Good afternoon, ladies and gentlemen and thank you for joining Dropbox's Fourth Quarter 2019 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask a question. As a reminder, this conference call is being recorded and will be available for replay from the Investor Relations section of Dropbox website, following this call.

I will now hand the call over to Darren Yip, Dropbox's Head of Investor Relations. Please go ahead.

Darren Yip - Head of Investor Relations

Thank you. Good afternoon and welcome to Dropbox's fourth quarter 2019 earnings call. Today, Dropbox will discuss the quarterly financial results that were distributed earlier. Statements on this call include forward-looking statements, including statements relating to the expected performance of our business, future financial results, including expectations regarding future profitability and our ability to generate and sustain positive free cash flow, our ability to extend our platform by developing new products or features or strategy, as well as the ability of our key employees to execute our strategy, long-term growth and overall future prospects.

These statements are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those projected or implied during this call, in particular, those described in our risk factors included in our Form 10-Q for the quarter ended September 30, 2019 and the risk factors that will be included in our Form 10-K for the quarter ended December 31, 2019. You should not rely on our forward-looking statements as predictions of future events. All forward-looking statements that we make on this call are based on assumptions and beliefs as of today and we undertake no obligation to update them except as required by law.

Our discussion today will include non-GAAP financial measures. These non-GAAP measures should be considered in addition to and not as a substitute for or in isolation from our GAAP results. A reconciliation of GAAP to non-GAAP results may be found in our earnings release, which was furnished with our Form 8-K filed today with the SEC and may also be found in the supplemental investor materials posted on our Investor Relations website at investors.dropbox.com.

I would now like to turn the call over to Dropbox's Co-Founder and Chief Executive Officer. Drew Houston. Drew?

Drew Houston - Co-founder and Chief Executive Officer

Good afternoon, everyone and welcome to our earnings call. On the call with me is Ajay Vashee, our Chief Financial Officer. Today, I'll recap our achievements and performance in 2019 and provide an update on how we plan to scale our business over the next few years. Ajay will review our financial results and provide guidance for Q1 and fiscal 2020.

2019 was an important year for Dropbox. During which we invested to build a strong foundation for profitable growth. We generated over $1.6 billion in revenue and ended the year with over 450,000 business teams. We also delivered a number of products and features to further position Dropbox at the center of our users' workflows. Mostly importantly, we unveiled the new Dropbox, a smart workspace to organize users' contents, connect them to their tools and bring everyone together. This included an all new desktop app that moves beyond files and organizes all your cloud content including support for Google Docs and integration with best-of-breed tools like Slack and Zoom. The new Dropbox uses machine intelligence to surface the work that's important to you when you need it and also includes Dropbox spaces which transforms the traditional shared folder experience into a connect workspace for all your cloud content.

We're operating in a world that's fragmented, not just across applications, but across content and teams. We saw an opportunity to bring everything together and with the new Dropbox that's what we've done. We're making the new desktop app available to more and more of our users and we're seeing some great early traction. Millions of users are now active in our new desktop experience on a weekly basis and we're finding that this cohort of active users is engaging with Dropbox more frequently and using differentiated features like suggested folders that intelligently highlight your most relevant content and people tabs that show you the content you're collaborating on with your team mates and we're seeing the new desktop experience help drive customer wins.

In Q4, we closed a wall-to-wall deployment with Exposure, the UK's largest independent marketing agency. When evaluating solutions, Exposure highlighted our smart workspace as a key differentiator over Microsoft and Google. On the partnership front, we continue to build new integrations over the past year to ensure the apps our customers use at work are an integral part of the Dropbox experience. Building on our existing integration with tools from companies like Adobe, Microsoft and Google. We introduced new deep integration strategic partners like Atlassian, Slack and Zoom to help bring users content into context. All these partnerships expand a robust ecosystem and make Dropbox an integral part of our users' workflows and we're already starting to see positive results. Early signals from users who have adopted these deep integrations suggest they're more likely to convert to our paid plans and tend to be more collaborative and engaged.

Finally, we announced a new partnership with BetterCloud, which gives admins the tools they need to manage and secure a best-of-breed SaaS environment. With BetterCloud we enable businesses to enforce custom security policies, scan content for sensitive data and automate critical processes. And in 2019 we also expanded our platform by welcoming HelloSign to the Dropbox family. Millions of people already use Dropbox as a place to collaborate on their most important content and together with HelloSign, we're delivering an even better experience to simplify their document workflows while expanding the markets we serve. We continue to see strong demand for HelloSign's e-signature and document workflow products. HelloSign is now fully integrated into Dropbox as well as our go-to-market efforts as one of our fastest growing businesses. Dropbox users can seamlessly send HelloSign signature request through new product flows, including our newly redesigned user interface. We've been pleased with HelloSign's progress and are excited about the opportunity we have together.

