Thank you for standing by. Welcome to the Q1 2026 Dropbox Earnings Conference Call. At this time, all participants are in a listen-only mode. Please be advised that today's conference is being recorded. After the speaker's presentation, there will be a question-and-answer session to ask a question please press star one one and wait for your name to be announced, to withdraw your question press star one one again. I would now like to hand the conference over to your speaker today, Sarah Schubach, Chief Accounting Officer and Head of Investor Relations.
Good afternoon, and welcome to Dropbox's first quarter 2026 earnings call. As a reminder, we will discuss non-GAAP financial measures on this call. Definitions and reconciliations between our GAAP and non-GAAP results can be found in our earnings release and our earnings presentation posted on our IR website at investors.dropbox.com. We will also make forward-looking statements on this call, including statements about our future outlook for our second quarter and fiscal year 2026, as well as our expectations regarding our business, assets, strategies, and the macroeconomic environment. Such statements are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those described. Many of those risks and uncertainties are described in our SEC filings, including our most recent report on Form 10-K and forthcoming report on Form 10-Q.
Forward-looking statements represent our beliefs and assumptions only as of the date such statements are made. We disclaim any obligation to update any forward-looking statements except as required by law. I will now turn the call over to Dropbox's CEO and Co-Founder, Drew Houston.
Thanks, Sarah. Good afternoon, everyone. Welcome to our Q1 2026 earnings call. Joining me today is Ross Tennenbaum, our Chief Financial Officer. I'll start with our business and product highlights from the quarter. Then Ross will review our Q1 financial results and our outlook. Let's get started. We delivered a strong start to the year, exceeding the high end of our guidance across revenue and operating margin with year-over-year revenue growth of 2%, excluding FormSwift, and unlevered free cash flow margin of 38%. On our Q4 call, I said that our goal in the Core business is not just to maintain it but to bend the curve back towards sustainable growth. I continue to be very impressed by Ashraf Alkarmi, who we hired in 2024 to lead our entire Core business.
Ashraf's an outstanding leader who's built a strong and talented bench. Together they've been rapidly improving the Core business to drive sustainable growth. Last quarter, we saw steady growth across our individuals business as a result of the C ore team's consistent execution and their focused strategy alongside funnel and product quality improvements to stabilize the team's business with the ultimate goal of positive net license growth. We're encouraged by our Q1 performance as we continue to build on that momentum. With that, I'll turn to the key drivers within the Core business. Within individuals, retention remains an important near-term revenue lever. In Q1, we continued to focus on targeted retention interventions, including improvements to prompts for mobile users, loss aversion messaging, and targeted price promotions for recently canceled customers.
Given the growth of mobile as a purchasing channel, we were encouraged to see that these efforts drove our mobile churn rate down mid-single-digit percentage points. We also made progress monetizing basic users through targeted promotions for additional storage, driving a 50% improvement in conversion among those targeted users nearing or exceeding their storage limits. For teams, one of the clearest signals we're seeing is that practical funnel improvements can drive meaningful results. In Q1, that included continued progress on pricing and packaging simplification, a more unified checkout experience, credit card trials, and onboarding and activation improvements. We also continued to make foundational improvements to the Core FSS experience. We strengthened the reliability, performance, and scalability of sync and uploads. We made the experience simpler and more intuitive across desktop, web, and mobile, and we're testing new media collaboration tools with streamlined review workflows, leveraging our AI-powered tools.
Taken together, these results reinforce our view that there are still meaningful levers inside the Core business to steadily improve its long-term trajectory, and that the changes we're making are starting to show up more clearly in our results. Now on to Dash. Dash and Dropbox represents our evolution from file storage to AI-powered content management. We're bringing together customers' content from across Dropbox and other major cloud apps into a single content-forward experience, making it easier to find, organize, and share work wherever it lives. With semantic search, AI-powered organization, and stacks for curation and sharing, Dash extends Dropbox from a file system into a system for all your cloud content. This direction offers a more seamless product experience and upgrade path with Dash for our existing base rather than a separate surface for customers to adjust to or learn about.
In Q1, we expanded the rollout of Dash and Dropbox and plan to significantly expand access to our base throughout the remainder of 2026. While adoption is still early, we're encouraged by repeat engagement with Dash's AI features, with more than 30% of weekly engaged users using those features again the following week and more than 50% of monthly engaged users using them again the following month. We're seeing stable retention patterns even as we expand beyond our initial target customers and we onboard new cohorts. Dash inside Dropbox will increasingly be our primary vehicle for scaling AI across Dropbox. As we've shared previously, we've also been evolving our standalone experience for customers who don't use Dropbox today.
