After a +9.1% session on Thursday, shares of cloud file
storage company Dropbox (DBX 31.76, -2.67, -7.76%) trade over 7% lower on Friday
despite an upbeat quarterly report. Dropbox trades lower due in part to the
recent run up, the company’s news that Dennis Woodside would step down as Chief
Operating Officer, and commentary about the upcoming lockup expiration.
So, despite beating market expectations in its second quarter report, shares of DBX are lower on Friday as investors digest news of a departing executive. Specifically, the company announced that Dennis Woodside would stepping down as COO. Mr. Woodside will remain at the company until early September and serve as an advisor through the end of the year. In lieu of hiring another COO, the company announced the promotion of two of its existing employees to executive roles -- Yamini Rangan, currently VP of Business Strategy & Operations, will become Chief Customer Officer, and Lin-Hua Wu will take on the role of VP of Communications.
Swinging back to the results, Dropbox beat on both earnings and sales in the second quarter, reporting earnings per share (EPS) of $0.11 on revenue growth of 27.2% to $339.2 mln. Additionally, non-GAAP gross margin were 74.5%, as compared to 66.7% in the same period last year, and paying users totaled 11.9 mln, as compared to 9.9 mln for the same period last year. Average revenue per paying user was $116.66, as compared to $111.19 for the same period last year.
Guidance was also strong, with Dropbox management expecting Q3 revenue to be in the range of $350-353 mln, non-GAAP operating margin to be in the range of 7.5-8.5%, and diluted weighted average shares outstanding to be in the range of 424-429 mln based on its trailing 30-day average share price.
Dropbox also raised its revenue guidance for the full year 2018. The company now sees FY18 revenues between $1.366-1.372 bln, up from $1.343-1.355 bln. Management also raised its non-GAAP operating margin guidance to 9.5-10.5% from the previous 9-10% and continues to expect free cash flow to be in the range of $340-350 mln. This figure includes one-time spend related to the build out of its new corporate headquarters. Finally, the company expects 2018 fully diluted weighted average shares outstanding to be in the range of 411-416 mln based on its trailing 30-day average share price.
In that vein, management now expects total Capital Expenditures related to the build out, net of tenant improvement allowances received, to be approximately $30-35 mln in 2018. In Q2, the company had $19 mln of additions to its capital lease lines for data center equipment. The company continues to expect additions to capital lease lines to be high single digits as a percentage of revenue this year.
Additionally, the company’s lock-up period is scheduled to end on September 18, 2018, which falls within its quarterly blackout period that commences at the close of trading on September 7, 2018. Therefore, in accordance with the lock-up agreements with the underwriters, the restricted period will end at the close of market on August 23, 2018, which is ten trading days prior to the commencement of the company’s quarterly blackout period. Dropbox will also release its market standoff agreements when the restricted period expires.
The company estimates that up to approximately 358.2 mln shares of Class A common stock may become eligible for sale in the public market after the close of market on August 23, 2018 (subject to continued vesting of any unvested equity awards as of such date), of which approximately 205.4 mln shares would be held by affiliates and subject to the volume and other restrictions of Rule 144 of the Securities Act of 1933, as amended.
All this news leaves the stock knocking on the door of its 50-day simple moving average (32.01). The stock recouped that level yesterday, ultimately finishing up a decent amount into the print. What the situation boils down to is that investors were perhaps not expecting a shakeup at the top. However, executive turnover isn’t always a bad thing, especially when it’s for the right or even unrelated reasons. There was no sign of foul play here, so investors may just be taking a piece off here with the looming lock-up expiration nearing.
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