And on the people front, we've continued to strengthen our leadership team. In the fall, Timothy Young joined Dropbox as SVP and GM of Core Dropbox and Bharat Mediratta joined as our CTO and SVP of Platform. Together, they've been reshaping our engineering product and design organizations to drive growth and scale in a more focused way. More recently we announced Olivia Nottebohm as our new Chief Operating Officer. Olivia joins us from Google Cloud where she helped build and scale their F&B business, directing go-to-market efforts for a multi-billion dollar portfolio of products that included G Suite and Google Drive. Olivia is a great strategic thinker and hands-on leader, and I'm thrilled to have her on our team as we enter our next phase of growth. We also welcomed Tifenn Dano Kwan as our new CMO in January. Tifenn is an accomplished executive with more than 15 years of experience in SaaS, most recently as CMO of SAP Ariba. She's a data-driven and operational leader with a long track record of success in integrated channel and partner marketing. I'm thrilled about what each of these leaders bring to Dropbox and we have the right team in place for our next chapter in our Company's evolution.

Overall, it's been an exciting year for Dropbox and while we've made some great new additions to our team, and I'm proud of everything we've accomplished, we clearly still have work to do. Looking ahead, Ajay and I want to ensure we continue to strengthen the investment thesis we bring to market and deliver shareholder value. As we drive adoption of our new products and continue to invest in growth, we'll be driving higher productivity and free cash flow in 2020, and by the end of this year, our goal is to become a profitable business on a GAAP basis. This orientation also extends beyond 2020. Longer term, we plan to drive accelerated margin expansion as we continue to innovate and methodically extend our platform into new markets. With that in mind, by 2024, we now expect to generate non-GAAP operating margins of 28% to 30% and annual free cash flow of over $1 billion. This is a meaningful increase over the targets we announced at our Analyst Day last year.

In addition, as announced earlier today, our Board of Directors has authorized a $600 million share repurchase plan. We think this approach will deliver compelling returns to shareholders, while also enabling us to make disciplined and focused investments in long-term growth. With that said, let's turn to our product strategy for 2020 and highlight where we plan to focus our investment and resources. Our primary focus this year will be on driving adoption of the new Dropbox. Today, millions of users are active in our desktop experience and with the roll out to just a portion of our user base, we've seen early adoption of over 200,000 of our 450,000 business teams. This is an important milestone because the new desktop app provides us with the foreground experience to help drive team expansion in a way that wasn't previously possible.

Now that we've begun to land the new desktop app within teams, we have the tool to further optimize our onboarding flows and in-product experiences to drive higher conversion efficiency. We plan to do this by simplifying the process of setting up a Dropbox business team and streamlining the invitation process to reduce the friction of finding and adding new team members. For example, instead of requiring an admin to add and improving team members, we will make it possible for the product to be spread virally from user to user. We also plan to highlight new add-on products such as extended version history and legal hold to further drive upsells.

And we'll be able to better promote products like HelloSign as well as our partner SKUs like the one we have with BetterCloud to our user base. Most Dropbox users in the workplace are still using one of our individual or basic plans. As a result, there remains a large embedded opportunity within our existing user base to drive both conversion and upsell into a business team plan. Driving adoption of our team plans not only unlocks value for our users, but provides a mechanism for us to grow our deployments within businesses over time. And while our primary focus in 2020 will continue to be on our business teams, we'll also introduce new products to address high-value personal workflows. 80% of our subscribers use Dropbox for work, but a substantial portion of our over 600 million registered users depend on Dropbox to address important personal use cases as well. And we know that over 40% of our business teams include a member who was formerly an individual subscriber, highlighting the importance of investing in our personal users as they're an integral part of our customer journey and driver of business adoption.

We have a unique view into these problems our users face both while using technology at work and at home, and it turns out that these issues have a lot in common. Our customers deal fragmentation and distraction in their personal lives too. So this year, we'll start to address some of those challenges, like accessing and sharing critical information such as your tax returns or digital copies of passports or managing passwords across services. These pain points open up opportunities for us to extend the secure and collaborative capabilities of Dropbox to our users' most important workflows at home, while expanding our monetization opportunities and the overall value proposition of our platform.

