Dropbox (DBX, Financial) shares are down 15% following a disappointing Q1 and FY25 revenue outlook. The decline is mainly due to Dropbox's decision to retain FormSwift, a document-generating application. Despite a strong performance leading into Q4 results, with shares up over 50% since August lows, the company's momentum has been halted by bearish guidance.

Previously, investors overlooked Dropbox's downbeat quarterly revenue projections, focusing instead on AI potential and cost-cutting measures, including a 20% workforce reduction in October. However, this time, the weak points were too significant to ignore.

• Dropbox experienced a consistent rise in paying users over the past three quarters, with an increase of 63,000 in Q2. However, in Q4, paying users dropped by 15,000 sequentially, the first decline since 4Q23. This was attributed to pricing sensitivity affecting down-sell, churn, and team expansion activities.
• Dropbox expects a decline of about 300,000 paying users in 2025, partly due to reduced investment in FormSwift. The company will retain FormSwift but eliminate its marketing efforts, creating headwinds for user growth.
• The decision impacts Q1 and FY25 revenue growth projections by 80 bps and 150 bps, respectively. Dropbox anticipates Q1 revenues of $618-621 million, a 2% year-over-year decline at the midpoint, marking its first year-over-year net sales drop in over five years. FY25 revenue is projected at $2.465-2.480 billion, a 3% decline at the midpoint.
• Dropbox plans to reaccelerate growth by optimizing its Teams business through pricing and churn improvements. The company aims to leverage its core business to launch Dash, an AI-powered universal search function, targeting around 0.5 million business accounts from its File Sync and Share (FSS) subscribers.
• However, Dropbox does not expect Dash to materially contribute to revenue this year. Competitors like Sharefile (PRGS, Financial) and Box (BOX, Financial) already offer similar features.

Dropbox's Q4 report showed strong bottom-line performance, but the negative revenue guidance due to the FormSwift decision and focus on Dash is affecting investor sentiment. With Dash still in its early stages, investors are taking profits, anticipating a noticeable impact on growth this year.