Dropbox reported 2Q revenue +3% above street and FCF +14% above (not factoring cap leases). DBX guided 3Q revenue MP 1.6% above street and raised full year 2018 revenue from $1,349MM MP to $1,369MM MP (street @ $1,345MM). The company also raised OPM% +50 bps for the full year to 10% at the MP. The biggest hit came on holding FCF guidance at $345MM MP for the full year (below street @ 351MM).
PUTS AND TAKES FROM THE QUARTER
- New SMR technology (increases storage density by 75% per hard disk drive) will help the company continue to improve GM% from 74% today to l-t goal of 77% MP
- New hires: VP of Product (x-LinkedIn, eBay, Apple) and VP of Product Marketing (x-Salesforce) could be a sign of a shift in focus to more enterprise-centric strategy
- +5% y/y growth in ARPU driven by a major milestone in 50% completion of renewals from customers previously grandfathered into higher-priced premium Teams plan: unfortunately, the company didn’t disclose how many users converted (an important signal to the payoff of this forced movement strategy)
- The COO leaving with no backup plan in place is a surprise, and continues to signal that the company lacks a coherent and sustainable business model
- Churn creep – the addition of only 400K net paying users in the face of management commentary around consistent gross user adds signals that there was a slight level of churn that popped from the price movement on the advanced teams plans
CORE THESIS REMAINS INTACT
- We continue to love the technology and innovation. We see continued GM% improvement in the out-years, as they begin to employ the new SMR hard drive technology. Bullish.
- Price will continue to drive better than street revenue, but only minimally while competition will weigh on outlook.
- The enterprise part can be good but the stock is way overpriced for just enterprise wins.
As we have said before (HERE), the company is squarely in the harvest part of its business lifecycle. There is nothing wrong with harvest, but the valuation / multiple range is totally different, reflecting a circumscribed market opportunity rather than an open-ended one. The model of free-to-paid-to-premium users is a path with rising churn, slower underlying revenue growth, rising FCF, but falling multiples. We continue to see downside risk to ~$20; DBX remains on Hedgeye Technology’s Best Ideas Short.
Please call or e-mail with any questions.
Ami Joseph
Managing Director