To wrap things up, 2019 was a milestone year for Dropbox. We set a clear product vision for the Company and launched the smart workspace category to help our users stay focused on their most important work. And as we begin the new year, we're committed to investing in our future while operating with discipline to drive more profitability. Underpinned by a strong core business, we remain confident in our ability to deliver a healthy balance of growth at scale, while accelerating margin expansion and free cash flow generation.

I'll now turn it over to Ajay, our CFO, to walk through our financial results.

Ajay Vashee - Chief Financial Officer

Thank you, Drew. Our Q4 results demonstrate our strong execution and focus on delivering a healthy balance of top line growth and profitability. Total revenue for the quarter was up 19% year-over-year to $446 million. On a constant-currency basis, relative to the average rates across Q4 of 2018, year-over-year growth would have been 20%. As this is our first earnings call of the year, I'd like to note that we're formally adding total annual recurring revenue or ARR as a new key metric. We believe that ARR is the best indicator of our business performance and provides the most complete insight into the contribution from all of our revenue streams, including our planned future products, add-ons, transaction volume based offerings and certain fees from the referral of users to our partners. Success with these types of initiatives will manifest in total ARR, but may distort or be excluded from metrics like paying users and ARPU.

With this in mind, ARR for the quarter was $1.820 billion, up 19% from the year-ago period. We ended Q4 with 14.3 million paying users and ARPU was $125 in the period. Our continued growth in ARR reflects our strategy to methodically convert our highest value users to drive sustainable monetization and retention.

Let's move on to some of our customer highlights. In Q4, we had a number of wins across a range of verticals including healthcare, government, finance and real estate. In addition to the deployment with exposure that Drew mentioned, I'm excited to share that one of the largest medical technology companies is now a Dropbox customer. This US-headquartered company, recently signed a three-year commitment to Dropbox, and will be deploying our enterprise product to over 10,000 employees. Strong organic adoption of our products among the company's sales, operations, marketing and design teams over the past few years was instrumental to landing a multi-thousand seat deployment. Employee preference, our best-in-class sharing tools, and HIPAA Compliance were all important factors in this customer's decisions to subscribe to our enterprise SKU.

Before I move on to the rest of the P&L, I want to note that unless otherwise indicated, all income statement measures that follow are non-GAAP and excludes stock-based compensation, amortization of purchased intangibles and certain expenses related to the acquisition of HelloSign. Our non-GAAP net income also excludes net gains and losses on equity investments. A reconciliation of GAAP to non-GAAP results may be found in our earnings release which was furnished with our Form 8-K filed today with the SEC and in the supplemental investor materials posted on our investor relations website.

Moving to the P&L, gross margin for the quarter was 78%, an increase of two percentage points compared to the fourth quarter of 2018. The increase in gross margin was driven by unit cost efficiency gains with our infrastructure hardware, including lower depreciation as a share of revenue. Moving to operating expenses, fourth quarter R&D expense was $132 million or 30% of revenue compared to 29% in Q4 a year ago. The increase as a percentage of revenue was primarily driven by higher headcount and investments in new product development and testing.

S&M expense was $97 million in the quarter or 22% of revenue compared to 25% in Q4 a year ago. The decrease was due to lower brand marketing spend relative to Q4 of 2018. G&A expense was $47 million or 11% of revenue, which is consistent with our G&A expense as a percentage of revenue in the prior year. Taken together, we earned $70 million in operating profit in fourth quarter. This translates to a 16% operating margin, which is 5 percentage point improvement from Q4 of 2018.

Net income for the quarter was $67 million, up from $42 million a year ago. Diluted EPS was $0.16 per share, based on 418 million diluted weighted average shares outstanding, up from $0.10 in Q4 a year ago.

Moving on to cash balance and cash flow, we ended Q4 with cash and short-term investments of $1.159 billion. Cash flow from operations was $187 million in the quarter. Capital expenditures were $26 million, yielding free cash flow of $161 million or 36% of revenue. CapEx in Q4 included $23 million of spend on our new headquarters of which $10 million was offset by tenant improvement allowances. Excluding the headquarter spend net of TIAs of $13 million, free cash flow would have been $175 million or 39% of revenue.

In Q4, we also added $37 million to our finance lease funds for data center equipment. We expect additions to our finance lease funds to be 7% and 8% of revenue in 2020 and to decline modestly as a percentage of revenue on an annual basis thereafter.

Let's move on to our full year results. Total revenue for 2019 was $1.661 billion, representing 19% year-over-year growth. On a constant-currency basis, relative to the average rates across 2018, year-over-year growth would have been 21%. Gross margin was 76%, up 1 percentage point from the prior year and our operating margin was 12%, in line with 2018. As a reminder, our operating margin in 2019 included a 2-point headwind from non-recurring facilities and M&A related expenses.

