Dropbox, Inc. — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. Financial figures are in U.S. dollars; amounts are in millions unless stated otherwise. Dropbox operates a global collaboration platform and reported more than 500 million registered users and 13.6 million paying users.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $401.5 | $339.2 | $787.1 | $655.5 |
| Gross profit | $298.6 | $249.7 | $585.8 | $445.4 |
| Gross margin | 74% | 74% | 74% | 68% |
| Operating loss | $(34.0) | $(7.2) | $(55.3) | $(473.1) |
| Net loss | $(21.4) | $(4.1) | $(29.1) | $(469.6) |
| Net loss per share, diluted | $(0.05) | $(0.01) | $(0.07) | $(1.51) |
- Q2 revenue grew 18% year over year, reflecting a 14% increase in paying users and higher average revenue per paying user (ARPU: $120.48 versus $116.66).
- Q2 operating expenses rose to $332.6 from $256.9, including increases in research and development, sales and marketing, and general and administrative costs. Gross margin was unchanged at 74%.
- For the first half, net cash provided by operating activities was $192.0, compared with $173.7. Capital expenditures were $63.4 versus $19.6, producing free cash flow of $128.6 versus $154.1. Free cash flow is a company-defined non-GAAP measure.
- At June 30, cash and cash equivalents were $343.6 and short-term investments were $629.2, totaling $972.8. Current assets were $1,067.7 and current liabilities $903.1. Deferred revenue was $517.3.
- No borrowings were outstanding under the $725.0 revolving credit facility; $657.2 remained available after letters of credit. Dropbox reported compliance with facility covenants. Finance lease liabilities totaled $188.5; operating lease liabilities totaled $679.7.
Changes, unusual items, and outlook
- The six-month 2018 comparison is affected by a $418.7 cumulative stock-based compensation charge associated with IPO-related vesting of two-tier restricted stock units. This substantially increased 2018 operating expenses and net loss; it explains much of the apparent year-over-year improvement in first-half losses.
- Q2 2019 other income included a $7.4 gain on an equity investment. The six-month 2019 income tax benefit of $5.1 primarily reflected HelloSign-related tax effects.
- Dropbox acquired HelloSign in February 2019 for purchase consideration of $177.9, including $171.6 of cash paid net of cash acquired in investing cash flows. The acquisition added $133.0 of preliminary goodwill. A further $48.5 of payments to key HelloSign employees is contingent on continued service and is to be expensed over three years.
- Management expects cost of revenue to rise in absolute dollars, gross margin to remain relatively constant near term and increase modestly over the longer term, and free cash flow to fluctuate. Infrastructure, datacenter and office investment—including the new headquarters—may reduce free cash flow as a percentage of revenue. Management said existing liquidity, operating cash flows and available borrowing capacity should meet needs for the foreseeable future. No specific revenue or earnings guidance was provided in the filing.
- Dropbox took possession of the second phase of its new San Francisco headquarters in April and planned to relocate in Q3 2019. Total expected minimum obligations for all three phases were $841.9, before expected tenant-improvement reimbursements and variable costs; $250.1 of operating lease commitments had not yet commenced at quarter-end.
Risks and contingencies
- Key business risks include retaining and upgrading subscribers, converting free users, slowing revenue growth, intense competition, service reliability, cybersecurity and privacy, and dependence on third-party platforms and datacenters. More than 90% of revenue came through self-serve channels.
- Twenty-nine percent of first-half sales were denominated in currencies other than U.S. dollars; Dropbox had no currency-hedging program. Management said a hypothetical 10% currency-rate change would not have produced material gains or losses for the periods shown.
- One customer represented 41% of trade and other receivables at June 30, although no customer accounted for more than 10% of revenue in the periods presented.
- Dropbox described ordinary-course legal matters, including a patent case in which the court resolved claims in Dropbox’s favor; the plaintiff appealed. Management did not consider pending matters likely to have a material adverse effect, while noting litigation outcomes are uncertain.
- Disclosure controls were assessed as effective at a reasonable assurance level. The filing identifies no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether paying-user and ARPU growth can continue, and whether subscription renewals and upgrades support revenue growth.
- How operating expenses and infrastructure spending affect operating losses, gross margin, and free cash flow after the unusually large 2018 IPO-related stock-compensation charge rolls out of comparisons.
- HelloSign integration, acquisition-related results and costs, and the eventual purchase-price allocation.
- Cash use and commitments associated with the headquarters, datacenters, finance leases, and operating leases.
- Customer receivable concentration, cybersecurity and privacy exposure, and the outcome of the Synchronoss appeal.