Dropbox (NASDAQ:DBX) Reports Q2 In Line With Expectations, Gross Margin Improves

Full Report / August 04, 2022
Add to Watchlist

Cloud storage and e-signature company Dropbox (Nasdaq: DBX) reported results in line with analyst expectations in Q2 FY2022 quarter, with revenue up 7.93% year on year to $572.7 million. Dropbox made a GAAP profit of $62 million, down on its profit of $88 million, in the same quarter last year.

Dropbox (DBX) Q2 FY2022 Highlights:

  • Revenue: $572.7 million vs analyst estimates of $571.2 million (small beat)
  • EPS (non-GAAP): $0.38 vs analyst estimates of $0.37 (2.7% beat)
  • Free cash flow of $205.9 million, up 57.5% from previous quarter
  • Customers: 17,370,000, up from 17,090,000 in previous quarter
  • Gross Margin (GAAP): 81.5%, up from 79.8% same quarter last year

Founded by the long-serving CEO Drew Houston and Arash Ferdowsi in 2007, Dropbox (NASDAQ:DBX) provides a file hosting cloud platform that helps organizations collaborate and share documents.

Houston came up with the idea when he realised that he didn't have his work USB drive on him, while sitting on a bus to New York for a weekend. He saw that a shared folder on the cloud would remove the need for a physical drive and he started coding the product (for himself) while still on the bus. And so blossomed a passion for the file-sharing product, which he named Dropbox after the communal folder he and his friends would use during LAN parties, back in their teens. Today, over half a million organisations use Dropbox to securely store and collaborate on all manner of file types.

From its inception, Dropbox saw viral growth because when one person used it to share a folder with another, the second person would have to create a dropbox account. From the early days, it was clear that Dropbox would face a crowded field, but by moving first and growing free users quickly, the company was able to become a trusted name in cloud storage. Since then, it has expanded into electronic signatures, but to this day organisations can sign up and try the solution for free, at least initially.

The catch phrase "digital transformation" originally referred to the digitization of documents within enterprises. The growth of digital documents has spurred an explosion of collaboration within and between businesses, which in turn is driving the demand for e-signature and content management platforms.

Dropbox faces competition from large organizations that provide cloud content management solutions such as Microsoft (NASDAQ:MSFT), Alphabet (NASDAQ:GOOG) and Box (NYSE:BOX).

Sales Growth

As you can see below, Dropbox's revenue growth has been unremarkable over the last year, growing from quarterly revenue of $530.6 million, to $572.7 million.

Dropbox Total Revenue

Dropbox's quarterly revenue was only up 7.93% year on year, which might disappoint some shareholders. On the other hand, revenue increased $10.3 million quarter on quarter, a strong improvement on the $3.1 million decrease in Q1 2022, and a sign of acceleration of growth, which is nice to see indeed.

Ahead of the earnings results the analysts covering the company were estimating sales to grow 7.05% over the next twelve months.

Customer Growth

You can see below that Dropbox reported 17,370,000 customers at the end of the quarter, an increase of 280,000 on last quarter. That's in line with the customer growth we have seen over the last couple of quarters, suggesting that the company can maintain its current sales momentum.

Dropbox Customers


What makes the software as a service business so attractive is that once the software is developed, it typically shouldn't cost much to provide it as an ongoing service to customers. Dropbox's gross profit margin, an important metric measuring how much money there is left after paying for servers, licenses, technical support and other necessary running expenses was at 81.5% in Q2.

Dropbox Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.81 left to spend on developing new products, marketing & sales and the general administrative overhead. Significantly up from the last quarter, this is a great gross margin, that allows companies like Dropbox to fund large investments in product and sales during periods of rapid growth and be profitable when they reach maturity.

Cash Is King

If you follow StockStory for a while, you know that we put an emphasis on cash flow. Why, you ask? We believe that in the end cash is king, as you can't use accounting profits to pay the bills. Dropbox's free cash flow came in at $205.9 million in Q2, roughly the same as last year.

Dropbox Free Cash Flow

Dropbox has generated $719.5 million in free cash flow over the last twelve months, an impressive 31.9% of revenues. This robust FCF margin is a result of Dropbox asset lite business model, scale advantages, and strong competitive positioning, and provides it the option to return capital to shareholders while still having plenty of cash to invest in the business.

Key Takeaways from Dropbox's Q2 Results

With a market capitalization of $8.85 billion Dropbox is among smaller companies, but its more than $1.44 billion in cash and positive free cash flow over the last twelve months give us confidence that Dropbox has the resources it needs to pursue a high growth business strategy.

It was good to see Dropbox improve their gross margin this quarter and once again produce a quarter of strong free cash flows. On the other hand, the revenue growth is slow these days. Overall, it seems to us that this was an ok quarter for Dropbox. The company is flat on the results and currently trades at $23.9 per share.

Is Now The Time?

When considering Dropbox, investors should take into account its valuation and business qualities, as well as what happened in the latest quarter. Although we have other favorites, we understand the arguments that Dropbox is not a bad business. However, its revenue growth has been very weak, and analysts expect growth rates to deteriorate from there. But on a positive note, its very efficient customer acquisition hints at the potential for strong profitability.

Dropbox's price to sales ratio based on the next twelve months is 3.6x, suggesting that the market is expecting more moderate growth, relative to the hottest tech stocks. In the end, beauty is in the eye of the beholder. While Dropbox wouldn't be our first pick, if you like the business, the shares are trading at a pretty interesting price point right now.

To get the best start with StockStory check out our most recent Stock picks, and then sign up to our earnings alerts by adding companies to your watchlist here. We typically have the quarterly earnings results analyzed within seconds from the data being released, and especially for the companies reporting pre-market, this often gives investors the chance to react to the results before the market has fully absorbed the information.