Dropbox (DBX)

Cloud storage and e-signature company Dropbox (Nasdaq: DBX) announced better-than-expected revenue in Q1 CY2025, but sales fell by 1% year on year to $624.7 million. Its non-GAAP profit of $0.70 per share was 12.6% above analysts’ consensus estimates.

Company Overview

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.

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.

A company’s long-term performance is an indicator of its overall quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years. Over the last three years, Dropbox grew its sales at a weak 4.8% compounded annual growth rate. This was below our standard for the software sector and is a tough starting point for our analysis.

This quarter, Dropbox’s revenue fell by 1% year on year to $624.7 million but beat Wall Street’s estimates by 0.7%.

Looking ahead, sell-side analysts expect revenue to decline by 3% over the next 12 months, a deceleration versus the last three years. This projection doesn't excite us and implies its products and services will face some demand challenges.

While reported revenue for a software company can include low-margin items like implementation fees, annual recurring revenue (ARR) is a sum of the next 12 months of contracted revenue purely from software subscriptions, or the high-margin, predictable revenue streams that make SaaS businesses so valuable.

Dropbox’s ARR came in at $2.55 billion in Q1, and over the last four quarters, its growth was underwhelming as it averaged 1.7% year-on-year increases. This performance mirrored its total sales and suggests that increasing competition is causing challenges in securing longer-term commitments.

Dropbox reported 18.16 million customers at the end of the quarter, a sequential decrease of 60,000. That’s worse than what we’ve observed previously, and we’ve no doubt shareholders would like to see the company accelerate its sales momentum.

The customer acquisition cost (CAC) payback period measures the months a company needs to recoup the money spent on acquiring a new customer. This metric helps assess how quickly a business can break even on its sales and marketing investments.

It’s relatively expensive for Dropbox to acquire new customers as its CAC payback period checked in at 69.9 months this quarter. The company’s slow recovery of its sales and marketing expenses indicates it operates in a highly competitive market and must invest to stand out, even if the return on that investment is low.

For software companies like Dropbox, gross profit tells us how much money remains after paying for the base cost of products and services (typically servers, licenses, and certain personnel). These costs are usually low as a percentage of revenue, explaining why software is more lucrative than other sectors.

Dropbox’s gross margin is one of the highest in the software sector, an output of its asset-lite business model and strong pricing power. It also enables the company to fund large investments in new products and sales during periods of rapid growth to achieve higher profits in the future. As you can see below, it averaged an elite 82.2% gross margin over the last year. That means Dropbox only paid its providers $17.85 for every $100 in revenue.

Dropbox produced a 81.3% gross profit margin in Q1, marking a 1.9 percentage point decrease from 83.2% in the same quarter last year. Zooming out, the company’s full-year margin has remained steady over the past 12 months, suggesting its input costs have been stable and it isn’t under pressure to lower prices.

Dropbox has been a well-oiled machine over the last year. It demonstrated elite profitability for a software business, boasting an average operating margin of 20.7%. This result isn’t surprising as its high gross margin gives it a favorable starting point.

Analyzing the trend in its profitability, Dropbox’s operating margin decreased by 3 percentage points over the last year. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability.

This quarter, Dropbox generated an operating profit margin of 29.4%, up 6.7 percentage points year on year. The increase was solid, and because its revenue and gross margin actually decreased, we can assume it was more efficient because it trimmed its operating expenses like marketing, R&D, and administrative overhead.

If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.

Dropbox has shown terrific cash profitability, driven by its lucrative business model that enables it to reinvest, return capital to investors, and stay ahead of the competition while maintaining an ample cushion. The company’s free cash flow margin was among the best in the software sector, averaging an eye-popping 33.8% over the last year.

Dropbox’s free cash flow clocked in at $153.7 million in Q1, equivalent to a 24.6% margin. The company’s cash profitability regressed as it was 1.7 percentage points lower than in the same quarter last year, prompting us to pay closer attention. Short-term fluctuations typically aren’t a big deal because investment needs can be seasonal, but we’ll be watching to see if the trend extrapolates into future quarters.

Over the next year, analysts predict Dropbox’s cash conversion will improve. Their consensus estimates imply its free cash flow margin of 33.8% for the last 12 months will increase to 36.9%, it options for capital deployment (investments, share buybacks, etc.).

Dropbox reported $1.18 billion of cash and $1.99 billion of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company’s debt level isn’t too high and 2) that its interest payments are not excessively burdening the business.

With $1.10 billion of EBITDA over the last 12 months, we view Dropbox’s 0.7× net-debt-to-EBITDA ratio as safe. We also see its $8 million of annual interest expenses as appropriate. The company’s profits give it plenty of breathing room, allowing it to continue investing in growth initiatives.

It was good to see Dropbox narrowly top analysts’ annual recurring revenue expectations this quarter. We were also happy its billings narrowly outperformed Wall Street’s estimates. On the other hand, its customer growth slowed. Guidance will be provided on the upcoming earnings call and could move shares. Overall, this was a mixed quarter. The stock traded down 1.3% to $29.30 immediately following the results.

Updated: May 15, 2025 at 10:08 PM EDT

Are you wondering whether to buy Dropbox or pass? We urge investors to not only consider the latest earnings results but also longer-term business quality and valuation as well.

Dropbox isn’t a terrible business, but it doesn’t pass our bar. To begin with, its revenue growth was weak over the last three years, and analysts expect its demand to deteriorate over the next 12 months. And while its bountiful generation of free cash flow empowers it to invest in growth initiatives, the downside is its ARR has disappointed and shows the company is having difficulty retaining customers and their spending. On top of that, its declining operating margin shows it’s becoming less efficient at building and selling its software.

Dropbox’s price-to-sales ratio based on the next 12 months is 3.5x. Beauty is in the eye of the beholder, but our analysis shows the upside isn’t great compared to the potential downside. We're pretty confident there are superior stocks to buy right now.

Wall Street analysts have a consensus one-year price target of $27.94 on the company (compared to the current share price of $29.10).

Want to invest in a High Quality big tech company? We’d point you in the direction of Microsoft and Google, which have durable competitive moats and strong fundamentals, factors that are large determinants of long-term market outperformance.

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