Dropbox's luck could be changing as its revamped platform and new executives could bring more opportunities for growth, analysts say (DBX)


Drew Houston

  • Dropbox shares are back above its IPO price for the first time since September on the heels of better-than-expected earnings results. 
  • Dropbox revamped its product in 2019 and hired four new executives, which analysts say could be a sign that the file storage company is experiencing a turnaround and there are happier days ahead.
  • Analysts will now be looking to see how Dropbox maintains the growth that comes with its revamped product, and how a new slate of executives help the company achieve that goal.  
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Dropbox is back above its IPO price of $21 for the first time since September, after reporting fourth quarter earnings that impressed Wall Street — and it’s a sign that the file storage company’s luck could be changing. 

Dropbox was well-received on Wall Street after its IPO in 2018, but then faltered as the company wasn’t growing its paying user base or revenue as fast as investors wanted. Dropbox has a freemium model where users can start using the product for free before moving to a paid option with more features.

On Thursday, Dropbox reported quarterly revenue of $446 million, above the $443 million Wall Street expected, and an increase of 19% from a year prior. It reported adjusted earnings per share of $0.16, above the $0.14 that analysts expected. 

User numbers also grew, and Dropbox said it had 14.3 million paying users in the fourth quarter, an increase from 14 million in the third quarter. Average revenue per paying user was $125, an increase from $123.15 in the third quarter.

On a call with analysts after the results on Thursday, CEO Drew Houston said the company expects to be profitable by the end of 2020, and CFO Ajay Vashee said Dropbox plans to generate over $1 billion in free cash flow by 2024. 

In 2019, Dropbox revamped its product to open up to tighter integrations with other workplace apps like Google Drive, Slack and Zoom. The company also saw a lot of leadership turnover in 2019, and recently brought on 4 new executives, indicating that the turmoil is starting to settle. 

Both factors, in addition to the fact that Dropbox raised its operating-margin and free-cash outlook for 2020 and over the long term and delivered better than expected results, have made investors more bullish on the stock going forward.

Analysts say they will now be looking to see if Dropbox maintains that growth, and how the new executives are positioned help drive the company in the right direction.  

New management 

“Dropbox management — in particular with the addition of new leadership — has aligned the company to focus on a smaller number of bets to grow margins,” Jason Ader, an analyst at William Blair wrote in a research note.

Dropbox said it will be focusing on growing its customer base for its new platform, making it easier for companies to add new users, while also developing a product for personal use that uses some of those integrations to attract new paying customers.

It recently hired a new COO, Olivia Nottebohm, who was previously a VP of sales and operations at Google Cloud, with the job of growing the user base for its G Suite productivity suite. The COO role was vacant for the 16 months before Nottebohm joined. In Q4, Dropbox’s cheif customer officer, Yamini Rangan, left and Nottebohm is expected to take on a lot of her previous responsibility. 

Analysts say her previous experience at Google is something from which Dropbox could greatly benefit.

“We believe the company’s new COO, who comes from Google and was a key contributor to the SMB success of G Suite, will complement the [management] team and bring proven experience around scaling a very similar billion dollar-plus business,” said Alex Zukin, an analyst at RBC capital markets. 

Dropbox also recently hired Tifenn Dano Kwan, previously CMO at SAP Ariba, as its new chief marketing officer. And the company also replaced former CTO Quentin Clark, who left at the end of 2019, with Bharat Mediratta, ex-Google engineer and cofounder of educational startup AltSchool.

Revenue growth 

Pat Walravens, an analyst at JMP Securities, said he took it as a good sign that Dropbox stopped the trend of decelerating revenue growth it saw over the last nine quarters. 

In addition to revamping its product, Dropbox also changed its pricing, which could have been a factor in the revenue growth it saw last quarter.

“We like how Dropbox arrested the nine-quarter trend of decelerating revenue growth that it experienced from 2Q17 to 2Q19, the way it has repriced and repackaged its solutions, the potential for the new Dropbox helps to bring all of a user’s content together, whether in the cloud or in traditional files,” Walravens wrote in a research note. 

Heather Bellini at Goldman Sachs echoed that sentiment, and wrote in a research note that the repricing and repackaging continues to be a “tailwind to revenues.”

RBC analyst Zukin notes that new COO Nottebohm’s experience could be key as Dropbox “contemplates appropriate pricing and packaging changes in light of an evolving set of product priorities.”

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