Company and Product Summary

Dropbox, the leading cloud storage and collaboration platform, filed for a $500M IPO with Goldman Sachs leading the offering. The company will trade under the ticker “DBX” on the Nasdaq. Dropbox was founded in 2007 (originally named Evenflow) as an easy-to-use consumer cloud storage product — the company describes the founding based on the idea that “life would be a lot better if everyone could access their most important information anytime from any device.” They have since expanded the product significantly to become a full collaboration suite. Dropbox is the king of the prosumer GTM (go-to-market) with over 90% of their revenue being generated by self-serve channels. Dropbox’s product is inherently viral and demonstrates powerful network effects— users get a Dropbox link from a friend, see how easy and elegant the product is, and sign up themselves. Here are a few product and user stats;

• Dropbox has over 500M registered users across 180 countries, with 11M (2.2%) paying them.
• Average Revenue per User (ARPU) in 2017 was $111.91.
• 100 million users have signed up since the beginning of 2017.
• There are 300,000 paying Dropbox Business Teams (minimum of 3 users). Dropbox has some Business Teams in the tens of thousands of users.
• Their users have added more than 400 billion pieces of content to Dropbox’s platform, which represents more than an exabyte (more than 1,000,000,000 gigabytes) of data. Those same users have also created 4.5 billion connections to shared content.
• More than 75% of Dropbox Business teams have linked to one or more third-party applications.
• In 2017, over 40% of new Dropbox Business teams included a member who was previously a subscriber to one of Dropbox’s individual paid plans.
• As of December 31, 2017, Dropbox was receiving over 50 billion API calls per month, and more than 500,000 developers had registered and built applications on their platform.

Company Timeline and Sign-ups

Dropbox did $1.1B in revenue in 2017, up 31% YoY. In terms of implied ARR (annual recurring revenue), they are at $1.2B and growing 28% YoY. While on a GAAP basis, Dropbox is losing money, the company generated $0.18 of non-GAAP earnings per share in 2017, an incredible feat for a software business of their size and growth. Their GAAP operating margin was (10)% in 2017, but the non-GAAP margin was 5%. Their free cash flow margin has been improving dramatically over the past few years, and was at 28% in 2017, up from 16% in 2016 and (11)% in 2015.

Dropbox generates revenue by selling subscriptions to their product. Of the 11M paying users, ~30% use Dropbox for work on a Dropbox Business Team plan. They estimate an additional 50% use Dropbox for work on an individual plan, which totals ~80% of paying users. The company has ~92% of the Fortune 500 with paying users and 56% have at least one paying Dropbox Business team. Customers can choose between an annual or monthly plan and a majority choose annual plans. Half of Dropbox’s revenue is outside the U.S. and no customer represents more than 1% of revenue. Their net revenue retention is ~100% for Dropbox Business teams and their blended net revenue retention across the entire business is 90%+. You can see how that compares to other software companies here. Dropbox has $430M in cash. The company is based in San Francisco, California, and has 1,858 FTEs (full-time employees).

Pricing and Features

Market Opportunity

The market opportunity for Dropbox is massive. Their market stretches across collaborative applications, content management, project management and cloud storage. IDC estimates those categories will total more than $50B of annual spend by 2019. Given the freemium / prosumer nature of the product, the company notes there are segments like freelancers and creative workers that aren’t included in that $50B number either, which is usually IT spend only.

The company will certainly focus on how they can increase the amount of Dropbox Teams, which have higher ACVs (annual contract value) and better net dollar retention characteristics.

Competition

Dropbox competes with a variety of companies and products across the collaboration and cloud storage markets. They compete with Amazon, Apple, Google, and Microsoft in the cloud storage market and in the content collaboration market with products offered by Atlassian, Google, and Microsoft. Box is a competitor in the enterprise cloud storage market.

Investors and Ownership

Dropbox has raised $617M in equity capital to date from many investors (list here) and 5%+ pre-offering shareholders include Sequoia (24.8%), Accel (5.3%) and T.Rowe Price (2.2%). CEO and co-founder, Drew Houston, is at a 24.4% pre-offering ownership stake. Their last round of $350M (series C) was led by BlackRock in February 2014 at a $9.65B pre-money valuation.

Financials and Metrics

Dropbox’s financial profile is extremely impressive — they are at $1.2B in ARR, growing 28% YoY and had a 28% free cash flow margin last year. Overall, margins have improved significantly over the past few years. For example, they have doubled their gross margin percentage since 2015. The company grows efficiently as well — their payback period over the past few quarters has been 15–17 months. Outputs of other financials and metrics are below:

Annual Historical P&L ($M)

Quarterly Revenue ($M)

Implied Ending ARR and ARR Comparison ($M)

Dropbox is at a scale that very few SaaS companies reach at $1B+ in ARR. The company added $75M of net new ARR last quarter and $270M over the past year. Their ARR ramp is below.

Here are some other SaaS IPO ARR ramps but there aren’t too many comparables for Dropbox given their size. Dropbox is the largest software company at IPO in the entire list. What does their ARR growth look like compared to other high-growth SaaS companies indexed to scale? The below chart compares them to Salesforce (CRM), ServiceNow (NOW) and Workday (WDAY) at relative ARR scale — as you can see they are in line with those businesses on ARR.

Average Revenue Per User (ARPU)

GAAP and Non-GAAP Operating Margins

Cohorts and Unit Economics

Dropbox has highly attractive cohorts and unit economics. As you can see in the chart below, their cohorts of new users usually generate higher subscription revenue over time. For example, the January 2015 cohort doubled in less than three years after signup, which the company believes is representative of other cohorts.

Given the self-serve nature of the business, Dropbox’s revenue is extremely predictable. Moreover, in 2017, 80% of revenue came from existing individual users and Dropbox Business teams who were using the product as of December 31, 2016. Atlassian and SendGrid, both with self-serve models had similar charts in their S-1.

Newer cohorts are generating higher subscription revenue — the chart below shows how each new cohort improves each year. These metrics are highly impressive given Dropbox’s scale.

Implied Payback Periods in Months

Annual Cash Flows ($M)

Quarterly P&L / Metrics ($M)

Valuation

It will be interesting to see if Dropbox can close trading above their last round valuation of $10B. Assuming they trade like other high-growth SaaS companies, it’s likely. While Dropbox is a subscription software business, they have higher cash flow margins than most SaaS companies and could also trade on a cash flow multiple. The below output has Dropbox’s implied valuation based on peer group NTM revenue, current ARR and LTM free cash flow multiples. Note this is simplistic but a good frame of reference.

Given the cash flow profile, my guess is the company closes above $10B after the first day’s close. While investors will love the viral go-to-market, a focus will certainly be how they can utilize their consumer adoption to drive more Dropbox Business customer sign-ups, which have larger ticket sizes and better retention characteristics.

Dropbox is the embodiment of how the software go-to-market has changed with the advent of the cloud — some of the most important and valuable software companies like Atlassian, Stripe, Twilio, and Slack have focused on acquiring users through a freemium or bottoms-up approach like Dropbox, and not through IT. Moreover, the company is seeing leverage in their margin structure and is going after a massive market opportunity. Dropbox is bound to have a successful IPO and public company journey.

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