Summary
Dropbox's fiscal 2025 third quarter showed a business shrinking at the top line while profits and margins expanded. Revenue was $634.4 million, down 0.7% from the prior-year quarter, and down 1.2% on a constant currency basis. Paying users slipped to 18.07 million from 18.24 million a year earlier. Total ARR was $2.536 billion, down 1.7% year over year and down $6.1 million quarter over quarter. The decline comes from the strategic decision to cut FormSwift investment and from churn and fewer upgrades in Teams plans, partly offset by growth in Individuals plans and a $3.1 million favorable foreign exchange benefit.
Gross profit was $506.1 million, down 4.0%, and gross margin was 79.8%, down 2.8 percentage points. Cost of revenue rose 15.1%, mostly a $16.7 million increase in infrastructure costs from depreciation tied to the datacenter refresh cycle. Non-GAAP gross margin was 81.4%, compared with 84.0% a year earlier. Management expects gross margin to stay relatively constant over the near and long term. Capital expenditures are expected to increase in the last quarter of 2025 as the company keeps buying infrastructure equipment.
Profitability moved the other way. Operating income was $174.7 million, up 36.7%, and operating margin was 27.5%, up 7.5 percentage points. Net income was $123.8 million, up 16.0%, and diluted EPS was $0.47, up from $0.34. The improvement rests on cost discipline after the workforce reduction of approximately 20% announced in October 2024. Research and development fell 19.2%, sales and marketing fell 17.2% and general and administrative fell 9.0%. Stock-based compensation dropped to $78.6 million from $92.3 million. Non-GAAP operating margin was 41.1%, against 36.2%. Interest swung to a net expense from net interest income a year earlier because of the term loan facility entered into in the fourth quarter of 2024, and the tax provision rose.
Cash generation held up. Net cash provided by operating activities was $302.1 million, up 10.2%, and $716.4 million for the nine months, up 5.3%. Capital expenditures were $8.4 million in the quarter, up 104.9%, and $10.5 million for the nine months, down 45.3%. Free cash flow, a non-GAAP measure, was $293.7 million versus $270.1 million, a 46.3% margin. Unlevered free cash flow was $314.2 million. Deferred revenue was $740.6 million, roughly flat year over year. Cash, cash equivalents and short-term investments ended at $925.3 million. Dropbox repurchased 13.8 million shares for $393.3 million during the quarter and 46.0 million shares for $1,300.3 million over nine months, and the board added a $1.5 billion authorization in August 2025. The term loan facility had $1,142.1 million outstanding and $1,550.0 million available to draw.
On the product side, Dropbox launched a self-serve version of Dash and deeper Dropbox integration, giving new and existing customers access to an AI assistant and search tool. The base includes 575,000 paying businesses, more than 700 million registered users and roughly 180 countries. The release carried no numeric outlook; the company said it would give forward-looking guidance on its quarterly call. Management expects free cash flow to generally increase in the near term as operating efficiencies build. It also warns that paying users and revenue may keep falling without gains in average revenue per paying user, pointing to the FormSwift pullback, a challenging Teams environment and macroeconomic uncertainty. The stated risk list also covers retention and conversion, pricing and packaging changes, security breaches, service disruption, competition and rapid technology change.
Forecast
Reported figures
GAAP, from SEC filings| Metric | Q3 FY2025 | Q2 FY2025 | QoQ | Q3 FY2024 | YoY |
|---|---|---|---|---|---|
| Revenue | $634.4M | $625.7M | +1.4% | $638.8M | -0.7% |
| Gross profit | $506.1M | $502.0M | +0.8% | $527.3M | -4.0% |
| Gross margin | 79.8% | 80.2% | -0.5 pp | 82.5% | -2.8 pp |
| Research & development | $182.3M | $184.4M | -1.1% | $225.7M | -19.2% |
| Sales & marketing | $91.5M | $87.8M | +4.2% | $110.5M | -17.2% |
| General & administrative | $57.6M | $58.8M | -2.0% | $63.3M | -9.0% |
| Total operating expenses | $331.4M | $333.6M | -0.7% | $399.5M | -17.0% |
| Operating income (loss) | $174.7M | $168.4M | +3.7% | $127.8M | +36.7% |
| Operating margin | 27.5% | 26.9% | +0.6 pp | 20.0% | +7.5 pp |
| Net income (loss) | $123.8M | $125.6M | -1.4% | $106.7M | +16.0% |
| Net margin | 19.5% | 20.1% | -0.6 pp | 16.7% | +2.8 pp |
| Diluted EPS | $0.47 | $0.45 | +$0.02 | $0.34 | +$0.13 |
Risks
Dropbox depends on retaining and upgrading paying users, and paying users declined to 18.07 million as of September 30, 2025 from 18.22 million as of December 31, 2024 and 18.24 million as of September 30, 2024. MD&A attributes pressure to a challenging operating environment across Teams plans and more customers opting for monthly plans.
