Bullish parts:
- Street looking for organic 1000bp decel in 2019...come on
- Street net adds look ridiculous...~1.5MM net adds per year, on what basis? Down from 2.2MM last year, 2.3MM year prior, 2.4MM before that...and YTD run-rate at 1.7MM with the seasonally best quarter for sign-ups right ahead? Come on. There is (real) decel (which matters for the medium term) and there is (fake) decel (which makes the setup way too easy into EPS). Fake decel!
- Other points:
- Acquired HelloSign in 1Q19 for $230MM, a small but growing company whose customer base grew ~25% in 2018
- 4Q18 should have the full strength of the y/y comparison of the current pricing increase
- Technology based gross margin leverage should continue to show through into margins
The Negatives:
- Price increases took effect Feb 1 2018...unless they announce another round there will be a decelerating impact on 2019 ARPU y/y which will be Shortable as the comparisons move from wax (4Q18) towards wane (4Q19)
- Resounding chorus of employee commentary (on available websites) knocking the company’s lack of vision, poor strategy, and potentially also the inability to grow organically with HelloSign marking a shift to inorganic growth strategy (ALREADY?!!?)
- Drew's stated strategy is to harvest the core business and drive the company towards new businesses. If you believe they will have success in the new businesses then you should be Long. Our view top-down is that it is very rare for companies to successfully pull this off without major game changing M&A. And on a bottom-up basis we are bearish on DBX chance for success in the new areas they have targeted. The 'new' businesses are:
- Enterprise storage: still nowhere on revenue impact, and the CRM integrations introduced at Dreamforce were high on fluff, low on substance
- Collaboration software: even internal DBX users of Paper complain about it, the tech was originally acquired in 2014, launched in 2015, re-launched in 2017, and...isn't changing the way people work (stated objective) or hitting the P&L much at all despite the time and effort underway
- Price increases are great short term fodder but don’t repeat longer term and the company isn’t cheap on FCF (x-cap leases) with the current pricing round nearly fully in FCF estimates
- With a registered user base of 300MM+ you'd think DBX would be pursuing strategies to unlock greater motion of free to paid. But a strategy of Taking Price on existing subscribers is the equivalent of throwing in the towel on Subscriber growth and pursuing monetization today. ~12.5-13MM current subs growing 1.5-2MM per year plus a gradual 100-200bp annual price kicker, with current rolling 12-months OCF margins of ~29-30% stuck since the transition off of AWS in 2016...
The ROI Equation:
- DBX has an efficient customer capture model. The company spent ~$340MM of non-GAAP S&M expense to add 1.9MM subs LTM, or ~$180 of CAC per sub. Unit churn is low teens (was 13% in 2017). Which means LTV is ~$1,050 against $180 CAC. The math works. Just remember...
- CAC was $160 last Q (TTM), $138 the Q before $127 before that...so while rising ARPU helps the LTV side of the equation, until you know where the math stabilizes, assume the multiple on this stock is going lower over the medium term
Stock is ~28x EV/FCF on 2019 using Street FCF minus Cap leases. Growth rate is declining from mid-20's% to high-teens %. Seems pretty fair, at best. A pop on better than 'fake decel' tonight would set up the Short even sweeter.
More questions & Some answers probably a few hours away.
Ami Joseph
Managing Director
Yosef Vaitsblit
Analyst
