Dropbox Is Going Public: What You Need to Know

Online cloud storage company Dropbox recently filed an S-1 prospectus as part of its intent to take its stock to the publicly traded markets under the ticker symbol DBX as early as March. As a direct competitor to Box (NYSE: BOX), the company is entering a fiercely competitive space where it will also compete with tech giants like Microsoft and Alphabet.

But Dropbox's unique approach of targeting individual users in hopes that they will become product evangelists at their organizations has fueled impressive growth and operating leverage. Further, Dropbox's over a half billion registered users makes the platform a force to be reckoned with, even if it's going up against tough competition.

Here are some of the most notable takeaways from DropBox's S-1 filing, which highlights financials for 2017 and provides insight into the company's strategy.

Dropbox views its registered users as salespeople

Dropbox boasts over a half of a billion registered users. Though only a small fraction of these users are paying for Dropbox, this doesn't mean the bulk of its users aren't important to Dropbox's business. Adopting a strategy Dropbox refers to as "viral, bottom-up adoption," Dropbox considers its 500 million registered users its "best salespeople."

"They've spread Dropbox to their friends and brought us into their offices," Dropbox explained. "Every year, millions of individual users sign up for Dropbox at work. Bottom-up adoption within organizations has been critical to our success as users increasingly choose their own tools at work."

To this end, Dropbox said an impressive 90% of its revenue is generated from self-serve channels, where users purchase a subscription on their own through the Dropbox mobile app or website. Further, the company notes that more than 40% of Dropbox Business teams include a member that was previously paying for one of its individual plans. This suggests paying individual subscribers often vouch for Dropbox to their workplace, helping sell business subscriptions.

Registered users are not unique users

Importantly, Dropbox clarifies in its S-1 filing that there are fewer unique users than registered users since one person may register more than once on its platform. "As a result, we have fewer unique registered users that we may be able to convert to paying users," Dropbox said.

But Dropbox estimates that "approximately 300 million of our registered users have characteristics -- including specific email domains, devices, and geographies -- that make them more likely than other registered users to pay over time."

Dropbox has 11 million paying users

Eleven million users pay for Dropbox, up from 8.8 million in 2016. While these paying users include individual subscribers, they also include all members that are a part of a Dropbox Business Team. "For example, a 50-person Dropbox Business team would count as 50 paying users, and an individual Dropbox Plus user would count as one paying user," the prospectus explained.

Of these 11 million paying users, 30% use Dropbox for work as part of a Dropbox Business team plan, Dropbox noted.

Over 300,000 business teams pay for Dropbox

Easily trumping Box's 80,000 paying businesses at the end of its third quarter of fiscal 2018, Dropbox has over 300,000 paying Dropbox business teams. These teams must have a minimum of three users, but some have more than tens of thousands, Dropbox said.

At the end of 2017, about 56% of Fortune 500 companies had at least one Dropbox Business team in their organization.

Revenue is rising rapidly

Dropbox isn't just pulling in more revenue than competitor Box, which is aiming to hit its $1 billion annual revenue target "in the coming years"; Dropbox is growing faster, too. Dropbox's revenue in 2017 rose 31% year over year to $1.1 billion, outpacing Box's 26% year-over-year revenue growth in its third quarter of fiscal 2018.

Dropbox is still losing money

Dropbox hasn't achieved GAAP profitability yet. But losses are narrowing quickly. In 2017, Dropbox lost $112 million, or $0.38 per share, on its income statement. This is a huge improvement from a net loss of $326 million, or $1.18 per share, two years ago.

What's particularly encouraging about Dropbox's finances is its cash flow statement, where the company is already free cash flow positive. Further, free cash flow is growing rapidly. Annual free cash flow has risen from an outflow of $64 billion in 2015 to positive free cash flow of $305 million in 2017.

While fierce competition in the online cloud storage space will have me on the sidelines when Dropbox goes public, the company's impressive business dynamics and financials are enough to at least get the stock on my watchlist.

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