Dropbox, Inc.

Company Overview: Dropbox, Inc. (NASDAQ: DBX) is a collaboration platform provider, which provides users with the ability to 1) Create, which includes Dropbox paper and doc scanner 2) Access and organise, which consists of search, rich previews, Dropbox Smart Sync, version history, third-party ecosystem, rewind, PC backup, passwords, and vault 3) Share, which comprises folders, shared links, transfer, file requests, and watermarking, 4) Collaborate, which incorporate comments and annotations, file activity stream, viewer information and presence, and HelloSign and 5) Secure, encompassing encryption, file recovery, and administrator controls features.

DBX Details

Key Takeaways from Q3FY21 (ended September 30, 2021)

• Double-Digit Growth in Revenue: In Q3FY21, the company's total revenue amounted to USD 550.2 million, representing a 12.88% increase year-over-year from USD 487.4 million in Q3FY20 attributable to growth in paying users, favourable foreign exchange rates across various currencies, and a shift in sales mix toward our higher-priced subscription plans.
• Surge in Operating Income: The company's operating income increased 157.67% YoY to USD 77.3 million in Q3FY21 from USD 30.0 million in Q3FY20, representing an improved operating margin of 14.0% in Q3FY21 vs. 6.2% in Q3FY20, attributable to a 789-bps reduction in total operating expense ratio.
• Growth in Net Income: In Q3FY21, DBX reported a net profit of USD 75.6 million, increased from USD 32.7 million in Q3FY20, representing a YoY growth of 131.19% with a diluted EPS of USD 0.19.

Revenues & Operating Profit Key Highlights; Analysis by Kalkine Group

Other Key Findings: Operating Metrics

• Growth in ARR: Total Annual Recurring Revenue (ARR), defined as a product of the number of users who have active paid licenses at the end of the period with annualized subscription price, grew 10.35% YoY to USD 2,218 million from USD 2,010 million on a constant currency basis.
• Increase in Paying Users: Paying users referred to number of users with active paid licences for access to DBX’s platform, increased to USD 16.49 million during Q3FY21 from USD 15.25 million during Q3FY20.

• Improvement in ARPU: Average revenue per paying user was USD 133.79 in Q3FY21 compared to USD 128.03 in Q3FY20.

Recent Developments

• On January 12, 2022, DocSend, a secure document sharing platform and DBX, recently released new data based on its Pitch Deck Interest metrics, revealing that venture capital investor and founder activity significantly increased year over year (YoY) in Q4FY21 and FY21. In Q4, VC engagement with startup pitch decks hit an all-time high, up 55 percent year over year and 44 percent overall.
• On October 06, 2021, the customer journey experience firm, ServiceSource International, Inc., said today that it had secured a new contract with DBX. ServiceSource gains another brand name client in the hyper-competitive cloud solutions industry due to this arrangement, solidifying its digital inside sales services as a strategic advantage in fast-growing markets.

Balance Sheet & Liquidity Position

• Increased Cash Balance: The company exited Q3FY21 with total cash and cash equivalents of USD 1.93 billion, significantly higher than USD 1.12 billion at the end of FY20.
• Cashflow from Operations: Operating cash inflow in 9MFY21 increased to USD 567.1 million from USD 400.1 million in the prior corresponding period.
• Raise in Leverage: DBX reported total outstanding debt of USD 1.67 billion as of September 30, 2021, higher than USD 271.2 million as of FY20 end.

Key Metrics: In Q3FY21, DBX's operating and net margins were 14.0% and 13.7%, higher than 6.2% and 6.7% reported in the corresponding previous financial year, respectively. Current ratio stood at 1.75x as of September 30, 2021 vs. industry median of 1.84x. Long-Term Debt to Total Capital was 102.8% as of September 30, 2021, significantly higher than 15.3% on September 30, 2020.

Profitability Metrics; Analysis by Kalkine Group

Top 10 Shareholders: The top 10 shareholders together form around 39.61% of the total shareholding, while the top 4 constitute the maximum holding. The Vanguard Group, Inc., and Pictet Asset Management Ltd. hold the maximum stake in the company at 10.21% and 4.61%, respectively, as also highlighted in the chart below: 

Top 10 Shareholders; Analysis by Kalkine Group 

Risk Analysis

• Voting Concentration Risk: Each share of DBX's Class B common stock has ten votes, compared to one vote for each share of its Class A common stock. As of September 30, 2021, its directors, executive officers, and other significant holders control 78.1% of the voting power, together with Mr. Houston (Co-founder and CEO) accounting for approximately 72.2% of the voting power. This constrains the ability of other shareholders to influence corporate decisions.
• Competition Risk: DBX operates in the highly competitive Application software industry and faces direct competition from established players like Apple, Google, Amazon, and Microsoft, which could cause pricing pressure. Should this trend continue, it could harm its financials.
• Receivable Concentration Risk: In Q3FY21, DBX's top two customers accounted for 15% and 33% of its trade and other receivables, respectively. As a result, the loss of such key customers could hurt its financials.
• Dependence on Third-Party Datacentres: DBX relies on data centre hosting services provided by third parties such as Amazon Web Services. Therefore, any termination/lapse of service or damage to a facility could negatively affect DBX's operations.

Outlook

• Looking forward, DBX expects to clock revenue of USD 2.15 billion in FY21, along with a Non-GAAP Operating Margin of 29.5%, at the midpoint of company guidance.
• It also anticipates generating Free cash flows to the tune of USD 715 million.

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)

Source: Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company's NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks. 

Stock Recommendation: DBX's share price has corrected 21.90% over the past six months. The stock is currently leaning towards the lower band of its 52-week range of USD 21.63 to USD 33.00. We have valued the stock using the EV/Sales multiple-based illustrative relative valuation method and arrived at a target price with an upside of low twenties (in percentage terms). We believe that the company can trade at a premium compared to its peer's average, considering its strong cash flows, robust profitability margins and growth in operating metrics. We have taken peers like Box, Inc. (NYSE: BOX) and VMware, Inc. (NYSE: VMW). Considering the strong bottom-line performance, robust profitability margins, associated risks, and current valuation, we give a "Buy" recommendation on the stock at the current price of USD 24.45, up 2.05% as of January 31, 2022, 10:29 AM ET.

DBX Technical Chart, Data Source: REFINITIV 

Technical Indicators Defined

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and the uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decision should be made depending on the investors' appetite for upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the valuation has been achieved and subject to the factors discussed above.

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