Dropbox, Inc. — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. All financial amounts are in U.S. dollars; dollar figures below are in millions unless stated otherwise. Dropbox generates most revenue from subscriptions, with more than 90% through self-serve channels. It reported 16.14 million paying users and more than 700 million registered users.
Financial performance and liquidity
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $530.6 | $467.4 | $1,042.2 | $922.4 |
| Gross profit / margin | $423.5 / 80% | $364.9 / 78% | $825.8 / 79% | $716.8 / 78% |
| Operating income | $84.4 | $12.8 | $126.9 | $39.6 |
| Net income | $88.0 | $17.5 | $135.6 | $56.8 |
| Diluted EPS | $0.22 | $0.04 | $0.34 | $0.14 |
| Operating cash flow | Not separately provided for the quarter | Not separately provided for the quarter | $335.6 | $199.2 |
| Free cash flow (non-GAAP) | Not separately provided for the quarter | Not separately provided for the quarter | $324.8 | $145.3 |
Q2 revenue grew 13.5% year over year; six-month revenue grew 13.0%. Management attributed growth primarily to more paying users and a sales mix shift toward higher-priced plans. Q2 operating margin was about 15.9%, versus 2.7% a year earlier; net margin was about 16.6%, versus 3.7%. Six-month operating and net margins were about 12.2% and 13.0%, respectively, versus 4.3% and 6.2%.
As of June 30, cash and cash equivalents were $885.3 and short-term investments were $1,058.9, totaling $1,944.2. Current assets were $2,067.3 and current liabilities $1,125.0. Deferred revenue was $657.5. Operating cash flow and free cash flow increased year over year; free cash flow is defined by the company as operating cash flow less capital expenditures.
Outstanding convertible notes had $1,389.1 principal and $1,368.4 carrying value: $695.8 due 2026 and $693.3 due 2028. The notes bear no regular interest. The $500 million revolving facility had no borrowings, $52.4 of letters of credit outstanding, and $447.6 available capacity; Dropbox reported covenant compliance.
Material changes versus prior comparable period
- Revenue increased 13.5% in Q2 and 13.0% for the first half. Paying users rose to 16.14 million from 14.96 million at June 30, 2020; total ARR was $2.166 billion versus $1.931 billion.
- Gross margin improved by about 2 percentage points in Q2 and 1 point for the first half. Operating income and net income rose materially, alongside lower operating expenses in Q2.
- Six-month operating cash flow increased to $335.6 from $199.2, while free cash flow rose to $324.8 from $145.3, supported by higher operating cash generation and lower capital expenditures.
- Dropbox issued approximately $1.4 billion of convertible notes in Q1 2021 and used proceeds in part to fund share repurchases. It repurchased 24.1 million shares for $582.7 in the first half, including $200.0 outside the repurchase program in connection with the notes.
- The DocSend acquisition closed March 22, 2021 for total purchase consideration of $131.7; its results were immaterial to reported period results. Goodwill increased by $110.1.
Outlook, management commentary, risks and unusual items
- Outlook: The filing provides no specific revenue or earnings guidance. Management expects free cash flow to generally increase as subscription sales grow and office-buildout capital expenditures decline; it expects cost of revenue and research and development spending to rise in absolute dollars, and gross margin to remain relatively constant over time.
- Virtual First: Dropbox recorded $17.3 of real-estate and related asset impairment in the first half, following $398.2 in 2020. It expects additional charges related to certain European leases. Benefits from remote work, including savings and productivity gains, are uncertain; sublease income and lease obligations remain risks.
- Workforce reduction: An approximately 11% workforce reduction announced in January generated $13.7 of severance and related expenses in the first half. The company did not expect significant further costs from the reduction.
- Taxes: Management said a significant portion of the valuation allowance on Irish deferred tax assets could potentially be released within 12 months, depending on actual profitability; timing and amount remain uncertain.
- COVID-19 and operating risks: No material adverse financial impact was reported for the periods, but the full effects remained uncertain. Risks include user retention and conversion, slowing growth, competition, security or service disruptions, foreign exchange exposure, and execution of the Virtual First model. Thirty percent of first-half sales were denominated in currencies other than U.S. dollars; the company did not hedge currency exposure.
- Legal matters: Federal IPO-related securities litigation reached an immaterial settlement in principle; the court preliminarily approved it on August 3, 2021, after quarter-end, with final approval scheduled for December 2, 2021. An appeal in the related state case remained pending; the company said it would defend against it.
- Other items: Stock-based compensation was $141.8 in the first half. The company reported an accumulated deficit of $2,547.5 and stockholders’ deficit of $94.8 at June 30, 2021. Management nevertheless stated available liquidity and expected operating cash flows should meet needs for the foreseeable future.
Important facts for investors to verify
- Whether paying-user, ARR, and ARPU growth persist and translate into subscription renewals, upgrades, and revenue growth.
- Cash generation quality and sustainability, including the effects of advance billings, deferred revenue, working-capital movements, and capital spending.
- Share repurchase pace and remaining authorization, weighed against the $1.389 billion note principal, lease commitments, and potential dilution from warrants or note conversion.
- Actual costs and sublease proceeds under Virtual First, including any additional impairment charges and the long-term effect on operations.
- Progress on DocSend integration and whether the acquisition contributes meaningfully to revenue and growth.
- Final disposition and financial impact, if any, of the securities litigation settlement and state-case appeal.