That work has helped us refine our onboarding and activation and new features, unlocking future greenfield growth opportunities. Dash is differentiated by its ability to bring together deep business context across work content and cloud apps, paired with core AI capabilities like search and chat. To support this, we've built what we call our context engine, which is our proprietary AI infrastructure that gathers context across all your contents and apps and connects it to leading AI models to enable faster, more accurate, and more useful results. As we've expanded access, we're seeing the strongest momentum when these capabilities are integrated directly into the core Dropbox experience. As a result, we're prioritizing bringing Dash learnings and AI features into existing Dropbox surfaces. This approach improves the customer experience while also increasing focus and efficiency across our teams.
We're also increasingly excited by the signal we're seeing in our emerging data security solution, which we call Dropbox Protect. As AI adoption grows, so does concern around governance, visibility, and control, and we're seeing that demand resonate clearly with IT and security buyers. That's why Protect fits naturally into our broader platform story. The same indexing and context engine we're building to improve search and knowledge work can also improve security posture and governance. In other words, our platform investment supports both productivity and protection. Over time, that has the potential to expand our addressable market and strengthen the return on the broader platform work we're already doing as we seek to position Dropbox as a leading provider that can help customers find, organize, share, and protect their content in one place.
To wrap up, Q1 was an encouraging step in our effort to bend the curve in Core. In Dash and Protect, we're continuing to see healthy customer signal and learnings to reinforce our conviction in the opportunity ahead. With that, I'll turn it over to Ross.
Thank you, Drew. Q1 was a strong quarter with important proof points for the thesis I laid out on my first earnings call. Last quarter, I told you that what ultimately drew me to Dropbox was the strength of the foundation and my belief in our growth opportunities. While our North Star is to grow free cash flow per share, restoring revenue growth remains our top priority in the near term. I pointed to the caliber of our new Core leadership team, led by Ashraf Alkarmi, and the untapped potential I saw across Core, Dash, and our broader capital allocation strategy. This quarter, we saw tangible evidence that those opportunities are real. Excluding FormSwift, revenue grew 200 basis points year-over-year. We also expanded our paying user base, maintained bottom-line discipline, and improved cash flow generation. Now turning to the Core business.
As we have been discussing, our work in Core is centered on driving sustainable growth. Those efforts include a range of initiatives to improve customer lifecycle metrics while also evolving the product to deliver more value to both new and existing customers. We saw additional proof points of that work in Q1. As Drew noted, we saw encouraging strength in both retention and conversion across the business. In individuals, targeted retention interventions and monetization efforts delivered improvement, while on teams, pricing and packaging, checkout, and onboarding changes continued to improve funnel performance. Excluding FormSwift, Core trends improved year-over-year, and paying users increased sequentially. Taken together, these results further increase our confidence that we are stabilizing Core and moving it toward a position of sustainable growth.
We also expanded the cohort of customers using Dash and Dropbox and continue to see encouraging engagement from those users, even though overall exposure remains limited today. We are continuing to bring Dash and core Dropbox features together into a more AI-forward product experience that we believe will create meaningful additional value for customers over time. We remain focused on a phased rollout of Dash and Dropbox across our team's customer base throughout 2026. To recap, the foundation I described last quarter is proving durable, and the growth opportunities I identified, while still early, are beginning to materialize. That's exactly the trajectory I came here to help build. With that context, let me turn to our financial results. Unless otherwise indicated, all income statement figures mentioned are non-GAAP and exclude stock-based compensation, amortization of purchased intangibles, certain acquisition-related expenses, workforce reduction expenses, and net losses on equity investments.
Our non-GAAP net income also includes the income tax effect of the aforementioned adjustments. In Q1, revenue increased 80 basis points year-over-year to $629 million, increased 200 basis points year-over-year when excluding FormSwift, which acted as a 120 basis points headwind to revenue growth. Constant currency revenue declined 80 basis points year-over-year to $620 million, was up 40 basis points year-over-year, excluding the headwind from FormSwift. Relative to our guidance, revenue outperformance was driven primarily by retention improvements across our self-serve SKUs. Total ARR was $2.56 billion, up 30 basis points year-over-year. Excluding the impact of FormSwift, which was a 100 basis points headwind, ARR was up 130 basis points year-over-year.
Total ARR, excluding FormSwift, was roughly flat on a constant currency basis. We exited the quarter with 18.09 million paying users, a sequential increase of approximately 14,000 paying users. Versus our prior commentary to expect a Q1 decline in paying users, we exceeded our expectations, primarily due to retention strength throughout the quarter, as well as individuals' gross adds outperformance. Average revenue per paying user was $141.18, as compared to $139.68 in the prior quarter. ARPU increased sequentially, primarily due to seasonal promotions on our individuals plan in Q4, which slightly depressed ARPU last quarter, as well as a larger mix of monthly plans and FX rate tailwinds.