Cash flow from operations was $529 million in 2019. Capital expenditures were $136 million, yielding free cash flow of $392 million or 24% of revenue. CapEx in 2019 included $120 million of spend on our new headquarters, of which $55 million was offset by tenant improvement allowances. Excluding the headquarter spend net of TIAs of $64 million, free cash flow would have been $457 million or 27% of revenue. In 2019, we also added $144 million to our finance lease lines for data center equipment.

Now, let's turn to our guidance. For the first quarter of 2020, we expect revenue to be in the range of $452 million to $454 million or 17% to 18% year-over-year growth. On a constant-currency basis relative to the average rates across Q1 of 2019, we anticipate year-over-year growth to be approximately 18% to 19%. We expect non-GAAP operating margin to be in the range of 13.5% to 14% and diluted weighted average shares outstanding to be in the range of 418 million to 423 million, based on our trailing 30-day average share price.

I would like to remind everyone that in Q1 of each year, there is seasonality to operating margins and free cash flow due to the reset of payroll taxes and the payout of year-end bonuses. Turning to the full year 2020, we expect revenue to be in the range of $1.890 billion to $1.905 billion or approximately 14% to 15% year-over-year growth. On a constant currency basis relative to the average rates across FY 2019, we anticipate revenue to be approximately $8 million higher. As Drew noted, we're focused on driving the adoption of our new desktop app this year as well as bringing some new products to market.

These initiatives will be incorporated into our outlook as we develop more signal throughout the year. We expect fiscal 2020 gross margin to be approximately 1.5 points higher than fiscal 2019, non-GAAP operating margin to be in the range of 17.5% to 18% and free cash flow to be in the range of $475 million to $485 million. This range includes one-time spend related to the build-out of our new corporate headquarters, as well as the payout of deal consideration holdback related to our acquisition of HelloSign. Excluding these items, free cash flow would be $525 million to $535 million. 2020 is the last year we expect to incur CapEx related to the buildout of our new headquarters. Finally, we expect 2020 diluted weighted average shares outstanding to be in the range of 417 million and 422 million based on our trailing 30-day average share price.

To echo what Drew mentioned earlier, we're committed to delivering shareholder value as we invest across our business in 2020 and beyond. As a result, we're raising our long-term operating margin target to 28% to 30%, up from 20% to 22% which we expect to reach by 2024. To get there, we will drive more efficiency and higher levels of productivity across each of our operating expense categories. Accordingly, we're revising our long-term target for R&D spend to 23% to 25% of revenue, down from 25% to 27% previously. Across R&D, we plan to be prudent with headcount expansion over the coming years as we drive adoption of the new Dropbox, optimize our team-oriented conversion flows and invest in new high ROI product launches. We're revising our long-term target for S&M spend to 18% to 20% of revenue, down from 22% to 24% previously. Across S&M, we plan to focus our spend to support adoption of the new Dropbox, while prioritizing our most strategic growth and monetization initiatives. Finally, we are maintaining our long-term G&A spend target of 8% to 10% of revenue.

I also want to note that these efficiencies put us on a trajectory to generate over $1 billion of free cash flow on an annual basis by 2024. I want to be clear that as we execute against our new targets, we won't be reducing investment in our growth engine and new product development. Rather, we have carefully considered where we can drive material efficiency improvements across the business while preserving investment in our highest potential product and growth bets. Our updated long-term operating margin and free cash flow targets not only demonstrate our commitment to delivering profitable growth, but are a testament to the inherent efficiency of our self-serve business model.

Finally, as indicated in our earnings press release, our Board has authorized a $600 million share repurchase program that we intend to execute on, beginning this quarter. This not only underscores the confidence that our Board and management team have in the future of Dropbox, but also allows us to leverage the strength of our balance sheet to deliver returns back to our shareholders.

I'm excited about the large and growing opportunity ahead of us as we continue to strengthen our core business and pioneer the smart workspace category. I'll now turn it back to Drew for closing remarks.

Drew Houston - Co-founder and Chief Executive Officer

Thank you, Ajay. We're focused on driving top line growth at scale, improving margins and efficiently allocating our capital in 2020 as well as longer term. I'm proud of what we've achieved in our first two years as a public company and with over 600 million registered users, we continue to have a huge opportunity ahead of us. Our new desktop app and the introduction of our new personal products later this year are just a start and I'm excited about our future.

With that, I'd like to open up the call for Q&A. Operator?

Question & Answers

Operator

[Operator Instructions] our first question comes from Justin Post with Bank of America. Your line is open.

