence on corporate matters[228] - Future substantial sales of Class A common stock, including those from convertible notes, could depress the market price and dilute existing ownership interests[232][234] General Risk Factors General risks include catastrophic events, unexpected tax liabilities, and failure to maintain effective disclosure and internal financial controls - Catastrophic events (natural disasters, cyber-attacks, pandemics) could disrupt services, increase costs, and harm business operations[246][247] - Exposure to greater than anticipated tax liabilities, including changes in U.S. or foreign taxation, could adversely impact results of operations[248][249][250] - Failure to maintain effective disclosure controls and internal control over financial reporting could impair the ability to produce timely and accurate financial statements[251][252][253] Unresolved Staff Comments There are no unresolved staff comments to report - No unresolved staff comments[258] Cybersecurity Dropbox implements a comprehensive cybersecurity program, overseen by the Board, to manage risks including operational threats and privacy violations - Dropbox employs an enterprise risk management program, security and privacy reviews, vulnerability management, internal red team program, and threat intelligence to manage cybersecurity risks[259] - An incident response program is in place to prepare for, detect, respond to, and recover from cybersecurity incidents, with regular tabletop exercises and escalations to management[261] - The Board of Directors and Audit Committee are actively involved in overseeing cybersecurity risk management, with a cross-functional leadership team providing periodic reports[265][266] Risk Management and Strategy The company's cybersecurity strategy includes enterprise risk management, security reviews, vulnerability management, and threat intelligence programs - The company's cybersecurity risk management includes an enterprise risk management program, security and privacy reviews, vulnerability management, internal red team program, and threat intelligence program[259] - An incident response program is maintained for detection, response, and recovery from cybersecurity incidents, with regular testing and escalation processes[261] - External and internal audits (SOC-2, ISO 27001), penetration testing, and a bug bounty program supplement the risk management approach, along with a vendor risk management program[263] Governance Cybersecurity risk management is overseen by the Board and Audit Committee, supported by a cross-functional leadership team and employee training - The Board of Directors and Audit Committee oversee cybersecurity risk management, discussing programs and policies at least annually and quarterly, respectively[265] - A cross-functional leadership team, including the Chief Privacy Officer, VP Business Foundations, Head of Security, and Chief Legal Officer, oversees information security and privacy programs[266] - All employees are required to complete annual information security and privacy training and receive ongoing security awareness education[267] Properties Dropbox's headquarters are in San Francisco, with additional offices and datacenter co-location facilities across the US and Ireland - Corporate headquarters are in San Francisco, California, with other offices in Seattle, Washington, and Dublin, Ireland[268] - Datacenter co-location facilities are located in California, Oregon, Texas, and Virginia[268] Legal Proceedings Dropbox is involved in a patent infringement suit by Motion Offense, LLC, where a jury found in favor of Dropbox in May 2023, with a third related suit pending - Dropbox is a party to legal proceedings, including a patent infringement suit by Motion Offense, LLC, alleging infringement of multiple U.S. patents[270][271] - In May 2023, a jury found in favor of Dropbox on all counts, including non-infringement and invalidity of the patents, with no damages awarded to Motion Offense[272] - A third related patent infringement suit by Motion Offense is pending, which Dropbox believes is without merit[273] Mine Safety Disclosures This item is not applicable to Dropbox, Inc - Not applicable[276] Part II Market for Common Equity, Stockholder Matters & Equity Purchases Dropbox Class A common stock is listed on Nasdaq, with 730 holders of record, no cash dividends, and significant stock repurchases in 2023 - Dropbox Class A common stock has been listed on the Nasdaq Global Market under the symbol 'DBX' since March 23, 2018[278] Holders of Record | Metric | Value (as of Feb 12, 2024) | | :--------------------- | :--------------------------- | | Holders of Record | 730 | - The company has never declared or paid cash dividends and intends to