Hello and welcome back to our regular morning look at private companies, public markets and the gray space in between.
This morning we’re digging into Dropbox’s earnings report (Q4 2019), and why its recent financial performance and plans for 2020 are making the storage and productivity-focused SaaS player shares soar.
While the broader SaaS category has seen huge valuation gains in recent quarters, Dropbox has not. Along with Box, the two file-sharing focused companies were left behind as their broader unicorn cohort’s value surged. Why? Slowing growth, mostly. But with Dropbox shares up 13% pre-market to more than $21 this morning — its original IPO price — perhaps things are changing for one of the two firms.
To figure out what happened, we’ll start by unearthing what Dropbox managed to pull off in Q4 and compare its projections with market expectations. At the end, we’ll translate what we’ve learned from public SaaS companies for their private, startup brethren. As always, when we look at public companies, we’re hunting for market signals that will impact startup fundraising and valuations.
Expectations
Dropbox turned in what is called a top-and-bottom beat yesterday, besting Q4 2019 market expectations in both revenue growth (top line) and profitability (bottom line) terms.
The company’s $446 million in revenue was $2.65 million ahead of expectations, driving 18.65% growth, which Dropbox rounded up to 19%. That was the same percentage that Dropbox said that it grew in all of 2019, which was a round-down from the 19.37% its full-year revenue expanded to compared with 2018’s result. The company’s 2018 top line came to $1.66 billion.
In terms of both profit and adjusted profit, Dropbox’s Q4 also came in ahead. The company’s $0.16 in adjusted profit per share was two cents above expectations, while the company’s net loss per share of $0.02 was a penny ahead of projections.
Companies’ share prices often rise after posting better-than-expected earnings; Dropbox’s stock might have risen on just the above news. However, the company’s profitability promises regarding 2020 likely mattered more. Recall that we’ve seen other companies’ shares rise recently in the wake of profitability projections (and some do the opposite).
Projections
Dropbox made a number of promises in its earnings call. Leaning on the fine folks at Seeking Alpha, here’s a short excerpt from the former-startup’s transcript (emphasis by TechCrunch):
As we drive adoption of our new products and continue to invest in growth. We’ll be driving higher productivity and free cash flow in 2020. And by the end of this year, our goal is to become a profitable business on a GAAP basis.
The company’s CEO went on to add that his company intends to “drive accelerated margin expansion,” leading to Dropbox expecting to “generate non-GAAP operating margins of 28% to 30% and annual free cash flow of over $1 billion” this year. The company noted that this was improved guidance and stated its decision to purchase $600 million of its own stock.
So Dropbox promised un-adjusted profits, probably in Q4 of 2020. How? With stronger margins, which will also help the company generate oodles of cash. Cash that will allow the San Francisco-based firm to likely keep buying its shares or start paying dividends.
Wall Street is bonkers for this set of results. And we can feel somewhat confident that it was the profitability promise, not future revenue growth projections, that were considered impressive because the company’s 2020 revenue projections ($1.890 to $1.905 billion) are bang-on current expectations ($1.9 billion).
Startups?
Wall Street is showering Dropbox in love because it is going to generate lots of cash this year, some adjusted profit, and eke out net income towards the end of the year. And with Dropbox so far from needing cash that it is going start giving fists of it back to shareholders, it’s like a different company.
For startups the takeaway is clear: If you can’t grow as fast as other SaaS startups, you can always generate truckloads of cash and hand it out. That makes you friends, too.
According to YCharts, Dropbox’s market cap has jumped about $1 billion this week. Now worth $8.87 billion, Dropbox’s revenue multiple is back up to 5.5x. Not great, but better.