Dropbox: New Products, Integration Will Help Drive Higher Productivity, Free Cash Flow In 2020

Cloud file storage and synchronization provider Dropbox said its 2019 focus on developing a business user collaboration ecosystem will expand in 2020 and beyond and help it cash in on its large user base to build a more profitable business.

A strong fiscal 2019 is giving Dropbox the confidence to predict 2020 will see it finally become profitable on a GAAP basis and be able to report annual free cash flow of $1 billion in 2024.

Those predictions, made by Dropbox co-founder and CEO Drew Houston during the San Francisco-based company's fiscal year 2019 financial analyst conference call Thursday, stemmed from a combination of a solid year financially with investments in more value-added services for users of its file hosting, cloud storage and file synchronization services.

Investors appeared to have welcomed the company's latest financial report. Dropbox share prices closed Thursday at $18.72 per share but jumped to as high as $21.53 a share after the financials were released before dropping back a bit to just under $21 per share in after-hours trading.

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Dropbox ended fiscal 2019 on Dec. 31 after a year of delivering multiple new products and features to help position the company at the center of users' workflows, Houston told the analysts.

The most important of these was the new Dropbox, which Houston called a smart workspace to organize users' content, connect them to their tools, and bring everyone together.

"This included an all-new desktop app that moves beyond files and organizes all your cloud content, including support for Google Docs and integrations with best-of-breed tools like Slack and Zoom," he said. "The new Dropbox uses machine intelligence to surface the work that's important to you when you need it, and also includes Dropbox Spaces, which transforms the traditional shared folder experience into a connected workspace for all your cloud content."

Millions of users are already using the new Dropbox app, and those users tend to engage more frequently and use differentiated features including suggested folders, Houston said.

Dropbox has also over the past year built in new integration with industry partners to help make it easier for users to become part of an integrated Dropbox experience, Houston said. This includes new integration with Atlassian, Slack and Zoom, in addition to previous integration with Adobe, Microsoft and Google, he said.

"We're already starting to see positive results," he said. "Early signals from users who have adopted these deep integrations suggest that they are more likely to convert to our paid plans, and tend to be more collaborative and engaged."

Dropbox this year also unveiled a partnership with New York-based SaaS management and security provider BetterCloud to help administrators manage and secure a best-of-breed SaaS environment, Houston said.

The company early last year also acquired HelloSign, a developer of tools for digitally signing contracts and documents as a way for users to simplify document workflows while expanding the markets it serves, he said.

The new products and integration are expected to help drive higher productivity and free cash flow in 2020, Houston said.

"And by the end of this year, our goal is to become a profitable business on a GAAP basis," he said.

Looking beyond 2020, Dropbox plans to drive accelerated margin expansion as it continues to innovate and methodically expand its platform into new markets, Houston said.

"With that in mind, by 2024, we now expect to generate non-GAAP operating margins of 28 [percent] to 30 percent and annual free cash flow of over $1 billion," he said. "This is a meaningful increase over the targets we announced [previously]."

For 2020, Dropbox's primary focus will be on driving adoption of the new Dropbox, which has already been adopted by over 200,000 of Dropbox's 450,000 Business teams and allows collaboration among multiple users, Houston said.

"This is an important milestone because our new desktop app provides us with a foreground experience to help drive team expansion in a way that wasn't previously possible," he said "Now that we've begun to land the new [Dropbox] desktop app within teams, we have the tools to further optimize our on-boarding flows and end product experiences to drive higher conversion efficiency."

Dropbox plans to do this by simplifying the process to set up a Dropbox team and streamlining the invitation process, Houston said.

"For example, instead of requiring an admin to add and approve new team members, we'll make it possible for the product to be spread from user to user," he said.

Dropbox also plans to use 2020 to highlight new add-on products including extended version history and legal holds to further drive upsells, and is looking to its large user base, most of whom still use either individual or basic plans, as the primary way to drive both conversion and upsell into a Dropbox Business team plan, Houston said.

"Driving adoption of our team plans not only unlocks value for our users, but provides a mechanism for us to grow our deployments within businesses over time," he said.

While Dropbox's primary focus in 2020 will continue to be on its Business teams, the company also plans introduce new products to address high-value personal workflows, Houston said.

"Eighty percent of our subscribers use Dropbox for work, but a substantial portion of our over 600 million registered users use Dropbox to address important personal use cases as well," he said. "And we know that over 40 percent of our Business teams include a member who was formerly an individual subscriber, highlighting the importance of investing in our personal users, as they're an integral part of our customer journey and driver of business adoption."

For Dropbox's fiscal fourth quarter of 2019, which ended Dec. 31, the company reported total revenue of $446.0 million, up about 19 percent from the $375.9 million the company reported for its fourth fiscal quarter 2018.

The company also reported annual recurring revenue of $1.820 billion, also up 19 percent over last year.

The increased revenue came in part from an increase in the number of paying users by year-end to 14.3 million, up from 12.7 million paying users at the end of 2018. Average revenue per paying user was $125.00, up from last year's $119.81.

Dropbox reported a GAAP loss of $6.6 billion, or 2 cents per share, down from last year's loss of $9.5 million, or 2 cents per share. On a non-GAAP basis, Dropbox reported net income of $67.4 million, or 16 cents per share, up from last year's $42.3 million, or 10 cents per share.

For all of fiscal 2019, Dropbox reported revenue of $1.661 billion, up 19 percent over its fiscal 2018 revenue of $1.392 billion. Average revenue per paying user for the entire year was $123.07, up from last year's $117.64 per paying user.

Dropbox also reported a GAAP loss of $52.7 million, or 13 cents per share, down significantly from the prior year's loss of $484.9 million, or $1.35 per share. On a non-GAAP basis, Dropbox reported net income of $207 million, or 50 cents per share, up from last year's $166.2 million, or 41 cents per share.