Dropbox Q2 shows it's on track, despite losing its CFO

Profile picture for user pwainewright By Phil Wainewright August 10, 2020
Summary:
Q2 results show Dropbox has succeeded in driving adoption of its new digital teamwork app, but the departure of its CFO worries investors

Drew Houston, CEO, Dropbox at app launch 2019-06 by @philww
Drew Houston, Dropbox

Digital teamwork vendor Dropbox posted some impressive Q2 numbers after market close on Thursday, well above analyst expectations, and revealed that 90% of its business customers have adopted the new app it launched last summer. But its stock was hammered Friday, falling 11%, as investors fretted about the departure of longstanding CFO Ajay Vashee, who is moving on in September to a role in venture finance. Tim Regan, who has been Chief Accounting Officer at Dropbox for the past three years, will take over the CFO role.

Vashee leaves Dropbox in excellent shape. Along with the analyst beat — at 22c EPS vs an estimate of 17c — Q2 was its second consecutive quarter of GAAP profitability and the company lifted its guidance for the full year, edging closer to $1.9 billion. But yet another change in the C-suite was perhaps not a great look after already seeing new faces in the CTO, CMO and COO roles over the past year, most recently former Google Cloud VP Olivia Nottebohm, who joined as COO in January.

For the record, here's a quick overview of numbers from the earnings report:

  • Total revenue was $467.4 million, up 16% from the same period last year (18% on a constant currency basis)
  • Total ARR ended at $1.931 billion, an increase of 17% from the same period last year (18% in constant currency).
  • Paying users ended at 15.0 million, up 1.4 millon on the same period last year.
  • Average revenue per paying user rose to $126.88 from $120.48 for the same period last year.
  • GAAP net income was $17.5 million, as compared to a loss of ($21.4) million in the same period last year. Non-GAAP net income was $93.2 million versus $42.0 million last year.
  • Cash, cash equivalents and short-term investments were $1.118 billion at the end of the quarter.

Customer milestone

There was good news on the customer front too:

  • Dropbox passed a significant milestone as the number of Dropbox business teams passed the half million mark, with 90% now using the new desktop application — 100,000 more than in Q1.
  • Trial volumes to team and individual plans have been 20% higher than pre-COVID levels, while conversion rates remain at the historical average.
  • The quarter saw several big educational deals, most notably University of Michigan, also North Western, University of Pennsylvania and Arizona State.
  • There was a seven-figure deal with a major European luxury retail company, expanding to over 20,000 seats, and other wins across media, construction, education and retail.

The increase in revenues per user has been helped in part during the quarter by the use of data science to identify the customers who are most likely to add a HelloSign subscription to their existing Dropbox contract, said Vashee. The machine learning model looks at file types, shared folder activity and other behavior to determine who should be targeted with prompts and notifications about HelloSign. Sign-ups have been 50% higher for these users compared to a control group, he said. Overall, usage of the e-signature products was up 25% in Q2 compared to Q1, he added.

CEO Drew Houston spoke to the wider shift to distributed work that Dropbox sees as its core opportunity.

We're addressing this universal need, right? That every knowledge worker needs an organized place for their content, that works with all other platforms. It's an even bigger need now that we're working from home, post-COVID, because so many of us have Office docs and Google docs and Airtables scattered across a number of platforms — and we don't see any of our competitors solving this problem ...

I think the shift to distributed work is a transformative opportunity ... not unlike the shift to mobile or shift to the cloud. And we're in the first innings of that transformation.

He also hinted at new announcements coming later this year, when Dropbox plans to increase its marketing spend to raise awareness of its business offerings, with a specific emphasis on remote work.

We have completely reoriented our product roadmaps since March and see many opportunities to design new products and experiences for distributed work. I'm excited to share more of what we've been working on in the second half of the year.

My take

A year ago, Dropbox's Q2 earnings call was all about the app, which had been announced at the end of the quarter and was due to roll out to customers in September. Houston was adamant that the app was the key to driving increased revenue per user:

We have this foreground surface that we entirely control, as opposed to being limited by the operating system. So it's a lot easier for us to drive adoption of things like Paper or HelloSign, when we can have a button that says send out for signature within Dropbox natively, as it were ...

A year later, it's happened just as Houston had predicted. Revenue per user is rising solidly and the HelloSign integration is already delivering the goods. Even more impressive, business customers have embraced the new app, with adoption now at the 90% mark — in fact, there were as many businesses using the new app in Q2 as the total number of business customers in Q1. This is quite an achievement, given how different the Dropbox Spaces experience is to the folder view that it supercedes.

This quarter's results, therefore, validate the path Dropbox has been pursuing over the past year and suggest that it's positioned itself well to compete to serve the distributed teamwork market, which looks to have been permanently boosted by the remote working surge in response to COVID-19. But Houston is exaggerating somewhat when he claims to be ahead of competitors in "solving the problem" of connecting work across multiple applications. Every player in this market has been galvanized by the current remote work surge and consequent uptake of digital teamwork solutions. Dropbox now has a platform that can hold its own in that market, but it will still face plenty of competition.

It will be interesting therefore to watch out for the promised announcements coming later in the year, which look set to add to the platform's appeal for distributed teamwork. Meanwhile, Q3's numbers will give us a first taste of the impact made by the new password manager, cloud backup and a family plan launched in June. New CFO Tim Regan will have a lot to report on.