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

Dropbox Inc (NASDAQ: DBX), a leading global collaboration platform, offers storage for users to share and synchronize their files, and generates revenue through paid subscriptions for additional space and business features. DBX has delivered top notch earnings and revenue figures for third quarter of 2018, beating analysts’ expectations. The key aspects to look through are the innovations in products that have driven stickiness or enhanced retention in terms of use by customers with improved search architecture called Nautilus, Dropbox Extensions and Paper Timelines for project management such that users are spending more time in the Dropbox application. DBX is thus developing an efficient self-service model with improving capabilities and leading Cloud-Based Content and Collaboration Platform services.


Financial Highlights (Source: Company Reports)

Strong third quarter 2018 performance: DBX in the third quarter of FY 18 has reported the adjusted earnings per share of 7 cents, beating the analysts’ estimates for the adjusted earnings per share of 6 cents. The company had reported the adjusted revenue growth of 26 percent to $360.3 million in the third quarter of FY 18, beating the analysts’ estimates for revenue of $352.8 million. The top-line growth came at the back of continued paid-user conversions. Additional revenue could be generated from each customer; while net income for the third quarter was $45 million, which is up from $24 million a year-ago. Dropbox had about 12.3 million paying customers (at end of September quarter), up 18% over the prior corresponding quarter. The conversions to individual and team plans have helped the group maintain a good paying customer base. DBX attracts new customers through self-serve products, as opposed to many peers; and the average revenue per customer has now increased to $118.60 against $112.05 noted in the same quarter of last year. Dropbox had earlier indicated that over 500 million of customers are the registered users with 300 million of those being potential paying customers. Looking at the net cash scenario, operating activities reported for cash of $128.0 million in the third quarter, as compared to $111.5 million in the same period last year. Free cash flow was $120.0 million in Q3 2018, as compared to $108.3 million in the same period last year. Cash, cash equivalents and short-term investments were $1,039.1 million at the end of the third quarter of 2018. The gross margins expanded to be over 75% from 68% the year before due to the unit cost efficiency gains with infrastructure hardware.

New Partnerships boosting performance: DBX has reinforced the global collaboration platform through new partnerships and integrations; and its Business customers will thus now have access to advanced security features (while security has been a key concern among customers). Dropbox has been seen to be partnering with Google Cloud Identity, Coronet, BetterCloud, Proofpoint, SailPoint, etc., and these have built integrations to support Dropbox Business. New partner capabilities also help admins to efficiently manage and control identity access, manage devices, govern data, and oversee security processes when employees and teams use Dropbox. Through collaboration with Google Cloud Identity, Dropbox has, in a way, enabled one to manage access to Dropbox Business accounts with Google login credentials and multifactor authentication. Moreover, the company has recently partnered with several investment class companies, including Adobe, Airtable and Lucidchart, so that the users can embed, design files, spreadsheets, and graphics directly from these applications into one consolidated paper dock. Further, the company strengthened its partnership with the company Salesforce, and this includes work around updated apps for Salesforce’s Sales Cloud and Service Cloud, and the launch of Extensions recently, catering to third-party integrations of services from companies including Microsoft, Adobe, DocuSign, etc. The users can now seamlessly perform actions without any break like add PDFs or take videos, request signatures and more right from Dropbox. The company has also enhanced the core Dropbox experience and has enabled Paper folder previous. With this added functionality, the users can paste the link in their Dropbox folders that their team can navigate through without ever leaving a Paper doc.

Increased R&D Spend is Paying Off: During the third quarter 2018, R&D expense was up to $105 million, or 29% of revenue compared to 26% in Q3 a year ago, that was partly due to higher investments in new product development and testing. During the quarter, the company delivered a number of innovations related with machine intelligence. Nautilus, the company’s upgraded search engine with improved architecture to speed up searches for relevant files has been made quite interesting. Nautilus can harness the power of machine intelligence for the delivery of completely personalized search experience for hundreds of millions of users. DBX also launched optical character recognition technology to search for images stored on the platform. There are billions of documents and PDF files on DBX that are actually a photo or a scan of original document, and are therefore stored in image form as opposed to text. This machine intelligence enabled future will be available to users on the company’s professional advanced and enterprise plans. Further, the company has also launched Paper Timelines, which is an interactive tool for project management on its document editing service. With Timelines the teams can add due dates and milestones and can show status update to stay aligned. From aggregating key files to assigning tasks, the teams can easily oversee all of their projects and corresponding activity with this tool so nothing gets overlooked.

One of the world‘s leading retailers is now DBX client: Meanwhile, DBX now has the Casino Group, one of the world‘s leading retailers as its clients. The Casino Group, French retailer which is a leader in the global food retail market, has more than 12,000 stores and over 220,000 employees around the world. Their most well-known brands in the French retail market and worldwide comprise of Monoprix, Leader Price, Spar, Naturalia, Franprix, and Cdiscount. The Casino Group has deployed Dropbox Business as a part of a broader strategy to modernize and update the Group’s Information Technology. The Casino Group will initially deploy Dropbox Business for 1,000 employees, who are mainly based at its headquarters. It will then plan to scale the deployment to other services or entities throughout the whole Casino Group.

Ingram Micro expanded its Dropbox business team deployment in the third quarter: The global IT distributor, Ingram Micro has expanded its Dropbox business team deployment in the third quarter. Ingram Micro's cloud division has established several high-value workflows on Dropbox, that include the external sharing with partners, as well as internal collaboration and planning. Ingram Micro's IT team will begin to leverage premium Dropbox business features like domain verification and account capture to gain insights into Dropbox usage by employees, and ensure that work and personal files are appropriately segregated. The Company also has chosen DBX, because of the company’s ability to integrate with an array of best in class security providers.


Margins and Financial Ratios (Source: Company Reports and Thomson Reuters)

Target for Acquisition: Salesforce made a significant 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 and Salesforce might be interesting in acquiring the group. 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. DBX has grown from 100 million users in 2012 to 200 million in November 2013 and to 500mm as of now.

Healthy Outlook: Dropbox expects fourth-quarter sales of $367 million to $370 million, and this seems to be above market estimates of $363.7 million. For the fourth quarter of 2018, non-GAAP operating margin is expected to be in the range of 9% to 10%. Dropbox has raised its full-year sales guidance from a range of $1.36 billion to $1.37 billion, to $1.38 billion to $1.39 billion against some market estimates of $1.37 billion. For FY 18, DBX expects gross margins to be approximately 75% due to lower depreciation expense on storage infrastructure that will offset spend on network expansion as the company grows the global footprint. For the FY 18, the company has also raised the non-GAAP operating margin guidance, which was previously 9.5% to 10.5%, to 11.5% to 12% and the company has also raised the free cash flow guidance, which was previously $340 million to $350 million, to $350 million to $360 million. For FY 18, the company expects the total CapEx to be $60 million to $65 million, including $30 million to $35 million related to the build out of the new headquarters. Finally, the company expects 2018 fully diluted weighted average shares outstanding to be in the range of $408 million to $413 million based on the trailing 30 day average share price.


Guidance (Source: Company Reports)

Stock Recommendation: Dropbox has exceeded the market expectations in all the first, second and third quarters of the year. The company has raised the full year guidance for FY 18. Forward 24 months EPS consensus scenario indicates a double digit upside (%) in stock price given strong execution of strategy, healthy top line growth continuing from the past and enhanced free cash flow margins. DBX stock finds support at $20.3 and resistance at $28.2. We give a “Buy” recommendation at the current price of $21.75.


DBX Daily Chart (Source: Thomson Reuters)

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