Revenue decreased 0.7% in FY2025 Q3 versus the prior-year quarter and 1.0% year to date, while Total ARR decreased to $2,536 million for the period ended September 30, 2025 from $2,574 million at December 31, 2024 and $2,579 million at September 30, 2024. Risk factors warn that growth rate has declined and negative growth has occurred in past periods.
Dropbox competes with Microsoft, Amazon, Apple, Google, Adobe, Box and others that may offer lower-priced, free or bundled products, pressuring pricing, top of funnel and conversion rates. MD&A notes revenue weakness from churn and fewer customers upgrading in Teams plans.
Risk factors continue to highlight the April 2024 Dropbox Sign unauthorized access, including ongoing consolidated class action litigation and regulatory scrutiny. Dropbox says it continues to face reputational and customer relationship risks from the incident.
Gross margin decreased to 79.8% in FY2025 Q3 from 82.5% in the prior-year quarter, down 2.8 percentage points, and decreased to 80.4% year to date from 83.0%, down 2.5 percentage points. MD&A attributes the pressure mainly to higher cost of revenue and lower revenue.
Dropbox is making significant investments in AI products such as Dash for Business, but risk factors say the AI marketplace is highly competitive and the investments may not yield returns. The EU AI Act and proposed or enacted U.S. state AI laws add regulatory uncertainty.
Cost of revenue increased 15.1% in FY2025 Q3 versus the prior-year quarter, primarily from $16.7 million higher infrastructure costs tied to datacenter refresh depreciation. Risk factors cite datacenter equipment supply chain, tariffs and capacity planning risks, and MD&A expects capital expenditures to increase in Q4 2025.
MD&A says Teams performance continues to be affected by cautious customer spend amid broader macroeconomic uncertainty. Risk factors cite inflation, interest rates, tariffs, retaliatory actions and foreign exchange volatility as factors that could cause customers to delay or cancel purchases.
The strategic decision to significantly reduce investments in FormSwift negatively impacted ARR, revenue and paying users in 2025. ARPU for the nine months ended September 30, 2025 decreased as a result of the FormSwift reduction and an increased mix of sales toward lower priced plans.
The term loan facility entered in Q4 2024 drove interest (expense) income, net up $24.1 million in FY2025 Q3 versus the prior-year quarter. The 2026 Notes mature on March 1, 2026, and Dropbox expects to pay them using proceeds from loans, while covenants may limit operating flexibility.
The Virtual First model and unused office space have led to real estate impairment charges, including a $2.6 million net loss on real estate assets for the nine months ended September 30, 2025, and lease termination payments. Weak San Francisco commercial real estate demand may hurt subleasing and require further charges.
The October 2024 reduction of global workforce by approximately 20% lowered employee-related costs but risk factors warn that loss of expertise and institutional knowledge may impair product development, culture and internal controls. Dropbox also depends on key personnel, including CEO Andrew Houston.
SaaS KPIs
All quarters →Paying users
Free cash flow
Total ARR
Free cash flow margin
Non-GAAP operating margin
Non-GAAP gross margin
Average revenue per paying user (ARPU)
Registered users
Unlevered free cash flow
Summary, forecast, risks and KPIs are extracted from DROPBOX, INC.'s SEC filings for Q3 FY2025 (10-Q / 10-K and the 8-K earnings release); GAAP figures in the summary are checked against the reported XBRL data. They can contain errors; the filings are authoritative. Processed Oct 1, 2026.