Justin Post - Bank of America - Analyst

Great. Thank you. A couple questions. First, just on the long-term outlook, $1 billion of free cash flow and higher margins. Just what's changed and gave you confidence in that margins and I guess philosophically, why not spend more on R&D and try to drive higher growth, how are you thinking about that? And then secondly, when we just think about the billings growth, it's more in line with revenue growth around 20%. Have you seen less shift to monthly or any reason for that? Thank you.

Drew Houston - Co-founder and Chief Executive Officer

This is Drew, I'll take the first part and thanks for the question. I wouldn't say anything has really changed with our philosophy. I mean, we've always been focused on delivering a healthy balance of growth and profitability and we're going after a huge opportunity in TAM, I think we are uniquely positioned to do that. But we did see an opportunity this year to strengthen the investment thesis we want to bring to market and put a couple of stakes in the ground in terms of our long-term profitability and cash generation that reflect the inherent efficiency of our business and just be really clear that we want to expand margins as we scale drive efficiency, drive productivity, while still leaving us plenty of room to invest. So as I said - as Ajay touched on, we still have - our dollar investments in these areas will continue to grow at healthy levels.

Ajay Vashee - Chief Financial Officer

And to answer the second part of your question there, Justin, on billings. So, a recent Plus repricing and repackaging initiative was a tailwind to billing in Q4. We're still working through that exercise. And I would just note as I mentioned previously while billings are related to revenue growth, not consistently predictive of revenue for us. There can be items in the given quarter that move billings growth higher or lower, but don't directly correlate to revenue, but we're seeing strength across monthly and annual subscriptions today.

Justin Post - Bank of America - Analyst

Great. Thank you.

Operator

Thank you. Our next question comes from Mark Murphy with JPMorgan. Your line is open.

Mark Murphy - JPMorgan - Analyst

Yes, thank you very much. Drew as you roll out the new Dropbox app and try to move more into the foreground, are you finding that people spend more time in Dropbox in other words, more minutes per day or more screen time or are you finding that they're taking more actions, maybe, they're getting into the app a little more frequently than they had been in the past, just curios on overall how does it change the engagement that you're seeing?

Drew Houston - Co-founder and Chief Executive Officer

Yes, we're seeing strong early in signal, both in terms of the kind of engagement that you're talking about. We certainly have collaborative engagement, engagement with new features like our people pages and our machine learning-driven smart suggestion. So, we've been happy with not just - so I think broadly these new cohort, those things, our engagement is increasing and just as importantly the kind of engagement, higher value engagement is increasing. So, that's certainly been an objective of the new Dropbox and something we're going to continue to drive and iterate on.

Mark Murphy - JPMorgan - Analyst

Thank you. As a quick follow-up for Ajay, I was wondering how you would characterize the Q4 performance in terms of the outbound activity. In other words, kind of the lumpier enterprise level deals which can affect the paid user numbers and just any comment on that outbound pipeline compared to a year ago.

Ajay Vashee - Chief Financial Officer

Sure. I can say that we continue to close a large volume of deals both through our self-serve engine as well as through our outbound efforts and just as a reminder for those on the call, self-serve represents 90% of our total revenue and is our primary go-to-market channel and we've built an efficient and scalable model that balances strong self-serve growth with a disciplined investment in outbound, and that's a model we plan to continue to scale for both our existing and our newer products. So, just a lot of consistency in what we saw with respect to that channel in Q4.

Mark Murphy - JPMorgan - Analyst

Thank you.

Operator

Thank you. Our next question comes from Heather Bellini with Goldman Sachs. Your line is open.

Heather Bellini - Goldman Sachs - Analyst

Great, thank you so much. I had two quick questions. One just from the nice improvement you're going to see next year, or I'm sorry, this year in gross margins, just if you could kind of detail kind of where the leverage is coming from on the gross margin line and if that's something that we can expect on an ongoing basis.

And then secondly, just in regards to paid users, I mean, kind of following up a little bit to Mark's previous question, but Ajay, you had made a comment, maybe I missed it this time, but made a comment on last quarter's call, just saying the first half of this year, you would expect kind of sub growth to be kind of below what we had been seeing. Do you still kind of see that comment and should we be benchmarking that off of, I think it was $300,000 that you just signed, but any comment you could give us on that kind of P times Q equation would be very helpful. Thank you.

Ajay Vashee - Chief Financial Officer

Sure. So, to start with the first part of your question around gross margins, we've continued to drive gross margin expansion over the last few quarters. And we have a long-term target for gross margins of 78% to 80% of revenue and we are at the lower end of that range today and those efficiency gains have been driven by our investments in things like SMR and the new cold storage tier that we launched. And so, you'll see us continue to drive more and more efficiency across GM in 2020. Right now, that long-term target continues to be 78% to 80% of revenue.

