Dec 8, 2021
[3 min Read]
Dropbox is a cloud storage service provider that has shifted to an enterprise software company that allows customers to integrate all apps, files, communication software from Google, Microsoft, Slack, Zoom, Salesforce, etc. into one smart online workspace. They have subscription plans for all types of users from personal to large enterprises for their main product Dropbox, Hellosgin (e-sign service), and Docsend (very secure file sharing service). They continue to increase the product-market fit through innovation, acquiring other companies, and increasing their deep integration with other enterprise software. The enterprise software industry does $115.2 billion in revenue and is expected to grow 4.2% for the next 5 years, however, due to Dropbox's superior products and non-paying user base (700 Million) they will outperform the industry‘s growth.
With the acquisitions of Docsend and Hellosign, ARPU is increasing by 4.45% CAGR as they upsell and cross-sell their customers on more products. Dropbox already has 700 million users, 16.14 million paying users growing by 9.72% CAGR, 80% gross margins, and increasing operating margins due to most R&D expenses being behind them thus every incremental customer costing less. Taking these factors into consideration, the question becomes, can Dropbox convert non-paying customers into paying customers and upsell them on more premium products. I believe they can because they have been increasing paying users at 9.72% CAGR and they will continue to grow their paying customer base by increasing their product-market fit by improving their product further. They will continue to acquire companies like Docsend and Hellosgin to make the Dropbox experience better and with this strategy, they can cross-sell products to even further increase APRU, and as file sizes get bigger and the need for storage grows, customers will need to get more storage.
The risks with business are very low due to low customer concentration, low churn, recurring revenue business model, and a strong capital position. They do not report churn numbers (2021, 10k, p. 15, “we do not actively monitor the retention rates of our individual users”), however, due to the friction involved in transferring files and NRR being 95% it is probably low. 75% of users are not in America. They have a LTV/CAC of 3.9 assuming 10% churn.
They have 133.15 ARPU which due to their subscription model recurs every year. They have a 1.8 quick ratio, and an asset to liability ratio of 0.87 (excluding goodwill), they recently issued $1.35 billion of convertible notes due in 2028 to buy back shares in Q1 of 2021 (due to the confidence management had in the business).
Drew Houston the CEO, co-founder, 25% shareholder of Dropbox and a director at Meta (Facebook) has the vision for the business to prosper. He revolutionized Dropbox and turned it from a cloud file storage business (it became commoditized) to a smart work online workspace that integrates all major enterprise software. Management is targeting a balanced growth and free cash flow business model. Management is aiming for $1 billion in free cash flow by increasing operating margin to 28-30% by 2024.
Link to my model for DBX: