Company Overview: Dropbox Inc., is an online company that provides online file storage and sharing services. The Company provides a Dropbox collaboration platform, which enables users to create, access, organize, share, collaborate and secure the content. Its Dropbox paper allow users to co-author content, tag others, assign tasks with due dates, embed and comment on files, tables, checklists and code snippets in real-time. Its Dropbox Smart Sync enables users to access their content on their computers without taking up storage space on their local hard drives. Its Dropbox Showcase enables users to present their work to clients and business partners through a Webpage.


DBX Details

Strong Second Quarter 2018 Performance: Dropbox Inc (NASDAQ: DBX), a global collaboration solutions’ company that transforms the way people and teams work together, has reported better than expected results for the second quarter of 2018. DBX offers storage for users to share and synchronize their files, and generate revenue through paid subscriptions for additional space and business features. The baseline Dropbox Basic is offered free and offers 2 gigabytes of storage. The company competes with Alphabet Inc Google, Microsoft Corp and Amazon.com Inc as well as Box Inc. DBX in the second quarter of FY 18 has reported the adjusted earnings per share of 11 cents, beating the analysts’ estimates for the adjusted earnings per share of 6 cents. The company had reported the adjusted revenue growth of 27 percent to $339.2 million in the second quarter of FY 18, beating the analysts’ estimates for revenue of $330.9 million. The revenue growth was almost in line with the 28% year-over-year revenue growth DBX had posted in the first quarter but sequentially, the quarterly revenue grew up 7%. The company's average revenue per user (ARPU) in the second quarter increased by 4.9% to $116.66 year over year, and has beaten the analysts’ expectations of $113.95. This also shows an acceleration from the 3.2% year-over-year growth Dropbox saw in the metric in the first quarter. The company had recently introduced plans that offered improved storage at higher prices, which led to a higher ARPU as more individual and corporate clients signed up for it. Dropbox paying subscribers grew 20 percent to 11.9 million at the end of June and  has beaten the average analyst estimate of 11.73 million. Moreover, the company's second-quarter non-GAAP operating margin is up significantly to 14.1% from 8% in the year-ago quarter, and it has beaten the management's guidance range for non-GAAP operating margin to be in the range of 9% and 10%. Furthermore, reflecting how DBX's business model benefits from improved scale, the company's non-GAAP gross margin has expanded from 66.7% in the year-ago quarter to 74.5%. GAAP gross margin similarly posted growth from 65.4% to 73.6%. Overall, in the second quarter, DBX's non-GAAP net income rose 140% year over year to $48 million. On a GAAP basis, DBX's net loss has narrowed from a loss of $26.8 million in the year-ago quarter to a loss of $4.1 million in the second quarter of 2018. Free cash flow, or cash from operations minus capital expenditures, rose from $82.4 million in the prior-year quarter to $102.2 million. Additionally, at the end of the second quarter of 2018, the cash, cash equivalents and short-term investments were $981.8 million.


Quarterly 2018 Performance (Source: Company Reports)

Pioneering Future of Cloud Infrastructure with SMR Technology Deployment: DBX has added custom-built storage infrastructure to the evolution of Magic Pocket. The company had successfully deployed Shingled Magnetic Recording (SMR) drive technology, which is expected to expand the overall storage density, will reduce the company’s physical data center footprint, and will provide the company significant cost savings. This is also without sacrificing performance or reliability. DBX is the first company to test and deploy SMR technology at this scale. The company expects approximately a quarter of its Magic Pocket infrastructure to be on SMR drive capacity by 2019. In the coming months, the company has also planned to open source the test software it created during the process, which will let other companies qualify SMR technology for their own enterprise storage environments. The creation of own storage infrastructure was a huge technological challenge for the company, but the company is getting benefit from this creation. Moreover, Dropbox had sourced SMR disk drives from third-party suppliers, designed a bespoke hardware and component ecosystem around it, and had created new software to get its compatibility with existing Magic Pocket architecture. The company had chosen SMR technology for the unique ability to expand storage capacity from 8TB to 14TB per disk, and still the infrastructure will be delivering the performance and reliability that the company expects. Further, this process reflects the company’s engineering expertise in building large distributed systems. By the end of 2018, DBX is expected to have an infrastructure footprint spanning 29 facilities in twelve countries and four continents, including storage for users inside and outside the U.S.

