Dropbox, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021. Amounts are in U.S. dollars; financial statement figures are in millions unless otherwise noted. Dropbox provides cloud content collaboration subscriptions and reported more than 700 million registered users and 15.83 million paying users.
Financial performance and position
| Metric | Q1 2021 | Q1 2020 | Change / context |
|---|---|---|---|
| Revenue | $511.6 | $455.0 | Up 12%, driven mainly by more paying users and a greater mix of higher-priced plans. |
| Gross profit / margin | $402.3 / 79% | $351.9 / 77% | Gross profit up 14%; margin expanded. |
| Operating income / margin | $42.5 / 8% | $26.8 / 6% | Improved despite a $17.3 real-estate impairment charge. |
| Net income / diluted EPS | $47.6 / $0.12 | $39.3 / $0.09 | Net income increased; tax benefit was $1.2 versus a $0.5 tax provision. |
| Operating cash flow | $115.7 | $53.3 | Higher, with advance subscription collections contributing. |
| Free cash flow (non-GAAP) | $108.8 | $25.5 | Operating cash flow less capital expenditures. |
At March 31, cash and cash equivalents were $845.5 and short-term investments were $1,070.9. Total assets were $3,307.3 and total liabilities were $3,390.3, leaving a stockholders’ deficit of $83.0. Dropbox reported $1,389.1 principal amount of 0% convertible notes due 2026 and 2028, carried at $1,367.5 net. The $500 million revolving facility had no borrowings; $53.0 of letters of credit left $447.0 available, and the company was in covenant compliance.
Key operating measures: ARR was $2.112 billion, up from $1.864 billion a year earlier; paying users rose to 15.83 million from 14.60 million; and annualized ARPU increased to $132.55 from $126.30. Management attributed ARPU growth mainly to higher-priced plan mix and, to a lesser extent, prior Plus-plan pricing changes.
Material changes versus the prior period
- Revenue grew 12%; gross margin rose approximately two percentage points, while operating margin improved from 6% to 8%.
- General and administrative expense increased 50% to $58.6, partly because Q1 2020 included a $23.8 million reversal of co-founder stock compensation. Total stock-based compensation was $67.9, versus $39.8 in Q1 2020.
- Operating cash flow and free cash flow increased; capital expenditures declined to $6.9 from $27.8.
- Dropbox acquired DocSend on March 22 for total purchase consideration of $131.7, including $125.5 cash paid to holders. The acquisition added $110.1 of goodwill; DocSend’s Q1 operating results were immaterial.
- Dropbox issued the 2026 and 2028 convertible notes for approximately $1.4 billion net proceeds, entered note hedges costing $265.3, and received $202.9 from warrant sales. It repurchased $431.9 of shares during the quarter, including $200.0 outside the repurchase program in connection with the notes.
Outlook, commentary, risks and unusual items
- Outlook: No specific revenue or earnings guidance was provided. Management expects gross margin to remain relatively constant and free cash flow to generally increase as subscription sales grow and office-related capital spending declines. Cost of revenue, research and development, and sales and marketing expenses are expected to increase in absolute dollars over time.
- Virtual First: Dropbox expects some facilities savings and sublease income but cautions that benefits are uncertain. It recorded a $17.3 impairment in Q1, following $398.2 in Q4 2020, and expects additional charges related to certain European leases. It also disclosed $105.4 of operating-lease commitments for leases not yet commenced.
- Workforce: An announced January reduction of approximately 11% of staff resulted in $12.8 of severance and related expense in Q1; management did not expect significant further costs from that reduction.
- COVID-19 and other risks: The company reported no material adverse Q1 impact from COVID-19 but said effects remain uncertain. Principal risks include slowing revenue growth, user retention and conversion, competition, security and service disruptions, execution of the Virtual First model, foreign-exchange exposure, and servicing convertible-note obligations. Thirty percent of Q1 sales were denominated in currencies other than U.S. dollars; Dropbox reported no currency hedging.
- Contingencies: Federal IPO securities plaintiffs reached a settlement in principle for an immaterial amount, subject to documentation and court approval. Plaintiffs appealed dismissal of the state case; Dropbox said it would defend the appeal. The filing says resolution of pending matters was not expected to have a material adverse impact.
Investor facts to verify
- Whether ARR, paying-user growth and ARPU trends persist, and how much growth reflects pricing or plan mix.
- Cash generation after considering advance billings, lease obligations, share repurchases and acquisition-related payments.
- The net economic and potential dilution effects of the convertible notes, note hedges and warrants, including their conversion and settlement terms.
- Actual sublease proceeds and any further Virtual First impairment charges, particularly for European leases.
- Integration and financial contribution from DocSend, and the final approval and terms of the IPO litigation settlement.