retain future earnings to finance operations, expansion, and stock repurchase programs[280][244] Issuer Purchases of Equity Securities (Q4 2023) | Period | Total Shares Purchased (millions) | Average Price Paid per Share ($) | | :---------------- | :-------------------------------- | :------------------------------- | | October 1 - 31 | 1.38 | 27.17 | | November 1 - 30 | 1.41 | 26.99 | | December 1 - 31 | 1.10 | 29.04 | | Total (Q4 2023) | 3.89 | 27.64 | Share Repurchase Program: | Authorization Date | Amount Authorized | | :----------------- | :---------------- | | Feb 2022 | $1.2 billion | | July 2023 | Additional $1.2 billion | 2023 Repurchases: | Shares Repurchased | Aggregate Amount | | :----------------- | :--------------- | | 22.7 million | $542.8 million | Market Information for Class A Common Stock Dropbox Class A common stock has been listed on the Nasdaq Global Market under 'DBX' since March 23, 2018 - Dropbox Class A common stock has been listed on the Nasdaq Global Market under the symbol 'DBX' since March 23, 2018[278] Holders of Record As of February 12, 2024, there were 730 holders of record for Class A and Class B common stock Holders of Record | Metric | Value (as of Feb 12, 2024) | | :--------------------- | :--------------------------- | | Holders of Record | 730 | Dividend Policy Dropbox has never declared cash dividends and intends to retain future earnings for operations, expansion, and stock repurchases - Dropbox has never declared or paid cash dividends and intends to retain future earnings to finance operations and expansion, and fund its stock repurchase program[280][244] Issuer Purchases of Equity Securities In Q4 2023, Dropbox repurchased 3.89 million shares for $107.5 million, and 22.7 million shares for $542.8 million in 2023 Issuer Purchases of Equity Securities (Q4 2023): | Period | Total Shares Purchased (millions) | Average Price Paid per Share ($) | | :---------------- | :-------------------------------- | :------------------------------- | | October 1 - 31 | 1.38 | 27.17 | | November 1 - 30 | 1.41 | 26.99 | | December 1 - 31 | 1.10 | 29.04 | | Total (Q4 2023) | 3.89 | 27.64 | Share Repurchase Program: | Authorization Date | Amount Authorized | | :----------------- | :---------------- | | Feb 2022 | $1.2 billion | | July 2023 | Additional $1.2 billion | 2023 Repurchases: | Shares Repurchased | Aggregate Amount | | :----------------- | :--------------- | | 22.7 million | $542.8 million | Stock Performance Graph The report includes a stock performance graph comparing Class A common stock against market indices from March 2018 to December 2023 - The report includes a stock performance graph comparing the cumulative total stockholder return of Class A common stock against the S&P 500 Index and Nasdaq Computer Index from March 23, 2018, through December 31, 2023[285] Unregistered Sales of Equity Securities There were no unregistered sales of equity securities to report - There were no unregistered sales of equity securities[286] [Reserved] This item is reserved and contains no information - This item is reserved[287] Management's Discussion and Analysis of Financial Condition and Results of Operations This section reviews Dropbox's financial condition, operations, business model, key metrics, and accounting estimates, comparing 2023 and 2022 performance - Dropbox's business model focuses on driving new signups, increasing conversion to paid plans via self-serve channels (over 90% of revenue), and upgrading/expanding existing customers with premium offerings and additional products like Dropbox Sign, DocSend, and FormSwift[298][299][300] - Macroeconomic headwinds in 2023 impacted Teams plans and acquired businesses (FormSwift, DocSend, Dropbox Sign) due to customer prudence and price sensitivity, while Individual plans showed strength[301][302] Key Business Metrics (YoY Change) | Metric (as of Dec 31) | 2023 Value | 2022 Value | Change ($M / % / M) | | :--------------------- | :--------- | :--------- | :------------------- | | Total ARR ($M) | $2,523 | $2,514 | +$9 (+0.4%) | | Paying Users (M) | 18.12 | 17.77 | +0.35 (+2.0%) | | ARPU ($) | $139.38 | $134.51 | +$4.87 (+3.6%) | Free Cash Flow (FCF) Reconciliation | Metric (in millions) | 2023 | 2022 | | :------------------------------- | :----- | :----- | | Net cash provided by operating activities | $783.7 | $797.3 | | Capital expenditures | $(24.3)| $(33.8)| | Free cash flow | $759.4| $763.5| Overview Dropbox provides a cloud-based platform for digital content creation, access, and sharing, serving over 700 million registered users globally - Dropbox provides a cloud-based platform for businesses and individuals to create, access, and share digital content, serving over 700 million registered users across