Introduced new subscription tiers: Last year, DBX had introduced new subscription tiers, which  continue to drive up the average revenue per user as the subscribers renew at higher prices. The new plans guard the existing customers that are using older pricing, give the existing subscribers the option to subscribe at the new, higher prices at renewal, or keep their lower prices with reduced functionality. At the end of the second quarter, the renewals for about 50 percent of grandfathered subscriptions for Dropbox Advanced have been completed, and a significant number of users elected to keep the higher-priced plans at the 30 percent price premium.

COO Transition: The market reacted a bit negatively after the company announced that Dennis Woodside is resigning from the position of Chief Operating Officer (COO). He had been instrumental in DBX’s initial public offering in March. However, he will be with the company until early September and will continue to serve as an advisor through the end of the year. Meantime, DBX is not planning to hire anyone for the position of COO and is promoting two senior leaders, Yamini Rangan and Lin-Hua Wu, who will join executive team, and will be restructured to take on Dennis’ responsibilities. Moreover, the company has added to their team Adam Nash, who was previously president and chief executive officer of Wealthfront, as vice president of product, as well as Naman Khan, a Salesforce.com Inc. and Microsoft Corp. recruit, as vice president of product marketing and global campaigns.


Opportunity for the Group (Source: Company Reports)

Strategic Partnership: DBX has made strategic partnership with Salesforce to connect the number one CRM platform, which will enable the companies of all types to collaborate and more deeply connect with their customers for sales, service, marketing, commerce, etc. With the partnership, the companies will initially deliver two new integrations to the brand engagement and boost team productivity. Further, Salesforce will use Dropbox Enterprise and DBX will significantly extend its use of Salesforce products including Salesforce Service Cloud, Marketing Cloud and PRM across its business. The new integrations are expected to begin rolling out from the second half of 2018. Moreover, DBX had made the strategic partnership with Google Cloud in order to deliver a more unified home for work. Working with Google Cloud, DBX has planned to develop a series of cross-platform integrations which will connect G Suite cloud productivity tools and content (Gmail, Docs, Sheets, Slides, Hangouts) with its global collaboration platform. These integrations will be made accessible for all DBX users. Therefore, the users will be able to create, open, and edit Google Docs, Sheets, and Slides files that live in DBX. From within Dropbox, the users will have the option to open and edit compatible files directly in Google Docs, Sheets, and Slides. Dropbox Business administrators will be able to manage Google Docs, Sheets, and Slides files just like any other content that lives in DBX. In addition, DBX will be able to develop additional native G Suite integrations with Gmail and Hangouts Chat, which will help teams keep project content connected to the conversations around it. These integrations are also expected to be available starting in the second half of 2018.


Growth Drivers (Source: Company Reports)

Outlook: For the third quarter of 2018, DBX expects revenue to be in the range of $350 million and $353 million, which is better than the analysts’ expectation for revenue of $345.9 million. The company has raised its full-year 2018 sales forecast to $1.372 billion, from its previous top-end estimate of $1.355 billion. For FY 18, the free cash flow is expected to be in the range of $340 - $350 million.


FY 18 Guidance (Source: Company Reports)

Stock Performance: DBX had made a very strong debut after getting listed in March as investors bought into the biggest technology initial public offering in more than a year, and DBX stock closed up more than 35 percent in their first day of trading. DBX has posted better than expected results in the second quarter 2018 due to the strong performance of the company. Further, DBX is giving tough competition to its peers after being the first company to test and deploy SMR technology. We give a “Buy” recommendation at the current price of $ 28.97.
 

DBX Stock Price Chart (Source: Financial Times)

 
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