Dropbox (DBX 26.63, +1.89, +7.64% ), which operates a cloud-based document sharing
platform, is trading higher after reporting strong Q3 results last night. This
was just DBX's third earnings report as a public company after debuting their
IPO in March 2018. The stock has been languishing since then. It has mostly
been staying in the $30+ range thru mid-August, but it has been trending lower
since then into the $22-30 area. We'll
see if this report can get the stock back on a sustained uptrend.
Non-GAAP EPS rose 57% yr/yr to $0.11, which was a good bit better than market expectations. Revenue rose 25.7% yr/yr to $360.3 mln, ahead of prior guidance of $350-353 mln. In terms of key metrics investors pay close attention to, paying users totaled 12.3 mln vs 10.4 mln in the prior year. Margins are another metric people watch closely. Non-GAAP operating margin in Q3 was 12.8% vs 8.2% last year and well above prior guidance of 7.5-8.5%. The operating margin expansion was driven by gross margin expansion and higher revenue in the quarter.
Average revenue per paying user (ARPU) was $118.60, up 6% from $112.05 for the same period last year. ARPU expansion was primarily driven by strong adoption of DBX's premium, Professional, and Advanced plans by new paying users. DBX also saw some tailwinds from teams opting to remain on its Advanced plan upon the expiration of their grandfathering period.
On the call, DBX talked about how one of the most important ways it's improving its platform is through machine intelligence, which DBX calls DBXi. As content gets created on an increasing variety of applications (email, texts, documents, spreadsheets etc.), it's getting more difficult to find things. DBX has introduced two new machine intelligence initiatives to help solve these problems.
First, DBX upgraded its search engine with an improved architecture called Nautilus. It delivers a more personalized search experience by surfacing the most relevant results. Second, DBX has made strides in making images searchable. Most tools cannot find text and images, but customers use images a lot. DBX has been scanning these docs to make them searchable.
In sum, the EPS and revenue upside in Q3 was pretty similar to what DBX has done in its two previous quarters as a public company. The key for DropBox is that while everyone knows them as a free place to store documents that can be shared with friends, it's important for them to convert as many free users to paying users as possible.
People may question why DropBox would give away storage for free, but the freemium model makes sense if it can build sufficient scale. The good thing is that all these free users create a pool of potential paying customers. In fact, they are potentially more valuable because they are already familiar with the DropBox ecosystem and they provide good word-of-mouth advertising to their family and friends etc. It's imperative for DBX to show these free users how much better the product can be when they pay extra.
It's early, but DBX seems to be converting these free users at a good enough of pace. DBX has increasingly been targeting business customers, broadening its focus beyond consumers. The company is profitable, which actually surprised us a bit as many freemium companies are not. Also, DBX seems to be quite innovative in terms of new product development as they seem to roll out new product versions and entirely new product offerings fairly often.
As we said, the stock price has been languishing since the IPO, mostly staying in the $30+ range thru mid-August, but it has been trending lower since then into the $22-30 area.
On a final note, people sometimes confuse DropBox (DBX) with Box (BOX). They are similar in that they both provide cloud-based document storage. However, BOX focuses more on enterprise customers while DBX has historically been more consumer-focused, but they are moving more into the business world. BOX is on a different fiscal year end, they will report Q3 (Oct) results on November 28. With that said, DBX's strong results probably bode well for BOX's upcoming earnings report.
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