approximately 180 countries[289] - The company has expanded from file synchronization to team synchronization, focusing on reducing 'work about work' and has 18.12 million paying users[290] Our Subscription Plans Dropbox offers diverse subscription plans for individuals and teams, with pricing based on licenses and some on transaction volume - Dropbox offers various subscription plans for individuals (Plus, Professional, Essentials, Family) and teams (Standard, Advanced, Business, Business Plus, Enterprise), with pricing based on licenses and some on transaction volume (Dropbox Sign)[291][292][293][295][297] - Customers can choose annual or monthly plans, with a majority opting for annual plans, though monthly plan adoption has increased[291] - Acquired services like FormSwift (cloud-based forms) and DocSend (secure document sharing and analytics) also offer paid subscription plans, primarily in the U.S. and billed in advance[294][295][296] Our Business Model The business model leverages viral growth to attract free users, converting them to paid plans and encouraging upgrades through self-serve channels - The business model relies on viral growth through word-of-mouth and content sharing to drive new signups for free accounts[298] - Over 90% of revenue comes from self-serve channels, with strategies to convert registered users to paid plans and encourage existing customers to upgrade or expand their subscriptions[299][300] Recent Developments Recent developments include macroeconomic impacts on Teams plans, a 16% workforce reduction, and a significant gain from a partial lease termination - Macroeconomic factors in 2023, including rising interest rates and banking sector volatility, impacted Teams plans and acquired businesses (FormSwift, DocSend, Dropbox Sign) due to cautious spending and price sensitivity, while Individual plans remained strong[301][302] - In April 2023, a 16% global workforce reduction incurred $39.3 million in severance and related expenses to streamline operations for long-term growth and profitability[305] - The Virtual First work model led to a $158.8 million gain in Q4 2023 from a partial lease termination for the San Francisco headquarters, offsetting $3.6 million in impairment charges for real estate assets in 2023 (compared to $175.2 million in 2022)[307][308] Key Business Metrics Key business metrics include Total ARR, Paying Users, and ARPU, which are influenced by subscription mix, acquisitions, and macroeconomic factors Total Annual Recurring Revenue (ARR) | Metric (as of Dec 31) | 2023 ($M) | 2022 ($M) | YoY Change ($M) | | :--------------------- | :-------- | :-------- | :-------------- | | Total ARR | $2,523 | $2,514 | +$9 | | Total ARR (Constant Currency) | $2,540 | $2,430 | +$110 | - Total ARR increased due to a higher mix of sales from higher-priced subscription plans, but was negatively impacted by foreign currency exchange rates in 2023[314] - ARR declined in Q4 2023 compared to Q3 2023 due to deprecation of the 'as much space as you need' policy for Advanced plans, challenging macro environment, and seasonality[311] Paying Users | Metric (as of Dec 31) | 2023 (millions) | 2022 (millions) | YoY Change (millions) | | :--------------------- | :-------------- | :-------------- | :-------------------- | | Paying users | 18.12 | 17.77 | +0.35 | - Paying user growth in 2023 was driven by self-serve channels and FormSwift acquisition, but the overall growth rate has declined and may continue to do so[320] - Paying users declined in Q4 2023 compared to Q3 2023 primarily due to reduced prominence of the Family plan and expected seasonality[321] Average Revenue Per Paying User (ARPU) | Metric (Year Ended Dec 31) | 2023 ($) | 2022 ($) | YoY Change ($) | | :------------------------- | :------- | :------- | :------------- | | ARPU | $139.38 | $134.51 | +$4.87 | - ARPU increased in 2023 due to a higher mix of sales from higher-priced subscription plans and the FormSwift acquisition, partially offset by Family Plan growth (lower price per user) and unfavorable foreign exchange rates[326] Non-GAAP Financial Measure: Free Cash Flow Free Cash Flow (FCF) is a liquidity measure, defined as net cash from operating activities less capital expenditures, which decreased in 2023 due to workforce reduction payments - Free Cash Flow (FCF) is defined as GAAP net cash provided by operating activities less capital expenditures, serving as a liquidity measure[330] Free Cash Flow (FCF) Reconciliation | Metric (in millions) | 2023 | 2022 | | :------------------------------- | :----- | :----- | | Net cash provided by operating activities | $783.7 | $797.3 | | Capital expenditures | $(24.3)| $(33.8)| | Free cash flow | $759.4| $763.5| - FCF decreased in 2023 compared to 2022 