Dropbox, Inc. — Form 10-Q Summary
Reporting period: Three months ended March 31, 2018; comparative period is the three months ended March 31, 2017. Dropbox operates a global collaboration platform and reported more than 500 million registered users and 11.5 million paying users. The quarter included the company’s March 27 IPO and concurrent private placement.
Key financial results
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Revenue | $316.3 million | $247.9 million |
| Gross profit / margin | $195.7 million / 62% | $154.4 million / 62% |
| Operating loss | $465.9 million | $33.4 million |
| Net loss | $465.5 million | $33.1 million |
| Net loss per share, diluted | $2.13 | $0.17 |
| Operating cash flow | $61.8 million | $61.6 million |
| Free cash flow (non-GAAP) | $51.9 million | $56.5 million |
Revenue increased 28%, principally from 23% growth in paying users and higher average revenue per paying user (ARPU: $114.30 versus $110.79). Paying users grew to 11.5 million from 9.3 million a year earlier. International revenue was $154.7 million and U.S. revenue was $161.6 million.
Reported expenses and net loss were heavily affected by IPO-triggered stock compensation: stock-based compensation was $486.5 million, compared with $38.8 million in Q1 2017. The company recorded a $418.7 million cumulative catch-up for two-tier RSUs when the IPO registration statement became effective, plus $10.6 million for co-founder awards. These amounts materially increased reported operating expenses and net loss; they are largely noncash, although related payroll-tax payments were cash outflows.
Cash from operations was nearly flat year over year. Free cash flow fell to $51.9 million from $56.5 million, reflecting compensation and bonus payments, payroll taxes on released RSUs, marketing outlays, and higher capital expenditures, partly offset by advance subscription billings. The filing defines free cash flow as operating cash flow less capital expenditures.
Financial position and liquidity
- At March 31, 2018, cash and cash equivalents were $665.3 million and short-term investments were $180.7 million, totaling $846.0 million. Current assets were $929.9 million; current liabilities were $746.1 million.
- Deferred revenue was $444.6 million, up from $417.9 million at year-end 2017. The company recognized $188.2 million of Q1 revenue that had been included in opening deferred revenue.
- Capital lease obligations totaled $170.0 million: $92.8 million current and $77.2 million non-current. No revolving-credit borrowings were outstanding. After $82.7 million of letters of credit, available revolver capacity was $642.3 million; the company reported covenant compliance.
- The IPO and concurrent private placement generated $638.2 million net of underwriting discounts and commissions, before offering costs. The underwriters’ additional-share option closed April 3, 2018, generating a further $108.4 million not included in quarter-end financial statements.
Material changes, outlook, and risks
- Despite higher revenue, GAAP losses widened sharply because of IPO-related stock compensation. Excluding that exceptional accounting impact, the filing does not provide a single adjusted operating-profit measure.
- Management expects revenue growth to be supported by paying-user growth and upgrades, but cautions that growth rates have slowed and may continue to slow. It expects operating expenses and infrastructure investment to increase in absolute dollars. Gross margin, excluding specified stock-compensation impacts, is expected to remain relatively constant near term and increase modestly over the long term.
- Management expects free cash flow to fluctuate and potentially decline as a percentage of revenue with infrastructure investment, office build-outs, and the new headquarters. It believes cash, investments, operating cash flow, and available credit will meet needs for the foreseeable future; additional financing may nevertheless be required.
- Commitments include a San Francisco headquarters lease with expected minimum obligations of approximately $829.7 million, before tenant-improvement reimbursements and variable costs. The company expects recurring rent payments to begin in Q3 2019 and plans to sublease its current headquarters after moving.
- Principal business risks include subscription renewal and paid conversion, slowing growth, competition, service availability and data security, international and privacy regulation (including GDPR taking effect in May 2018), foreign-exchange exposure, and the ability to scale infrastructure and operations. The company had no currency hedging program and reported 33% of Q1 sales denominated in non-U.S. currencies.
- Dropbox disclosed an ongoing patent-infringement lawsuit brought by Synchronoss Technologies; management did not expect it to materially adversely affect results, cash flows, or financial position, but litigation outcomes remain uncertain. The company also disclosed an OFAC voluntary self-disclosure concerning apparent sanctions-related platform access; the filing does not state a final resolution.
- The company changed the estimated useful life of certain infrastructure equipment from three to four years, reducing Q1 cost-of-revenue depreciation by $6.1 million. It also reported effective disclosure controls at quarter-end. The expected 2019 lease-accounting adoption is anticipated to substantially increase recorded assets and liabilities, with no material income-statement impact expected.
Important facts for investors to verify
- How much future reported expense and dilution will arise from remaining employee and co-founder equity awards, including the $500.1 million unamortized compensation balance for awards other than the co-founder grants.
- Whether paying-user growth, renewals, upgrades, and ARPU can sustain revenue growth as the company’s growth rate moderates.
- Underlying cash generation after separating large noncash stock compensation from payroll taxes, RSU tax-withholding payments, capital expenditures, and lease-financed infrastructure spending.
- The full cost and timing of the new headquarters lease, the ability to sublease the current office, and the implications of lease commitments for liquidity.
- Potential outcomes and financial exposure from the Synchronoss litigation and the OFAC disclosure, as well as the company’s readiness for GDPR and other privacy requirements.
- Voting control and potential share supply: Class B shares carry ten votes each, and the filing describes substantial insider voting control and potential future sales as lock-up restrictions expire.