And as it relates to paying users, yes, you're correct. On last quarter's call we noted that paying user growth would be slightly lower over the next couple of quarters as a result of our Plus repricing and repackaging initiative, and that's consistent with our expectations when we launched it. That initiative overall continues to be a tailwind to revenue and I would just note that profitably growing our total ARR base versus optimizing for a specific net new paying user number is our priority and where you will see us focus resourcing and commentary going forward.

Heather Bellini - Goldman Sachs - Analyst

Okay. So just to be clear then, with that $300,000 is - like that type of level is what you're trying to steer us toward - given that comment still seems to hold with what you said on the Q4 call?

Drew Houston - Co-founder and Chief Executive Officer

Yes, the comment that we made prior is nohold. We don't formally guide [Speech Overlap]. Yeah, we don't formally guide to the metric, but the prior commentary is reflective of reality today.

Heather Bellini - Goldman Sachs - Analyst

Okay, great. Thank you.

Operator

Thank you. Our next question comes from Karl Keirstead with Deutsche Bank. Your line is open.

Karl Keirstead - Deutsche Bank - Analyst

Thank you. I'd love to go back to that initial question around the long-term growth margin trade-offs. So, to go from 17%, 18% margins this year to 28% to 30% in 2024, that's obviously about 300 basis points a year, which is fantastic. At the Analyst Day in the fall, you put up a slide suggesting that you could do over 200 bps a year in operating margin improvement only under what you called a moderate growth scenario. So, obviously if getting to 28% to 30% via a fairly material growth deceleration, that might dampen the volume of the applause around that margin improvement. So, maybe if I could a fairly pointed question to Drew and Ajay, in 2024 do you think Dropbox can still be a double-digit revenue growth story?

Ajay Vashee - Chief Financial Officer

Sure. Why don't I start by answering some of the questions and points you were making around how we plan to drive that margin expansion and then I can talk a bit about long-term growth and how we're thinking about that today. So, to start with profitability, I would just reiterate what Drew said and that we've always been focused on delivering a healthy balance of growth and profitability and we want to ensure that we continue to strengthen the investment thesis that we're bringing to market, and our 2020 guidance and the revisions that we made to our long-term margin targets are reflective of the inherent operating efficiency of our business and we've aligned under new leadership to drive growth in scale in a more focused way and that's unlocked opportunities to accelerate margin expansion and free cash flow generation. And so this year, as well as longer term, we plan to drive more efficiency and higher levels of productivity across each of our operating expense categories. So, across R&D, we will be prudent with how we spend as we drive adoption of the new Dropbox and we optimize those team-oriented conversion flows and invest in new high ROI product launches. And then across S&M, as I mentioned earlier, we'll focus our spend to support adoption of the new Dropbox while prioritizing our most strategic growth and monetization initiatives.

And as it relates to growth, as we execute to our expense targets, we won't reduce investment in our growth engine and new product development. Rather, we're really carefully considered where we can drive material efficiency improvements across the business while preserving investment in our highest potential product and growth bets, and these are bets probably you will see factored into our top line guidance as we build more signal over the course of the year. And I would say at the highest level, we're focused on solving large and unmet customer needs and methodically expanding the markets that we serve. Our acquisition of HelloSign launch and the smart workspace category I think are good examples of this. And longer term, certainly focused on maintaining double-digit revenue growth, committed to delivering over $1 billion in annual free cash flow by 2024 and being prudent with the expectations that we're setting today we are in the business of generating returns on investment and aspire to hire and leading levels of productivity on our spend.

Karl Keirstead - Deutsche Bank - Analyst

Got it. Terrific answer. Yeah, go ahead, Drew.

Drew Houston - Co-founder and Chief Executive Officer

I would just underscore what Ajay said about the long-term aspirations. I mean, there's no questions that the opportunities there and frankly we don't see anyone solving our customers challenges around being able to focus at work and the fragmentation and distraction that's happening as there's this proliferation of tools at work. And so, we think we're uniquely positioned for that and while we launched the new Dropbox, it's just the beginning.

Karl Keirstead - Deutsche Bank - Analyst

Got it, okay. Terrific answer and then maybe my follow-up, just on the buyback, Drew or Ajay, should we interpret that as a signal that, in terms of use of cash 2020 might be somewhat quieter M&A year? Would that be fair or no?

