Remote Work Had Several Implications For Dropbox Earnings

Despite its increased importance in the new ‘home office' normal, the document storage and cloud segment has been largely ignored compared to the likes of Zoom Video ZM, DocuSign DOCU and Fastly FSLY.

Last Thursday, Dropbox DBX showed how much it benefited from the work-from-home trend as it reported better-than-expected fourth-quarter revenue. Quarterly sales topped $500 million for the first time as revenue improved 13% but Dropbox suffered a $400 million real estate hit as it sought to make remote work more permanent.

Fourth quarter

Revenue of $504.1 billion brought in adj anusted net income of $117.9 million, or 28 cents a share. In the same period a year ago, earnings were 16 cents a share on sales of $446 million.

The remote work trend

Before Dropbox committed to having its people work remotely, technology companies including Twitter TWTR had said they would allow employees to continue working from home even after the pandemic subsides. Earlier this month, San Francisco's biggest employer, Salesforce CRM said that most of its employees will be in offices one to three days per week once it's safe enough to return, In October, after thousands of its employees had gotten used to working without being next to their colleagues, Pinterest PINS said it had agreed to pay $89.5 million to stop a lease for 490,000 square feet of office space near its San Francisco headquarters to avoid paying at least $440 million in rent.

Dropbox's "Virtual First"

Last quarter, Dropbox announced is "Virtual First" strategy that makes remote work primary. At the end of third quarter, the company had over $1 billion in total lease liabilities on its balance sheet which includes assets other than just office space, so from an investment perspective, the cost savings could significantly boost profit margins. Dropbox stated that trimming 11% of its workforce was part of the "Virtual First" strategy to increase operational efficiency.

The Impairment Charge

The one-time impairment charge of "right-of-use and other lease related assets"amounted to $398.2 million. Dropbox is known for its lavish office space in San Francisco's South of Market neighborhood but going forward, only the tasks that require collaboration between team members will be executed in Dropbox Studios.

During the first three quarters of 2020, Dropbox generated a net income ending its years-long losing streak. But the impairment charge that Dropbox disclosed reverses that streak, resulting in a nearly $346 million loss, compared to third quarter's profit of $33 million. The charge was excluded from non-GAAP results which showed an annualized increase in profit.

Dropbox ended the year with strong margin expansion, free cash flow, and more than $2 billion in ARR as itcontinued to make progress toward its long-term financial targets.

Customers

Putting all those millions that downloaded Dropbox aside, the company's revenue depends on users that pay for its premium services. A big concern is the potential for those individuals and businesses to churn to the titans such as Alphabet GOOG or Microsoft, MSFT that can easily undercut them on price. But a steady march up in customer count should continue to alleviate these concerns and Dropbox's average revenue per user (ARPU) is a good indicator of the company's pricing power.

Dropbox ended the quarter with 15.48 million paying users, compared to 14.31 million for the same period last year, up 8.2% on a YoY basis. In the previous, third, quarter that ended last September, paying customers grew to 15.25 million as they were 14 million in Q3 of 2019. Increases in paying users drove growth as ARPU stood at $130.17 for the quarter, up 4.14% YoY.

Cash Flow

Dropbox's measures profitability with free cash flow or more precisely, by deducting capital investments from cash generated from business operations. Management's long-term goal is $1 billion in annual free cash flow by the fiscal year 2024. In the fourth quarter, free cash flow was $158.4 million compared to third quarter's $187 million.

From operations, Dropbox generated cash flow of $570.8 million in 2020 compared to $528.5 million in 2019. Free cash flow for 2020 was $490.7 million compared to $392.4 million reported in 2019. The company will have to continue working hard if it is to hit its 2024 free cash flow guidance.

New products

Dropbox has integrated several new products such as HelloSign, a digital signature company it acquired in 2019 for $230 million. Notably, HelloSign witnessed strong traction in the fourth quarter as it witnessed a 70% increase in end user signature requests.

Perhaps the most important updates released in November with the progress of Dropbox Spaces 2.0. that aims to provide users a virtual workspace in a home office environment. Spaces is Dropbox's key tool in winning customers in a post-pandemic world.

Outlook

Overall, the next year will be crucial for for the cloud-based storage and  workflow management company. The company is sitting on an increase in demand for its cloud-based management tools due to the global transition to distributed work environments. Going into 2021, the company is focused on executing its strategy and building essential products for the new era of distributed work. Dropbox shares have risen about 20% since the company last reported earnings on November 5^th. But only time will tell if it can succeeded winning new customers over its many strong competitors.

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