primarily due to payments related to the workforce reduction[331] Components of Our Results of Operations This section details revenue recognition, cost of revenue, operating expenses, real estate gains/losses, interest, other income, and income taxes - Revenue is recognized ratably over subscription terms, primarily from self-serve channels, and is influenced by paying user growth and ARPU[334][335][336][337] - Cost of revenue includes infrastructure costs (depreciation, rent, network, support), employee-related costs, credit card fees, and amortization of developed technologies[338] - Operating expenses comprise Research and Development (employee costs, hosting fees), Sales and Marketing (employee costs, advertising, app store fees, deferred commissions), and General and Administrative (employee costs, legal, finance, professional fees)[341][344][346] - Net (gain) loss on real estate assets includes gains from lease terminations and impairment charges related to the Virtual First strategy[348] - Interest income (expense), net, primarily consists of interest on investments and finance lease obligations, while Other (loss) income, net, includes non-operating gains/losses and foreign currency transactions[349][350] - Income taxes are influenced by jurisdictional mix of earnings, tax credits, state income taxes, and changes in valuation allowances on deferred tax assets[351] Results of Operations (2023 vs. 2022) This section presents a comparative analysis of consolidated statements of operations for 2023 and 2022, highlighting revenue, gross profit, operating expenses, and net income Consolidated Statements of Operations (in millions) | Metric | 2023 | 2022 | Change ($M) | Change (%) | | :------------------------- | :-------- | :-------- | :---------- | :--------- | | Revenue | $2,501.6 | $2,324.9 | +$176.7 | +7.6% | | Cost of revenue | $478.5 | $444.2 | +$34.3 | +7.7% | | Gross profit | $2,023.1 | $1,880.7 | +$142.4 | +7.6% | | Gross margin | 81% | 81% | 0% | 0% | | Research and development | $936.5 | $891.9 | +$44.6 | +5.0% | | Sales and marketing | $466.0 | $409.4 | +$56.6 | +13.8% | | General and administrative | $237.1 | $222.9 | +$14.2 | +6.4% | | Net (gain) loss on real estate assets | $(155.2) | $175.2 | $(330.4) | (189)% | | Income from operations | $538.7 | $181.3 | +$357.4 | +197.1% | | Interest income (expense), net | $19.4 | $3.3 | +$16.1 | +487.9% | | Other (loss) income, net | $(3.7) | $8.1 | $(11.8) | (145.7)% | | Income before income taxes | $554.4 | $192.7 | +$361.7 | +187.7% | | (Provision for) benefit from income taxes | $(100.8) | $360.5 | $(461.3) | (127.9)% | | Net income | $453.6 | $553.2 | $(99.6) | (18.0)% | - Net income decreased by 18.0% in 2023, primarily due to a one-time tax benefit of $420.2 million in 2022 from the release of a valuation allowance on deferred tax assets, despite a significant increase in income from operations in 2023[353][366] Liquidity and Capital Resources Dropbox finances operations through cash generation, convertible notes, and a revolving credit facility, with cash primarily used for operations and stock repurchases Cash, Cash Equivalents, and Short-Term Investments (as of Dec 31, 2023) | Metric (in millions) | 2023 | 2022 | | :------------------------- | :----- | :----- | | Cash and cash equivalents | $614.9 | $232.8 | | Short-term investments | $741.1 | $1,110.6| | Foreign subsidiaries cash | $362.7 | N/A | - Operations are financed through cash generation, convertible senior notes ($1.4 billion issued in 2021), equity issuances, and finance leases. A $500.0 million revolving credit facility provides additional flexibility[368][369][371] - Principal uses of cash include funding operations, repurchasing Class A common stock ($542.8 million in 2023), purchasing short-term investments, and satisfying tax withholding obligations for equity awards[370] Cash Flow Activities (in millions) | Cash Flow Type | 2023 | 2022 | | :------------------------- | :----- | :----- | | Operating activities | $783.7 | $797.3 | | Investing activities | $395.2 | $(48.5)| | Financing activities | $(799.2)| $(1,041.8)| | Effect of exchange rate changes | $2.4 | $(7.2) | | Net increase (decrease) in cash | $382.1 | $(300.2)| | Cash & cash equivalents - end of period | $614.9 | $232.8 | Significant Impacts of Stock-Based Compensation The Co-Founder Grant of 10.3 million RSAs to CEO Drew Houston has service, market, and performance-based vesting conditions over ten years - The Co-Founder Grant of 10.3 million Class A common stock RSAs to CEO Drew Houston in December 2017 has service-based, market-based, and performance-based vesting conditions over a ten-year period[388][389] - The first tranche (2.1 million shares) vested in Q4 2021. Stock-based compensation