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Dropbox's (DBX) Q1 results and guidance may not be spectacular -- revenue growth was a mere 3.3% for the quarter -- but the performance qualifies as "better-than-feared" following a Q4 earnings report that included a 50,000 qtr/qtr drop in paying users. Encouragingly, paying users returned to growth in Q1, increasing by 35,000 qtr/qtr, even as customers remained cautious with their spending. The return to user growth, combined with a 6.8% yr/yr decrease in operating expenses, drove EPS higher by 38% yr/yr to $0.58, comfortably exceeding expectations.

• Expectations were muted heading into this earnings report, as reflected in the stock's lack of recovery after plunging by 23% in the wake of DBX's Q4 results and downside Q1 and FY24 revenue guidance in mid-February. Therefore, the company's Q2 revenue guidance of $628-$631 mln, which is slightly below consensus at the midpoint, may actually be providing some relief to investors who were anticipating an even weaker outlook. That may especially be the case since DBX also reaffirmed its FY24 revenue outlook of $2.535-$2.550 bln.
• With that said, the company is still contending with some of the same headwinds from last quarter. Namely, during the earnings call, CEO Andrew Houston stated that the company continues to see pressure across the self-serve individual and team offerings within the File, Sync, and Share (FSS) business. Furthermore, he reiterated that the macroeconomic environment remains challenging, especially within the SMB market.
• However, the situation doesn't seem as bleak as it did last quarter. For instance, DBX commented during the Q4 earnings call that it was seeing lower top-of-funnel demand and conversion challenges regarding the core FSS business, including with Teams. Last night, Mr. Houston said that Q1 saw some improvement in top-of-funnel demand, due to changes made to reduce friction in the onboarding process and improving the Team admin workflow. As a result of these changes, Team invitations, weekly average usage, and trial starts, all experienced yr/yr increases.
• Additionally, DBX acknowledged last quarter that it was experiencing conversion challenges for its bundles, which includes FSS and limited functionality for products like Dropbox Sign, DocSend, and Replay. To address this issue, the company dropped bundled pricing back to pre-launch levels and it's currently analyzing the impact of the reduced pricing.

The main takeaway is that while business is far from booming for DBX, the company's Q1 earnings report showed that it's still generating healthy earnings growth and that demand has at least stabilized, if not strengthened a bit from last quarter.