Gross margin was 81.1% for the quarter, down 180 basis points from the year-ago period, reflecting increased infrastructure costs associated with the expansion of Dash and Dropbox, as well as higher depreciation as a result of our hardware refresh cycle. Operating margin was 40.1%, ahead of our guidance of 38% and down roughly 160 basis points from the year-ago period. Operating margin decreased year-over-year, largely due to the gross margin dynamics I just described, as well as continued investment in R&D to support both Core and Dash initiatives. Compared to our guidance, operating margin benefited primarily from timing-related savings that we expect to be pushed to subsequent quarters, as well as higher revenue and lower services spent. Net income for the first quarter was $180 million.
Diluted EPS for the first quarter was $0.76 based on 237 million diluted weighted average shares outstanding, compared to $0.70 in the year-ago quarter. Cash flow from operations was $205 million, an increase of 33% versus the year-ago period. Unlevered free cash flow was $236 million, or $1 per share, up 69% year-over-year. This quarter also included $33 million interest payments, net of the associated tax benefit, related to amounts drawn under our term loan facility, as well as $1 million in capital expenditures. The year-over-year increase in cash flow primarily reflects stronger operating performance and the absence of certain one-time cash outflows, including a $36 million payment for the buyout of our San Francisco lease and $10 million in payments related to our Q4 2024 reduction in force.
In the quarter, we added $12 million to our finance leases for data center equipment. Turning to the balance sheet, we ended the quarter with cash and short-term investments of $1.29 billion. In the first quarter, we repurchased approximately 14.3 million shares, spending approximately $367 million. As of the end of the first quarter, we had approximately $800 million remaining under our existing share repurchase authorization. In Q1, we also drew down $700 million in the quarter to repay our March 2026 convertible notes. I'll now offer our outlook for Q2 and our updated outlook for the full year 2026. For the second quarter of 2026, we expect total revenue to be in the range of $624 million-$627 million.
Excluding FormSwift, this implies 80 basis points of year-over-year growth at the midpoint. We are expecting a currency tailwind of approximately $9 million. On a constant currency revenue basis, we expect total revenue to be in the range of $615 million-$618 million. We expect our non-GAAP operating margin to be approximately 38.5%, and we expect diluted weighted average shares outstanding to be in the range of 226 million-231 million shares based on our 30-day trailing average share price. For the full year 2026, we are raising our total revenue guidance by $12 million from a prior range of $2.485 billion-$2.5 billion to a revised range of $2.497 billion-$2.512 billion.
Excluding FormSwift, this implies roughly flat growth year-over-year at the midpoint. We are expecting a currency tailwind of approximately $27 million. On a constant currency revenue basis, we expect revenue to be in the range of $2.47 billion-$2.485 billion. We continue to expect gross margin to be in the range of 81.5%-82%. We are also raising our non-GAAP operating margin by 50 basis points from 39%-39.5% to be in a new range of 39.5%-40%. We are also raising our unlevered free cash flow guidance, which we now expect to be at or above $1.055 billion.
We continue to expect CapEx to be in the range of $20 million-$25 million, and additions to finance lease lines to be approximately 4% of revenue. Finally, we expect diluted weighted average shares outstanding to be in the range of 222 million-227 million shares. I will now provide supplemental information as it relates to guidance. With respect to revenue, we are raising our full-year revenue guidance to reflect the progress we saw in Q1.
While still early, targeted retention work in individuals, along with funnel, onboarding, and pricing and packaging improvements in teams, are beginning to translate into results, which gives us greater confidence in our ability to continue building on that momentum over the balance of the year. Last quarter, we said we expected modestly negative paying user growth in Q1, followed by roughly flat paying user trends for the remainder of the year. We were pleased to see better than expected performance in Q1, with paying users increasing sequentially in the quarter, driven by continued progress across the initiatives I mentioned previously. As a result, we now expect paying user trends for the full year to be modestly better than our prior year and to be slightly positive overall.
For ARPU, we expect modest sequential declines throughout the rest of the year, driven by the wind down of FormSwift, lower FX tailwinds, and the growth of our simple plan, which carries a lower price. Our gross margin outlook continued to assume modest pressure this year as we scale Dash and Dropbox and expand across more of our teams base, partially offset by ongoing infrastructure efficiencies. While we remain confident in long-term margin profile of these investments, the near term cost impact will depend in part on the pace of rollout, customer adoption, and the timing of optimization work. As a result, we expect some quarter-to-quarter variability in gross margin as we work through those dynamics. We're increasing our operating margin and unlevered free cash flow guidance relative to our prior guidance as a result of Q1 performance and expected performance in the remainder of the year.