expense for the grant is recognized using the accelerated attribution method[391] Co-Founder Grant Stock-Based Compensation Expense (in millions) | Year Ended Dec 31 | Expense | | :---------------- | :------ | | 2023 | $9.4 | | 2022 | $11.7 | Critical Accounting Estimates Critical accounting estimates include lease liabilities remeasurement, particularly a $158.8 million gain from a lease termination, and income tax valuation allowances - Critical accounting estimates include the remeasurement of lease liabilities and valuation of right-of-use assets, particularly after the partial termination of the San Francisco headquarters lease, which resulted in a $158.8 million gain in Q4 2023[394][395] - Income taxes involve significant judgment in assessing deferred tax asset realizability and valuation allowances. A $420.2 million tax benefit was recognized in 2022 from releasing a valuation allowance on U.S. federal and state deferred tax assets[400][401][516] Change in Accounting Estimate Effective Q1 2024, the useful lives of certain infrastructure server assets will increase from four to five years, favorably impacting 2024 operating income by $30.5 million - Effective Q1 2024, the useful lives of certain infrastructure server and component assets will increase from four to five years due to technological advancements, expected to favorably impact cost of revenue and operating income by approximately $30.5 million in fiscal year 2024[402] Recent Accounting Pronouncements Dropbox adopted ASU 2022-02 with no material impact and is evaluating ASU 2023-07 and ASU 2023-09 for future impact - The company adopted ASU 2022-02 (Troubled Debt Restructurings and Vintage Disclosures) on January 1, 2023, with no material impact. It is evaluating ASU 2023-07 (Segment Reporting) and ASU 2023-09 (Income Tax Disclosures) for future impact[523][524][526][527] Quantitative and Qualitative Disclosures About Market Risk Dropbox faces market risks from interest rate fluctuations on investments and foreign currency exchange rates, with 27% of 2023 sales non-USD denominated - Dropbox's investment portfolio (cash, cash equivalents, short-term investments) is subject to interest rate risk. A hypothetical 100 basis point increase in interest rates would reduce the market value by $7.9 million as of December 31, 2023[404][406] - The company is exposed to foreign currency exchange risk, as 27% of 2023 sales were non-U.S. dollar denominated, primarily in Euros, British pounds sterling, Australian dollars, Canadian dollars, and Japanese yen[407][409] - Net foreign currency transaction losses were $3.2 million in 2023, compared to gains of $0.2 million in 2022. The company does not currently hedge against foreign currency exposures[410][411] Interest Rate Risk Dropbox's investment portfolio is exposed to interest rate risk, with a hypothetical 100 basis point increase reducing its market value by $7.9 million - Dropbox holds $614.9 million in cash and cash equivalents and $741.1 million in short-term investments, primarily in money market funds, corporate notes, and U.S. Treasury securities, for working capital[404] - A hypothetical 100 basis point increase in interest rates would result in a $7.9 million reduction in the market value of the investment portfolio as of December 31, 2023[406] - The company has no outstanding amounts under its revolving credit facility, which bears variable interest, and no other long-term debt with floating interest rates[405] Foreign Currency Exchange Risk Dropbox is exposed to foreign currency fluctuations, as 27% of 2023 sales were non-U.S. dollar denominated, impacting revenue and costs - Dropbox's results are subject to foreign currency fluctuations, with 27% of 2023 sales denominated in non-U.S. dollar currencies (Euro, British pound sterling, Australian dollar, Canadian dollar, Japanese yen)[407][409] - Expenses are primarily U.S. dollar denominated, so a stronger U.S. dollar can decrease revenue relative to costs, impacting margins[409] Net Foreign Currency Transaction Gains (Losses) (in millions) | Year Ended Dec 31 | Amount | | :---------------- | :----- | | 2023 | $(3.2) | | 2022 | $0.2 | Financial Statements and Supplementary Data This section presents Dropbox's audited consolidated financial statements and notes, with an unqualified opinion from Ernst & Young LLP on financials and internal controls - Ernst & Young LLP issued an unqualified opinion on Dropbox's consolidated financial statements for the period ended December 31, 2023, and on the effectiveness of internal control over financial reporting[417][418][433] - Critical audit matters identified were revenue from contracts with customers (due to high volume, low-value transactions and system dependency) and the gain