Ajay Vashee - Chief Financial Officer

Well, this is Ajay. I can say that M&A has always been an important part of our growth strategy as a company. That will continue to be the case going forward and we really have an efficient cash flow generative business and we're confident that we can invest in new products and growth while engaging into share repurchase to deliver returns back to our shareholders. And in 2020 for example, we do plan to generate hundreds of millions of dollars of free cash flow on top of the nearly $1.2 billion of cash and marketable securities we currently have on our balance sheet which gives us plenty of dry powder to do both.

Drew Houston - Co-founder and Chief Executive Officer

Yeah, and I wouldn't say - this is a commentary on our willingness to do M&A.

Karl Keirstead - Deutsche Bank - Analyst

Got it. Congrats on the terrific - your guidance.

Drew Houston - Co-founder and Chief Executive Officer

Thank you.

Operator

Thank you. Your next question comes from Rishi Jaluria with D.A. Davidson. Your line is open.

Hannah Rudoff - D.A. Davidson - Analyst

Hi guys, this is Hannah on for Rishi. Thanks for taking my questions. First off, could you guys talk about what you're seeing in terms of cross-sell of Paper

And HelloSign [Technical Issues] you can provide on how the new Dropbox can help with that?

Drew Houston - Co-founder and Chief Executive Officer

Sure. So these are important products that continue to do well. So, Paper - Paper docs monetization more indirectly in that people who are customers that - we're trying to lifetime value of Dropbox. So customers that use Dropbox and Dropbox Paper convert to a paid subscription at twice the rate. They retain at a better rate. And so, Paper's is an example of something where we - today we monetize that indirectly and then HelloSign is a separate SKU and that's - and we're focused there on driving adoption of HelloSign among Dropbox users and I'd say we're early in that process.

Hannah Rudoff - D.A. Davidson - Analyst

Great, thanks.

Drew Houston - Co-founder and Chief Executive Officer

And I would now I'd just add that the new Dropbox helps drive adoption of both of those things. It gives us a new surface to both promote them and build a more integrated and differentiated experience for both. So for example, with HelloSign, after you hit save on a document or contract, being able to send it out for signature with one click, there is a lot more surfaces like that where we can help users - connect users to that to all of our new products.

Hannah Rudoff - D.A. Davidson - Analyst

Great, that makes a lot of sense. And then is there any notable feature functionality that Dropbox lacks? A lot of customers [Technical Issues].

Drew Houston - Co-founder and Chief Executive Officer

Well, I think we're continuing to iterate on the core experience and helping. The new Dropbox - it's a completely new desktop app built from scratch. And so, guiding folks to use that new behavior instead of being the operating system, we're just trying to make that transition as seamless as possible and gently. I mean Dropbox does a lot of different things for people. So, figuring out how do we introduce new functionality like HelloSign and Paper, but also play to our strengths and simplicity and design, that's the tradeoff. Those are the kind of tradeoffs we're still iterating on, but we're happy with our progress.

Hannah Rudoff - D.A. Davidson - Analyst

Great. Thanks, Drew.

Operator

Thank you. Our next question comes from Pat Walravens with JMP Securities. Your line is open.

Mark - JMP Securities - Analyst

Hi. This is Mark [Phonetic] for Pat. Thank you so much for taking my question. Just on HelloSign, just wondering if you can talk a little bit about what's your go-to-market strategy there? Thanks.

Drew Houston - Co-founder and Chief Executive Officer

Hi, so it's pretty straightforward. I mean there is a bunch of different - certainly HelloSign e-signature. There is demand for that across all of our segments. I'd say the part we're most focused on is really HelloSign strength, which is in that self-serve, and their sweet spot is really SMB. And when we look at the e-signature market, particularly for SMB, it's underpenetrated. I mean, a lot of our - we watch a lot of our customers still using pen and paper-based workflows and one of the things we're most excited about with the combination was being able to introduce HelloSign to our self-serve base. We're in the early innings of that and as I said before, the new Dropbox and other levers or the new Dropbox and we have all kinds of opportunities across our whole go-to-market to introduce HelloSign to our customers. So, we're excited about the upside potential there.

Mark - JMP Securities - Analyst

Great. Thank you.

Operator

Thank you. Our next question comes from Scott Wilson with RBC Capital Markets. Your line is open.

Scott Wilson - RBC Capital Markets - Analyst

Thanks for taking questions. I'm on for Alex. I guess first, Drew, you recently hired a COO, can you kind of speak to the delegation of responsibilities where you see Olivia's strengths complementing yours and maybe areas of the company you expect might receive more or less of your attention as Olivia kind of fully ramps into her role.

