Dropbox, Inc. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. Amounts are in millions of U.S. dollars except per-share data and operating metrics. Dropbox sells subscriptions to its cloud content collaboration platform; it reported more than 700 million registered users and 16.49 million paying users.
Financial and operating performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $550.2 | $487.4 | $1,592.4 | $1,409.8 |
| Gross profit / margin | $438.2 / 80% | $384.2 / 79% | $1,264.0 / 79% | $1,101.0 / 78% |
| Operating income / margin | $77.3 / 14% | $30.0 / 6% | $204.2 / 13% | $69.6 / 5% |
| Net income | $75.6 | $32.7 | $211.2 | $89.5 |
| Diluted EPS | $0.19 | $0.08 | $0.53 | $0.21 |
Q3 revenue rose 12.9% year over year; nine-month revenue rose 13.0%. Management attributed growth primarily to more paying users, a greater mix of higher-priced plans, and favorable foreign exchange. Paying users reached 16.49 million, versus 15.25 million a year earlier; ARR was $2.218 billion versus $1.981 billion. ARPU was $133.79 for Q3 versus $128.03.
Cash flow: For the nine months, operating cash flow was $567.1 million versus $400.1 million. Capital expenditures were $20.8 million versus $67.8 million, producing reported free cash flow of $546.3 million versus $332.3 million. Management linked the increase to higher operating cash generation and lower office build-out spending.
Liquidity and debt: At September 30, cash and cash equivalents were $688.9 million and short-term investments were $1,239.8 million, totaling $1.929 billion. Current assets were $2.056 billion and current liabilities $1.175 billion. The company had $1.389 billion principal amount of 0% convertible notes outstanding: $695.8 million due 2026 and $693.3 million due 2028; carrying value was $1.369 billion. The $500 million revolving facility had no borrowings, $52.2 million of letters of credit, and $447.8 million available. Dropbox reported covenant compliance. Finance lease obligations totaled $303.1 million and operating lease liabilities $828.8 million.
Total liabilities were $3.502 billion, exceeding total assets of $3.339 billion; stockholders’ deficit was $162.6 million. Deferred revenue was $668.0 million. Nine-month share repurchases totaled $763.7 million, including $200 million outside the repurchase program in connection with the notes issuance.
Material changes and unusual items
- Operating income and margins improved as revenue growth outpaced cost growth. Cost of revenue increased 8.5% in Q3 and 6.3% year to date.
- Nine-month results included a $17.3 million real-estate impairment related to the Virtual First strategy; no such charge was recorded in Q3. Dropbox recorded a $398.2 million related impairment in 2020.
- Dropbox acquired DocSend in March for total purchase consideration of $131.6 million; its reported operating contribution was immaterial in the periods presented. The acquisition added $110.0 million of goodwill.
- The company issued the 2026 and 2028 notes in Q1, receiving approximately $1.4 billion net of offering and issuance costs before related hedge transactions. Note hedges cost $265.3 million and warrant sales generated $202.9 million; together they are intended to reduce potential conversion dilution, though warrants may dilute shares if the stock price exceeds their strike price.
- A workforce reduction of approximately 11% was announced in January; Dropbox recorded $14.3 million of related costs for the nine months and did not expect significant further charges.
- Other income declined year over year, partly because 2020 included a $17.5 million equity-investment gain. 2021 also included gains on infrastructure asset disposals.
Outlook, management commentary, and risks
The filing gives no numerical revenue or earnings guidance. Management expects free cash flow generally to increase as subscription sales grow and capital expenditures on office build-outs decline. It expects gross margin to remain relatively constant, while cost of revenue, research and development, and sales and marketing expenses are expected to rise in absolute dollars. Management says existing cash, investments, operating cash flow, and available revolver capacity should meet needs for the foreseeable future.
Dropbox said COVID-19 had not materially adversely affected financial condition or results through Q3, but future effects remain uncertain. The long-term effect of the Virtual First model is also uncertain; anticipated savings and productivity benefits are not assured. The company may incur additional impairment charges, including on certain European leases, and sublease income could be lower than expected.
Principal risks include slower revenue growth; retaining, upgrading, and converting users; intense competition and pricing pressure; cybersecurity, privacy, service availability, and data-loss risks; dependence on third-party integrations and infrastructure; foreign-exchange exposure (the company does not hedge currency exposure); and execution risks from Virtual First and acquisitions. The company also has long-term lease commitments and convertible-note obligations. A federal securities class-action settlement was preliminarily approved, with final approval scheduled for December 2, 2021; an appeal remained pending in the state case. Management said resolution of pending matters was not expected to materially adversely affect results, cash flows, or financial position.
Key facts for investors to verify
- Whether paying-user growth, ARR, and ARPU continue to support subscription revenue growth, and how much growth reflects pricing mix or foreign exchange.
- Whether cash flow and free cash flow remain strong after considering lease commitments, finance-lease asset purchases, and share repurchases.
- How the 2026/2028 notes, hedge and warrant transactions, and potential share dilution evolve; confirm conversion conditions and future cash obligations.
- Whether Virtual First produces expected savings and sublease income, or leads to further impairment charges.
- Whether the DocSend acquisition delivers the intended product and customer benefits, and whether the securities litigation settlement receives final approval.