from remeasurement of operating lease liability (due to judgmental assumptions in allocating consideration)[422][423][426][427] Consolidated Balance Sheet Highlights (in millions) | Metric (as of Dec 31) | 2023 | 2022 | | :-------------------- | :-------- | :-------- | | Total Assets | $2,983.5 | $3,110.1 | | Total Liabilities | $3,149.3 | $3,419.5 | | Total Stockholders' Deficit | $(165.8) | $(309.4) | Consolidated Statements of Operations Highlights (in millions) | Metric (Year Ended Dec 31) | 2023 | 2022 | 2021 | | :------------------------- | :-------- | :-------- | :-------- | | Revenue | $2,501.6 | $2,324.9 | $2,157.9 | | Gross profit | $2,023.1 | $1,880.7 | $1,713.7 | | Income from operations | $538.7 | $181.3 | $274.4 | | Net income | $453.6 | $553.2 | $335.8 | | Basic net income per share | $1.33 | $1.53 | $0.87 | | Diluted net income per share | $1.31 | $1.52 | $0.85 | Report of Independent Registered Public Accounting Firm (Opinion on Financial Statements) Ernst & Young LLP issued an unqualified opinion on Dropbox's consolidated financial statements, which fairly present its financial position and results - Ernst & Young LLP provided an unqualified opinion that the consolidated financial statements for Dropbox, Inc. as of December 31, 2023 and 2022, and for the three years ended December 31, 2023, present fairly, in all material respects, the financial position and results of operations in conformity with U.S. GAAP[417] - Critical audit matters included the Company's accounting for revenue from contracts with customers due to high volume, low-monetary-value transactions and system dependency, and the gain from remeasurement of operating lease liability due to judgmental assumptions in allocating consideration[422][423][426][427] Report of Independent Registered Public Accounting Firm (Opinion on Internal Control Over Financial Reporting) Ernst & Young LLP issued an unqualified opinion on the effectiveness of Dropbox's internal control over financial reporting as of December 31, 2023 - Ernst & Young LLP issued an unqualified opinion that Dropbox, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2023, based on the COSO criteria[433] Consolidated Balance Sheets This section presents the consolidated balance sheets for Dropbox as of December 31, 2023 and 2022, detailing assets, liabilities, and stockholders' deficit Consolidated Balance Sheet (in millions) | Metric (as of Dec 31) | 2023 | 2022 | | :-------------------- | :-------- | :-------- | | Cash and cash equivalents | $614.9 | $232.8 | | Short-term investments | $741.1 | $1,110.6 | | Total current assets | $1,516.6 | $1,489.8 | | Property and equipment, net | $309.2 | $308.4 | | Operating lease right-of-use asset | $183.8 | $260.6 | | Intangible assets, net | $58.1 | $88.3 | | Goodwill | $402.2 | $403.3 | | Deferred tax assets | $460.4 | $498.7 | | Total Assets | $2,983.5 | $3,110.1 | | Total current liabilities | $1,201.5 | $1,196.5 | | Operating lease liability, non-current | $310.7 | $585.2 | | Finance lease obligation, non-current | $168.5 | $151.7 | | Convertible senior notes, net, non-current | $1,377.8 | $1,374.0 | | Total Liabilities | $3,149.3 | $3,419.5 | | Total Stockholders' Deficit | $(165.8) | $(309.4) | Consolidated Statements of Operations This section provides the consolidated statements of operations for the years ended December 31, 2023, 2022, and 2021, detailing revenue, expenses, and net income Consolidated Statements of Operations (in millions, except per share data) | Metric (Year Ended Dec 31) | 2023 | 2022 | 2021 | | :------------------------- | :-------- | :-------- | :-------- | | Revenue | $2,501.6 | $2,324.9 | $2,157.9 | | Cost of revenue | $478.5 | $444.2 | $444.2 | | Gross profit | $2,023.1 | $1,880.7 | $1,713.7 | | Research and development | $936.5 | $891.9 | $755.9 | | Sales and marketing | $466.0 | $409.4 | $427.5 | | General and administrative | $237.1 | $222.9 | $224.6 | | Net (gain) loss on real estate assets | $(155.2) | $175.2 | $31.3 | | Total operating expenses | $1,484.4 | $1,699.4 | $1,439.3 | | Income from operations | $538.7 | $181.3 | $274.4 | | Interest income (expense), net | $19.4 | $3.3 | $(5.2) | | Other (loss) income, net | $(3.7) | $8.1 | $30.1 | | Income before income taxes | $554.4 | $192.7 | $299.3 | | (Provision for) benefit from income taxes | $(100.8) | $360.5 | $36.5 | | Net income | $453.6 | $553.2 | $335.8 | | Basic net income per share | $1.33 | $1.53 | $0.87 | | Diluted net income per share | $1.31 | $1.52 | $0.85 | Consolidated Statements of Comprehensive Income This section presents the consolidated statements of comprehensive income for the years ended December 31, 2023, 2022, and 2021 Consolidated Statements of Comprehensive Income (in millions) | Metric (Year Ended Dec 31) | 2023 | 2022 | 2021 | | :------------------------- | :----- | :----- | :----- | | Net income | $453.6 | $553.2 | $335.8 | | Change in foreign currency translation adjustments | $0.2 | $(7.1) | $(0.6) | | Change in net unrealized gains and (losses) on short-term investments | $27.2 | $(39.2)| $(12.9)| | Total other comprehensive income (loss) | $27.4 | $(46.3)| $(13.5)| | Comprehensive income | $481.0 | $506.9 | $322.3 | Consolidated Statements of Stockholders' (Deficit) Equity This section presents the consolidated statements of stockholders' (deficit) equity for the years ended December 31, 2023, 2022, and 2021 Consolidated Statements of Stockholders' (Deficit) Equity (in millions) | Metric (as of Dec 31) | 2023 | 2022 | 2021 | | :-------------------- | :-------- | :-------- | :-------- | | Additional paid-in-capital | $2,598.0 | $2,511.6 | $2,448.1 | | Accumulated deficit | $(2,742.3)| $(2,772.1)| $(2,739.4)| | Accumulated other comprehensive loss | $(21.5) | $(48.9) | $(2.6) | | Total stockholders' deficit | $(165.8) | $(309.4) | $(293.9) | - The company's accumulated deficit decreased from $(2,772.1) million in 2022 to $(2,742.3) million in 2023, reflecting net income for the period[449] Consolidated Statements of Cash Flows This section presents the consolidated statements of cash flows for the years ended December 31, 2023, 2022, and 2021 Consolidated Statements of Cash Flows (in millions) | Cash Flow Type (Year Ended Dec 31) | 2023 | 2022 | 2021 | | :--------------------------------- | :----- | :----- | :----- | | Net cash provided by operating activities | $783.7 | $797.3 | $729.8 | | Net cash provided by (used in) investing activities | $395.2 | $(48.5)| $(524.8)| | Net cash used in financing activities | $(799.2)| $(1,041.8)| $16.2 | | Effect of exchange rate changes on cash and cash equivalents | $2.4 | $(7.2) | $(3.1) | | Net increase (decrease) in cash and cash equivalents | $382.1 | $(300.2)| $218.1 | | Cash and cash equivalents - end of period | $614.9 | $232.8 | $533.0 | Notes to Consolidated Financial Statements These notes detail significant accounting policies, cash and investments, business combinations, debt, lease obligations, and income taxes - Note 1 details business description, basis of presentation, use of estimates (including a change in accounting estimate for useful lives of infrastructure assets from 4 to 5 years effective 2024), and significant accounting policies like revenue recognition and stock-based compensation[454][455][457][458][459][464][470] - Note 2 provides details on cash, cash equivalents, and short-term investments, including fair value measurements and unrealized losses, noting that management does not intend to sell these securities prior to anticipated recovery[528][534] - Note 5 outlines business combinations, specifically the acquisition of FormSwift in 2022 for $68.9 million and DocSend in 2021 for $131.8 million, detailing purchase consideration and allocation to assets and goodwill[545][546][547][553][554][555] - Note 8 details the company's debt, including a $500.0 million revolving credit facility (unused as of Dec 31, 2023) and $1.4 billion in 0% convertible senior notes due 2026 and 2028, along with related convertible note hedges and warrants[562][566][582][586] - Note 9 discusses lease obligations, including operating leases for offices and datacenters and finance leases for equipment. A partial termination of the San Francisco headquarters lease in Q4 2023 resulted in a $158.8 million gain[590][591][592][599][601] - Note 14 covers income taxes, including deferred tax assets and liabilities, valuation allowances, and a $420.2 million tax benefit in 2022 from the release of a valuation allowance on U.S. federal and state deferred tax assets[635][638][516] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure There have been no changes in or disagreements with accountants on accounting and financial disclosure - None to report[652] Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2023, with no material changes - Disclosure controls and procedures were evaluated and deemed effective at a reasonable assurance level as of December 31, 2023[652] - Management concluded that internal control over financial reporting was effective as of December 31, 2023, with an unqualified audit opinion from Ernst & Young LLP[654][655] - No material changes in internal control over financial reporting occurred during the quarter ended December 31, 2023[656] - The report acknowledges that control systems have inherent limitations and cannot prevent all errors or fraud[657] Evaluation of Disclosure Controls and Procedures Management, including the CEO and CFO, concluded that disclosure controls and procedures were effective