Drew Houston - Co-founder and Chief Executive Officer

Sure. So for context we just added Olivia Nottebohm as our new COO. She just started a couple of weeks ago and she's hit the ground running and she comes from Google Cloud where she ran their SMB sales and more of that, a lot of the go-to-market. And she will be running all of our go-to-market functions. And so, there is a number of functional areas that she will be responsible for and she will be a partner for me in running the company more broadly.

So, making sure - as now, we have multiple lines of business and the complexity and scale of the business has increased, really making sure that we're operationally excellent across all those dimensions. Olivia will be helping me do that throughout the company and that frees me up to spend more time proportionately on product development, making sure that our pipeline of new products, things like the new Dropbox, make sure our core business grows. I'll proportionately be able to spend more time on product development.

Scott Wilson - RBC Capital Markets - Analyst

Great, makes sense. And maybe a quick follow-up for Ajay. Ajay, if I'm not mistaken, I think your net add of ARR, your sequential ARR in the fourth quarter, it was actually less than it was in the third quarter. So, I guess the question would be, did you see any uptick in churn relative to expectations, given the pricing changes. And I guess if not, how should we kind of frame that ARR metric this quarter. In general, do you feel that your business kind of has the pronounced seasonality in 4Q typical to most software companies or are you little bit atypical there?

Ajay Vashee - Chief Financial Officer

Yeah, good questions. And I would say as it relates to the Plus repricing and repackaging. I've answered your question as no. We've seen a modest impact, but the impact has been well within our expectations and that's something we noted last quarter as well. I can say that, net revenue retention for our plus subscribers has increased meaningfully as a result of the initiatives. So overall, it's a been a tail winter revenue and we've been able to manage to very healthy retention rates. And last year, I can say that ARR benefited from a few different factors that were non-recurring in certain periods and so early in the year benefitted from our acquisition of HelloSign and then from monthly subscriber renewal as part of that Plus repricing and repackaging in Q3 and so adjusted for these one-time non-recurring benefits net new ARR in Q4 was consistent with historical quarters. In 2019, I'd also note that total ARR grew 19% year-over-year in Q4. So, we delivered a strong growth rate there.

Scott Wilson - RBC Capital Markets - Analyst

Thanks guys.

Operator

[Operator Instructions] We have a question from Brent Thill with Jefferies. Your line is open.

Luv Sodha - Jefferies - Analyst

Hi. This is Luv Sodha on for Brent Thill. Thank you for taking my questions and thank you for the long-term guidance. I sort of wanted to ask about how you guys are thinking about ARPU versus like net new user growth over the next year. I mean you have seen some meaningful ARPU expansion given the Plus repackaging and repricing. What should we expect going into next year for ARPU versus net new user growth?

Ajay Vashee - Chief Financial Officer

Sure. This is Ajay, happy to take that question. I can say that in the past I've talked about a material driver of ARPU expansion. One of the primary drivers of ARPU expansion being higher attach rates to our premium SKUs from new paying users. That continues to be the case. It's a very material driver as well as us driving a higher and higher mix of teams licenses, which have a higher ASP, over time. And so we continue to drive that mix shift from individuals towards teams and we continue to drive higher and higher attach rates to our premium individual plan as well as our premium team plan. So, that tailwind to ARPU is going to continue throughout the year. The primary driver of revenue growth for us has always been paying user conversion. So, that will continue to be the case just on a volume basis, but you'll see a continued tailwind to ARPU as well over the course of 2020.

Luv Sodha - Jefferies - Analyst

Got it. And then just one quick follow-up, if I may. In terms of the partnerships, I know you guys mentioned Zoom, Slack, has it led into some kind of go-to-market traction going to market together with Zoom or Slack or some kind of cross promotion there? Any color would be appreciated. Thank you.

Drew Houston - Co-founder and Chief Executive Officer

Sure. There's certainly that opportunity and growing our ecosystem is something - is an area where we're going to continue to make big investments. So, the starting point has been building the integrations and so the integrations between Dropbox and Slack, both the Dropbox integration within Slack and the Slack integration with Dropbox are really popular on both sides and I can say the same thing about our integrations with Zoom and others that we've announced recently. So we've been - spoke this initially on the product experience and making sure that's good and now we're focused and we'll be turning to focus on driving adoption and other things we can do on go-to-market.

Luv Sodha - Jefferies - Analyst

Got it. Thank you.

Drew Houston - Co-founder and Chief Executive Officer

All right. Thank you everyone for joining us today. We appreciate your support and really looking forward to speaking with you again next quarter.

Operator

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DROPBOX INC

Q4 2019

Earnings Transcript

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