Dropbox, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; comparative period is Q1 2018. Dropbox operates a global collaboration platform and reported more than 500 million registered users and 13.2 million paying users.
Key financial metrics
| Metric | Q1 2019 | Q1 2018 | Change / context |
|---|---|---|---|
| Revenue | $385.6 million | $316.3 million | Up 22% |
| Gross profit / margin | $287.2 million / 74% | $195.7 million / 62% | Margin expanded 12 percentage points |
| Operating loss | $21.3 million | $465.9 million | Q1 2018 included exceptional IPO-related stock compensation |
| Net loss | $7.7 million | $465.5 million | Basic and diluted loss per share: $0.02 vs. $2.13 |
| Operating cash flow | $63.2 million | $61.8 million | Cash generation increased slightly |
| Capital expenditures / free cash flow | $29.7 million / $33.5 million | $9.9 million / $51.9 million | Free cash flow fell, largely as capex rose |
| Cash and short-term investments | $915.2 million | $1,089.3 million at Dec. 31, 2018 | Cash and cash equivalents were $359.2 million |
Paying users increased 15% year over year to 13.2 million; ARPU rose to $121.04 from $114.30. Deferred revenue was $508.4 million at quarter-end. No customer represented more than 1% of revenue.
Material changes and balance-sheet position
- The comparison with Q1 2018 is significantly affected by $418.7 million of cumulative stock-based compensation recognized when IPO-related vesting conditions were met. Total stock-based compensation was $55.6 million in Q1 2019 versus $486.5 million a year earlier.
- Dropbox acquired HelloSign on February 8 for $177.6 million of purchase consideration. The acquisition added $44.6 million of identifiable intangible assets and $132.7 million of goodwill. A further $48.5 million of cash compensation for key personnel is conditional on continued service and is to be expensed over three years.
- Total assets were $2.13 billion and total liabilities $1.42 billion at March 31. The company had no revolving-credit borrowings; $68.9 million of letters of credit left $656.1 million available under its $725 million facility. It reported compliance with facility covenants.
- Adoption of lease accounting standard ASC 842 added operating-lease right-of-use assets and liabilities. At March 31, operating-lease liabilities were $515.6 million and finance-lease obligations were $177.4 million.
Outlook, commentary and risks
- Management expects cost of revenue, research and development, sales and marketing, and general and administrative expenses to increase in absolute dollars. It expects gross margin to remain relatively steady near term and increase modestly over the longer term.
- Management expects free cash flow to fluctuate, with infrastructure purchases and investment in offices—including the new headquarters—potentially lowering free cash flow as a percentage of revenue. The filing provides no specific revenue, earnings, or free-cash-flow guidance.
- Management said existing cash, investments, operating cash flow, and available credit should meet needs for the foreseeable future. Q1 investing cash outflow included $172.1 million paid for HelloSign, net of cash acquired.
- The new San Francisco headquarters has expected minimum lease obligations of $843.1 million across its phases, before anticipated landlord reimbursements and variable expenses. The company also disclosed $408.3 million of operating leases not yet commenced.
- Key risks include retaining and converting users, slowing revenue growth, competition and pricing pressure, service disruption or security incidents, privacy regulation, foreign-exchange exposure, and successful integration of HelloSign. The company does not hedge currency exposure and notes that a stronger U.S. dollar could pressure margins.
- Dropbox is defending a patent-infringement lawsuit brought by Synchronoss Technologies; management said it did not expect the matter to have a material adverse effect, while cautioning litigation outcomes are uncertain. Disclosure controls were assessed as effective at a reasonable-assurance level.
Investor verification points
- Assess underlying operating-cost and margin trends apart from the unusually high IPO-related stock compensation in Q1 2018.
- Check whether paying-user growth, ARPU, renewals, and conversion of registered users continue to support revenue growth.
- Track free cash flow and capital spending, including office and datacenter build-outs, alongside acquisition spending.
- Review HelloSign integration, acquisition-related costs, goodwill and intangible valuations, and the service-conditioned $48.5 million compensation commitment.
- Evaluate lease commitments—including the headquarters—and credit-facility covenants against liquidity needs.
- Monitor litigation, privacy and security developments, competitive pressure, and currency movements.