at a reasonable assurance level - Management, with CEO and CFO participation, evaluated the effectiveness of disclosure controls and procedures as of December 31, 2023, concluding they were effective at a reasonable assurance level[652] Management's Report on Internal Control Over Financial Reporting Management concluded that internal control over financial reporting was effective as of December 31, 2023, as audited by Ernst & Young LLP - Management is responsible for maintaining effective internal control over financial reporting and concluded it was effective as of December 31, 2023, based on the COSO framework[653][654] - Ernst & Young LLP audited and issued an unqualified opinion on the effectiveness of internal control over financial reporting[655] Changes in Internal Control Over Financial Reporting No material changes in internal control over financial reporting occurred during the quarter ended December 31, 2023 - No material changes in internal control over financial reporting occurred during the quarter ended December 31, 2023[656] Inherent Limitations on Effectiveness of Disclosure Controls and Procedures Management acknowledges that control systems have inherent limitations and may not prevent all errors or fraud - Management acknowledges that control systems provide only reasonable, not absolute, assurance and may not prevent all errors or fraud due to inherent limitations like faulty judgment, simple errors, collusion, or management override[657] Other Information CEO Andrew Houston adopted a Rule 10b5-1 trading arrangement on December 5, 2023, for the sale of Class A and Class B common shares - On December 5, 2023, CEO Andrew Houston adopted a Rule 10b5-1 trading arrangement to sell up to 8,266,666 Class A common shares (from restricted stock awards) and 3,100,000 Class B common shares[659] - The trading arrangement is intended to satisfy the affirmative defense in Rule 10b5-1(c) and is effective until February 28, 2025, or earlier if all transactions are completed[659] Securities Trading Plans of Directors and Executive Officers CEO Andrew Houston adopted a Rule 10b5-1 trading arrangement for the sale of Class A and Class B common shares, effective until February 28, 2025 - CEO Andrew Houston adopted a Rule 10b5-1 trading arrangement on December 5, 2023, for the sale of up to 8,266,666 Class A common shares (subject to restricted stock awards) and 3,100,000 Class B common shares[659] - The trading arrangement is set to conclude by February 28, 2025, or upon the completion of all transactions[659] Disclosure Regarding Foreign Jurisdictions that Prevent Inspections This item is not applicable to Dropbox, Inc - Not applicable[661] Part III Directors, Executive Officers and Corporate Governance Information for this item is incorporated by reference from the definitive Proxy Statement for the 2024 Annual Meeting of Stockholders - Information is incorporated by reference from the 2024 Proxy Statement[662] Executive Compensation Information for this item is incorporated by reference from the definitive Proxy Statement relating to the 2024 Annual Meeting of Stockholders - Information is incorporated by reference from the 2024 Proxy Statement[663] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information for this item is incorporated by reference from the definitive Proxy Statement relating to the 2024 Annual Meeting of Stockholders - Information is incorporated by reference from the 2024 Proxy Statement[664] Certain Relationships and Related Transactions, and Director Independence Information for this item is incorporated by reference from the definitive Proxy Statement relating to the 2024 Annual Meeting of Stockholders - Information is incorporated by reference from the 2024 Proxy Statement[665] Principal Accountant Fees and Services Information for this item is incorporated by reference from the definitive Proxy Statement relating to the 2024 Annual Meeting of Stockholders - Information is incorporated by reference from the 2024 Proxy Statement[666] Part IV Exhibits, Financial Statement Schedules This section lists financial statements, schedules, and exhibits filed as part of this Annual Report on Form 10-K, with some incorporated by reference - Consolidated Financial Statements are listed in Part II, Item 8 of this Annual Report on Form 10-K[668] - All other financial statement schedules are omitted as the information is either not required or already presented in the consolidated financial statements or notes[669] - Exhibits are listed in the Exhibit Index and are either incorporated by reference or filed with this Annual Report on Form 10-K[670] Form 10-K Summary This item indicates that no Form 10-K Summary is provided - No Form 10-K Summary is provided[676]