Notably, as we prioritize the Dash and Dropbox experience, we expect that bringing Dash and Dropbox closer together will create additional efficiencies as we progress throughout the year. Lastly, we expect our weighted average shares outstanding to decrease to approximately 222 million-227 million shares, which continues to assume we exhaust the remaining balance on our share repurchase authorization. With that, operator, please open the line for questions.
Thank you. As a reminder, to ask a question, please press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. One moment for questions. Our first question comes from Steven Enders with Citi. You may proceed.
Hi, this is Palak for Steven Enders. Thank you so much for taking our questions and congratulations on the great results. I think my first question is about Dash adoption. Just trying to understand how much of Dash adoption is happening within the Core versus, is there a meaningful standalone Dash-driven customer base at this point?
Sure. Thanks for the question. We're targeting both existing and new users with Dash. Where we're investing a lot is deeply integrating Dash into the core Dropbox experience, and that's certainly where we have our home field advantage and our 18 million subscribers and so on. There's a lot of integration work to make that seamless. We've seen good progress in terms of Dash within Dropbox, in terms of engagement and repeat use and a lot of the signals we're looking at there, and we're continuing to roll out these integrations to a larger percentage of our team space. We also see Dash as a way to expand to folks who aren't using Dropbox today. You don't even need files in Dropbox.
Dash will integrate with your Google Docs and your Slack and your Salesforce, basically all of the different apps that you're using. We do see it as a growth lever, but in the near term, the most rapid way to drive distribution is gonna be with our existing base.
Perfect. That's very helpful. The next question is on the guide, and, you know, there's like a pretty solid raise on the guide and increase in paying user. I know a lot of it comes from the advancements within Core and, you know, simplifying the product. Just trying to understand, does this account for any improvement coming specifically from Dash, or is that not a part of the assumption?
Thanks. Yeah, this is Ross. I think we were pleased, number one, you know, in Q1, that we were able to exceed our expectations on net new paying users. As you said, we did revise upward our guide to say that we're gonna modestly grow net new paying users for the year. That's mostly driven by individuals and teams. Individuals, including the simplified plan, teams, has exceeded our performance as well. That's mostly driven by Core and not a lot of inclusion of Dash right now as we continue to prioritize rolling out Dash and Dropbox and focus on increasing engagement there.
Got it. Perfect. Thank you so much.
Thank you. As a reminder, to ask a question, please press star one one on your telephone. Our next question comes from Matt Bullock with Bank of America. You may proceed.
Hi. Jacob Gideon on for Matt Bullock. Could you help us think about the evolution of Dash in terms of, like, the pricing and packaging, and then, like, how we should think about Dash as positioned against other ecosystems like, you know, for example, Microsoft Copilot? Thank you.
Sure. First, we see Dash as for our existing users, it's a natural extension of the value that we're already providing to our customers. Particularly when you integrate Dash into the core Dropbox experience, some of the benefits include being able to talk to your Dropbox in natural language, and a lot of Dropbox customers, as you'd imagine, they work with big files, so these are often creative folks or in marketing or media companies or architecture or construction. Dropbox's support for all those kinds of content is a big advantage versus a lot of the other AI tools which tend to be more tech-centric.
Against something like Microsoft Copilot, or an AI integrations within any one ecosystem, Dash is platform agnostic, similar to Dropbox itself, so that it is designed to integrate with the whole universe of every ecosystem and every different, every different platform, which is a big advantage because otherwise you will tend to see some siloing or Microsoft will tend to support the Microsoft ecosystem really well, but will have relatively less coverage in the Google ecosystem or in other ecosystems, whereas Dash, again, similar to Dropbox, supports everything by design. We do see that our focus on content is an advantage, and that dovetails naturally with our base. The ability within Dropbox to have multimodal semantic search is really valuable.
If you do a search for a red sunset, with Dash and Dropbox, we'll be able to actually search the content of all the media in your Dropbox. Whereas you used to have like red sunset in the file name to get search results, now we can any picture that has or any photo or image that has a red sunset in it, if someone says red sunset in a video, we transcribe the video under the hood, we index the transcripts, things like that. We are going deeper on workflows around finding, organizing, sharing, protecting content, which is what people use Dropbox to begin with. We see that as a natural advantage for us, and source of differentiation in addition to being platform agnostic.
Very helpful. Thank you.
Thank you. I would now like to turn the call back over to Sarah Schubach for any closing remarks.
Thanks everyone for joining us today. We're looking forward to speaking with you next quarter. Have a great rest of your day.
Thank you. This concludes the conference. Thank you for your participation. You may now disconnect.