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Dropbox drops sharply after guidance disappoints

Key Points
  • Dropbox's stock moved lower after the company gave guidance that was lower than expected in some areas. 
  • The company beat estimates on the top and bottom lines for the fourth quarter.
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You win or lose your IPO years before going public, says Dropbox CEO

Dropbox stock rose slightly and then fell as much as 11 percent after the tech company reported disappointing guidance on its fourth-quarter earnings call on Thursday afternoon.

Here's how the company did in the quarter:

  • Earnings: 10 cents per share, excluding certain items, vs. 8 cents per share as expected by analysts, according to Refinitiv.
  • Revenue: $375.9 million, vs. $370 million as expected by analysts, according to Refinitiv.

Dropbox stock moved lower after the company issued guidance for the first quarter and all of 2019.

In terms of revenue, Dropbox beat expectations. For the first quarter Dropbox said it expects $379 million to $382 million in revenue; analysts polled by Refinitiv were expecting $377 million. For the full year, Dropbox forecasts $1.627 billion to $1.642 billion in revenue; the Refinitiv estimate was $1.60 billion. 

Operating margins were below expectations, though. Dropbox expects 7 percent to 8 percent, excluding certain items, in the first quarter, while the FactSet analyst estimate was 12.1 percent. And in all of 2019 Dropbox sees an operating margin of 10.5 percent to 11.5 percent, below the FactSet estimate of 13.4 percent.

The company will have overlapping rent expenses because of its new headquarters and its existing one in San Francisco. Dropbox's chief financial officer, Ajay Vashee, said on Thursday's conference call that he expects Dropbox to return to operating margin expansion "as we exit 2019."

Free cash flow guidance for 2019 was weak as well at $375 million to $385 million. The FactSet estimate was $405.7 million.

In the fourth quarter of 2018, the company's revenue grew 23 year over year, which ended Dec. 31, the company said.

Dropbox said added around 400,000 paying users in the fourth quarter, with a total of 12.7 million. Analysts polled by FactSet had been looking for an increase of 277,000 paid users in the quarter.

The company also exceeded estimates on average revenue per user at $119.61. The FactSet consensus estimate was $118.48.

But at the end of the quarter Dropbox's deferred revenue was below the $498 million estimate, at $485 million.

Dropbox provides a cloud-based file sharing application with more than 500 million registered users, and it competes with the likes of Apple, Box, Google and Microsoft.

"Are you taking businesses away from other companies like Box, is that true? " CNBC's Deirdre Bosa asked Dropbox co-founder and CEO Drew Houston in an interview on Thursday. "We are, absolutely," Houston replied.

Dropbox shares have risen almost 24 percent since the beginning of the year.

"Each quarter, we have become increasingly impressed with DBX's business and financial model," RBC Capital Markets analysts led by Mark Mahaney, who have an outperform rating on the stock, wrote in a note distributed to clients on Tuesday.

"Best of breed FCF [free cash flow] margins (33 percent in Q3) coupled with robust, consistent revenue growth. Call it Internet Scalability with SaaS [software as a service] Predictability. DBX's freemium model enables highly cost-efficient customer acquisition, very high customer retention levels, and substantial revenue visibility with plenty of upsell opportunities. And new product improvements seem to be sticking with paying users. We continue to see a favorable set up for the stock."

In the fourth quarter Dropbox announced a partnership with video calling software company Zoom and introduced Extensions that incorporate third-party services into its app. In January Dropbox made its biggest-ever acquisition, HelloSign, which has put it in competition with Adobe and DocuSign.

"We remain positive on the HelloSign acquisition, as it helps Dropbox move up the value chain, similar to the motion with Dropbox Paper, in our view," Rishi Jaluria of DA Davidson, who has a buy rating on Dropbox, wrote in a Tuesday note.

In 2018 HelloSign had around $20 million in revenue, Vashee said on the conference call. "In 2019 we don't expect HelloSign's contribution to Dropbox's top line [to be] material, because as part of purchase accounting guidelines we will write down a significant portion of HelloSign's deferred revenue," he said.