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

Eyeing $3.2 Billion Digital Signature Market: Dropbox Inc (NASDAQ: DBX) is a leading global collaboration platform that transforms the way people and teams work together, and was formerly known as Evenflow, Inc. and then the name got changed to Dropbox, Inc. in October 2009. Dropbox Inc. was founded in 2007 and is headquartered in San Francisco, California; and the group offers storage for users to share and synchronize their files. The group generates 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. Meanwhile, DBX undertook a user survey that confirmed about it considering the addition of an electronic signature feature to its Dropbox Professional product, which it referred as “E-Signature from Dropbox”. DBX is looking for exploring a venture into the digital signature market, which according to consulting firm Stratistics MRC is expanding at the rate of 30.0% annually. The global digital signature market had generated $662.4 million in revenues in 2016, which Stratistics MRC expects to grow to $3.2 billion by 2022. The major players in the digital signature market comprise of Adobe Systems, DocuSign, and OneSpan. Thus, as per the survey done, it was demonstrated that how this digital signature feature works and customers were asked about how likely they would be to use the product and how often. Dropbox is gauging the customer’s interest in a potential new product. DBX had also asked survey respondents about their usage of other e-signature brands. Moreover, the addition of a digital signature tool to its paid packages could help DBX to upgrade from free plans to paid plans, which will potentially lead to higher average revenues per customer. DBX is working on a contract workflow, being able to move to the signature phase without changing context (or to share with a user who doesn’t use Dropbox) could add lot of value over and above simply storing the document. DBX is looking for ways to move beyond pure storage to give customers the ability to collaborate and share that content, particularly without forcing them to leave the application to complete a job. This ability to do work without task switching is something that DBX has been working on with Dropbox Paper.


Transformation of Software Playbook (Source: Company Reports)

Investment in its own cloud infrastructure Magic Pocket: DBX has spent hundreds of millions of dollars to build its own infrastructure Magic Pocket and has removed itself from other dependents such as Amazon. They have become more vertically integrated, which means more cost savings and better control over quality. As a result, the file transfers are not only super easy but also lightning fast.

Target for Acquisition: Salesforce had made a $100mn investment at approximately $21 per share during the IPO time. Salesforce has a history of buying complimentary companies in order to develop their own platform. In order to increase their revenues, it would seem that Dropbox complements Salesforce cloud business. Salesforce currently owns around 5 million of shares. Other potential companies that could be interested in acquiring DBX, would be any of the largest tech companies like Microsoft, Apple or Google all with whom Dropbox has existing relationships. Steve Jobs had already tried to acquire Dropbox in 2009, but the attempt was unsuccessful. From that time to now, DBX has not only survived but has grown from 100 million users in 2012 to 200 million in November 2013 and to 500 million as of today across 180+ countries.

Growing Ecosystem and Platform: DBX has actively been signing up with technology partners and integrated with names such as Microsoft, Adobe, Salesforce, Slack, and Okta. The company  also has a partnership with Google and supports their ecosystem strategy to be at the center of users' workflows.

Robust Performance in the Second Quarter 2018: DBX in the second quarter of FY 18 has posted better than expected results and beaten the analysts’ estimates. The company delivered 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%. During the second quarter 2018, paying users had totaled 11.9 million, as compared to 9.9 million for the same period last year. Average revenue per paying user was $116.66 in the second quarter, as compared to $111.19 for the same period last year. The company's 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 bigger storage at higher prices, which led to a higher average revenue per user (ARPU) as more individual and corporate clients signed up for it. Dropbox's paying subscribers grew 20 percent to 11.9 million at the end of June and were above 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 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 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.
 

Second Quarter 2018 Performance (Source: Company Reports)

Healthy 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. In the third quarter, the operating margin is expected to be 8% on the back of planned increases in infrastructure investments, and timing of certain marketing and hiring expenses. 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. The company has also raised the operating margin forecasts by 50bps. 2018 fully diluted shares are expected to be in the range of 411 to 416 million shares.


FY 18 Guidance (Source: Company Reports)

Robust growing market penetration: DBX core file-sharing business is part of a rapidly growing market, which is projected to reach $5.5 billion by 2020 as per key market experts. The company is also aggressively expanding and investing in adjacent markets such as collaboration with features such as Dropbox Paper. This feature is like Google Docs and will allow the users to create documents, and projects instead of just sharing existing files like most other file-sharing companies.


Financial and Other Metrics (Source: Company Reports and Thomson Reuters)

Stock Analysis and Recommendation: DBX is trading at a level of A$27.11, has support at $25.65 and resistance at $34.45. This reflects upside stock momentum going forward. The group has also improved significantly on its financial and operating metrics. Meanwhile, Dropbox has exceeded the Wall Street expectations in both first and second quarter. The analysts are expecting that this would continue in the third and the fourth quarter. The company's investments in its own unique custom-built infrastructure called Magic Pocket and SMR (drive technology that increases overall storage density) and digital products like Paper, Showcase, and its app, along with the company’s efforts to deal with more enterprise customers, are expected to boost sales. Further, DBX is backed by some of the most promising Venture Firms and Strategic Investors, who are holding onto their shares post IPO. The group also made some leadership changes including COO transition with the overall transformational approach. The group is expected to witness double digit growth going forward. We give a “Buy” on Dropbox at the current price of $27.11.
 

DBX Daily Chart (Source: Thomson Reuters)

 
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