Dropbox, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Dropbox provides cloud-based file storage and content collaboration subscriptions. Results are unaudited and in U.S. dollars; amounts below are in millions except per-share data and operating metrics.
Financial and operating results
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $487.4 | $428.2 | $1,409.8 | $1,215.3 |
| Gross profit / margin | $384.2 / 79% | $323.4 / 76% | $1,101.0 / 78% | $909.2 / 75% |
| Operating income (loss) / margin | $30.0 / 6% | $(18.6) / (4)% | $69.6 / 5% | $(73.9) / (6)% |
| Net income (loss) | $32.7 | $(17.0) | $89.5 | $(46.1) |
| Diluted EPS | $0.08 | $(0.04) | $0.21 | $(0.11) |
| Operating cash flow | Not presented for quarter alone | $400.1 | $341.7 | |
| Free cash flow (non-GAAP) | Not presented for quarter alone | $332.3 | $231.1 |
- Q3 revenue rose 14% year over year; nine-month revenue increased 16%. Management attributed growth principally to more paying users, the Plus-plan price increase, and a greater mix of higher-priced plans.
- Paying users were 15.25 million at September 30, versus 14.00 million a year earlier. Total ARR was $1.981 billion versus $1.766 billion; ARPU was $128.03 for Q3 versus $123.15.
- Cash and cash equivalents were $452.7 and short-term investments were $773.8 at quarter-end, totaling $1,226.5. Current assets were $1,330.2 and current liabilities $1,026.9. The company reported no revolving-credit borrowings, $45.7 of letters of credit, and $679.3 of available borrowing capacity; it was covenant-compliant.
- Lease obligations were significant: reported operating lease liabilities totaled $867.0 and finance lease obligations $255.8. These are lease obligations, not drawn revolving debt.
- Nine-month cash used in investing activities was $191.6 and cash used in financing activities was $307.9. Financing outflows included $177.3 of stock repurchases, $66.5 for tax withholdings on equity awards, and $64.9 of finance-lease principal payments.
Changes versus prior comparable periods
- Gross margin improved to 79% from 76% in Q3 and to 78% from 75% for the nine-month period, as revenue growth outpaced cost-of-revenue growth; Q3 cost of revenue declined 2% year over year.
- Operating results shifted from losses to profits in both comparisons. R&D spending increased 6% in Q3 and 14% year to date, while sales and marketing declined 2% and 1%, respectively.
- Nine-month G&A expense decreased 7%, partly reflecting a $23.8 stock-compensation reversal after co-founder and former director Drew Houston? Correction: former co-founder and director Mr. Ferdowsi resigned in March 2020 and forfeited his unvested awards. The reversal included $21.5 relating to prior periods.
- Nine-month operating cash flow increased to $400.1 from $341.7, and free cash flow to $332.3 from $231.1, helped by stronger operating cash generation and lower capital expenditure ($67.8 versus $110.6).
- Cash and cash equivalents declined from $551.3 at December 31, 2019, while short-term investments increased from $607.7. The company repurchased 9.2 million shares for $177.3 during the first nine months of 2020.
Outlook, commentary, risks, and unusual items
- Virtual First and impairment: In October 2020, Dropbox announced remote work as its primary employee model and plans to reduce its office footprint and sublease space. It preliminarily expected a $400–$450 impairment charge on right-of-use and other lease-related assets, mostly in Q4 2020, with some potentially in the first half of 2021. Management expected a GAAP net loss in Q4 and for full-year 2020; no numeric revenue or earnings guidance is provided in the supplied filing text.
- Management said the benefits and long-term financial and operating effects of Virtual First are uncertain. Sublease income may be lower than expected, and the company may be unable to sublease space on favorable terms, potentially resulting in further impairment or continuing lease costs.
- COVID-19 impacts remained uncertain. Risks cited include paying-user growth, renewals and payment timing, vendor and hardware supply disruptions, foreign-exchange effects, and lower interest income from reduced rates. The company also noted savings from reduced travel, events, utilities, and other costs.
- Other key risks include competition and slowing growth, retention and conversion of free users, platform availability and security, privacy regulation, foreign-currency exposure (28% of nine-month sales were in non-U.S. currencies; the company did not hedge), and dependence on third-party services and integrations.
- Six putative securities class actions concerning alleged IPO-registration-statement misstatements were disclosed. A federal court dismissed the consolidated complaint with leave to amend on October 21, 2020; Dropbox said it considered the claims without merit and did not expect a material adverse impact. The filing also describes ongoing patent litigation and other ordinary-course legal matters.
- Other notable items: Q3 included retirement of $110.2 of fully depreciated datacenter assets. The company recorded $23.1 of other income for the nine-month period, including equity-investment and foreign-currency gains. It maintained a full valuation allowance on U.S. and Irish deferred tax assets.
Important facts for investors to verify
- Whether the estimated $400–$450 impairment was recorded as expected, its final timing and amount, and its effect on GAAP profitability and lease-related asset values.
- Subsequent trends in paying users, ARR, ARPU, renewals, and the mix of monthly versus annual subscriptions, including whether the reported growth persists.
- Whether operating cash flow and free cash flow remain strong after considering capital spending, finance leases, share repurchases, and the timing of customer billings.
- The amount of repurchases under the $600 million authorization and the remaining cash available after repurchases and lease commitments.
- Developments in the IPO-related lawsuits, other litigation, and any material change in the company’s assessment of potential exposure.
- Execution and costs of the Virtual First transition, including realized sublease income, further impairment charges, employee impacts, and any effect on product development or security.