Dropbox (NASDAQ:DBX) Exceeds Q2 Expectations

Full Report / August 05, 2021
Add to Watchlist

Cloud storage and e-signature company Dropbox (Nasdaq: DBX) announced better-than-expected results in the Q2 FY2021 quarter, with revenue up 13.5% year on year to $530.6 million. Dropbox made a GAAP profit of $88 million, improving on its profit of $17.5 million, in the same quarter last year.

Dropbox (DBX) Q2 FY2021 Highlights:

  • Revenue: $530.6 million vs analyst estimates of $523.8 million (1.29% beat)
  • EPS (non-GAAP): $0.40 vs analyst estimates of $0.33 (22.3% beat)
  • Free cash flow of $216 million, up 98.5% from previous quarter
  • Customers: 16,140,000, up from 15,830,000 in previous quarter
  • Gross Margin (GAAP): 79.8%, up from 78.6% previous quarter

Founded by the long-serving CEO Drew Houston and Arash Ferdowsi in 2007, Dropbox 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 acceleration of digital transformation initiatives by enterprises, coupled with the growing volume of data generated by businesses are important factors that are driving the demand for cloud storage and document 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 solid over the last year, growing from quarterly revenue of $467.4 million, to $530.6 million.

Dropbox Total Revenue

This quarter, Dropbox's quarterly revenue was once again up 13.5% year on year. We can see that the company increased revenue by $19 million quarter on quarter. That's a solid improvement on the $7.5 million increase in Q1 2021, so shareholders should appreciate the acceleration of growth.

Analysts covering the company are expecting the revenues to grow 8.92% over the next twelve months, although we would expect them to review their estimates once they get to read these results.

Customer Growth

You can see below that Dropbox reported 16,140,000 customers at the end of the quarter, an increase of 310,000 on last quarter. That is a bit slower customer growth than last quarter but still in line with what we are used to seeing lately, suggesting that the company still has decent 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, licences, technical support and other necessary running expenses was at 79.8% in Q2.

Dropbox Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.79 left to spend on developing new products, marketing & sales and the general administrative overhead. Significantly up from the last quarter, this is a good 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 reaches maturity.

Key Takeaways from Dropbox's Q2 Results

Sporting a market capitalisation of $12.1 billion, more than $1.94 billion in cash and with positive free cash flow over the last twelve months, we're confident that Dropbox has the resources it needs to pursue a high growth business strategy.

It was nice that Dropbox improved their gross margin, even if just slightly. And we were also happy to see it topped analysts’ revenue expectations, even if just narrowly. On the other hand, it was less good to see that revenue growth is now a bit weaker and there was a slowdown in customer growth. Zooming out, we think this was still a decent, albeit mixed, quarter, showing the company is staying on target. The company is up 3.01% on the results and currently trades at $32.5 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 Dropbox is not a bad business, it probably wouldn't be one of our picks. Its revenue growth has been mediocre, and analysts expect growth rates to deteriorate from there.

Dropbox's price to sales ratio based on the next twelve months is 5.7, suggesting that the market has lower expectations of the business, relative to the high growth 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.