How the boxes stack up: Benchmarking Dropbox’s S-1 IPO Filing

How does Dropbox’s S-1 filing compare to Box?

Dropbox has officially filed its S-1 and is looking to raise $500M in its IPO. The valuation remains unclear as share pricing has yet to be determined. For what it’s worth it did raise $350M at a $10 billion valuation in 2014.

Previously, I benchmarked Snap Inc’s S-1 filing to its peers Facebook and Twitter. I’ve decided to do a similar comparison for Dropbox’s S-1, comparing it to Box which went public in 2015.

Note: In this post, I’m just presenting the facts and observations — all quantitative.

If you’re considering buying Dropbox stock when it goes public, you might want to read this first.


The Basics

First, let’s compare some basic metrics and see how the boxes stack up (pun intended!)

Dropbox has nearly twice as many employees as Box did when it went public.
Dropbox has raised $1.1B in debt, which is not captured above.

Key Takeaways

  • Both companies had been around for 10 years prior to going public, but Dropbox’s workforce is almost double that of Box at the time of IPO
  • Dropbox has raised significantly more money in the private markets than Box did

Show me the money

Looking at the financial metrics it’s easy to see how different Dropbox and Box really are leading up to its IPO. Dropbox’s year ended Dec 2017 revenue was $1.1B, compared to Box’s trailing twelve months revenue as of October 2017 was $479M. This scale is shown in both company’s S-1 filings as Dropbox filed theirs in millions vs Box’s figures, which were filed in thousands!

With that in mind, let’s dive in…

Revenue

While Box went public first, Dropbox is a substantially bigger company. For perspective, Dropbox pulled in $604M in revenue 3 years ago which is still more than Box generated for the last twelve months (October 2017) at $479M.

Looking at Revenue growth, Box was growing faster — but don’t be fooled, this is just a law of smaller numbers. Its harder to grow revenues 100% when you’re generating $800M top line.

Gross Margins

Revenues are great, but how much does it cost you to generate $1 of revenue?

Dropbox’s gross margins have improved significantly over the last 3 years and have now reached 67%, which is still low compared to software standards. For comparison, Box was at 67% gross margins 3 years prior to its IPO.

Research and Development expenses as a % of Revenue

As tech companies that are always developing new and innovative features products, its important to look at their spending behaviour in this category.

What if we look at it on a total dollar basis?

Dropbox has consistently spent ~34% for the last 3 years leading up to its IPO, while Box go to 37% of revenue spent on R&D the year prior to its IPO.

Sales & Marketing expenses as a % of Revenue

And on a total dollar basis?

Box spent heavily on Sales & Marketing leading up to its IPO — to the tune of 138% of revenue spent in this category. In contrast, Dropbox has consistently spent between 28–32% of its revenue on Sales & Marketing efforts leading up to its IPO.

General & Administrative expense as a % of Revenue

Total dollar basis

Again, Dropbox shows its financial discipline having spent between 14–18% on G&A expenses compared to 32–64% of revenue spent by Box.

Net Profit (Loss) Margin

Dropbox’s disciplined financial model shines in its net profit/(loss) margin as it has a -10% margin heading into its IPO compared to -136% for Box.

Interesting note here is that Box had growing net losses heading into its IPO, compared to Dropbox which has been reducing its losses for the last 3 years leading up to its public debut.

That being said, one of the risks identified in Dropbox’s S-1 that may cause some pause for investors is:

We have a history of net losses, we anticipate increasing expenses in the future, and we may not be able to achieve or maintain profitability.

While this is similar language to what was contained in the Snap S-1, the chances of Dropbox not achieving profitability (compared to Snap) are much lower!

Cash is king

Both Box and Dropbox had healthy cash balances heading into its IPO. Dropbox has $430M in the bank and could double that by raising as much as $500M in its IPO.

What about some other key metrics?

Box and Dropbox both generate revenue from selling cloud storage to its users. While Box targets the enterprise, Dropbox started off targeting consumers and over the years has moved into enterprise. This is evident in how both companies report on their key metrics. (Since these are non-standard metrics and are reported differently by both companies, I’ll look at them in isolation)

Customers

Dropbox touts its 500M+ registered users, of which 11M+ are paying users (or customers) — this means that ~2.2% of its user base pay for the product. This represents a significant growth vector for Dropbox.

Dropbox has been able to steadily grow its paying user base over the last few years. If we consider that in its first year as a public company, Dropbox grows its paying user base to 13.8M (using the 25% growth rate from 2016 to 2017), it would still only result in 2.8% of its registered user base being paid customers (of course assuming their 500M registered user base remains constant — which is unlikely).

This growth alone would add an additional $308M in revenue assuming the 2017 ARPU of $111.91!

Box on the other hand promoted a slightly different metric in its S-1 filing. While Box had 25M registered users in its filing, across 225,000 organizations. Similar to Dropbox, not all of Box’s users pay for its product. In fact only 34,000 paying organizations did — or 15% of its organizations.

ARPU

Average revenue per user (ARPU) determines how much revenue the company generates from its average paying user. Leading up to its IPO, Dropbox ARPU has hovered between $110-$114.

Box doesn’t report ARPU, but discusses Average Annual Contract Value (ACV) — this is because Box charges based on organizations who many have 100 users or 1000 users. Box’s ACV prior to IPO was $3,653. Since Box does not disclose the average number of users per paying organization, it’s difficult to compare this metric to Dropbox’s ARPU.

Retention

One of the holy grails of a SaaS company (which Box and Dropbox both are) is its retention — or said another way, how much of its revenue from existing customers can the company keep over time.

Given Dropbox’s consumer roots and its freemium model, retention isn’t one of its strong suits. In it’s S-1, it makes only one claim about retention:

As of December 31, 2017, our blended Annualized Net Revenue Retention across the entire business, including individuals and Dropbox Business customers, was over 90%.

While 90% isn’t bad, it looks atrocious compared to Box:

Given Box’s enterprise focus, its retention is well above 100%. This means that each paying organization actually grows over time using Box. Or said another way, if an organization started using Box and paid $100, at the end of year 1 it would pay $136. This $36 increase could come from adding more users as the organization grows or hires more people.

Valuation multiple

It’s still unknown where Dropbox will price its shares — but if we assume its at a similar multiple to Box, it could be between 5x (Box current EV/Revenue multiple) and 7.9x (Box’s EV/Revenue multiple at IPO).

This would give Dropbox a valuation between $5B to $8.7B — a discount to its 2014 round which valued the company at $10B.

Some final thoughts

As Dropbox enters the public markets, it is very clear that the company is much larger than its peer Box, which debuted 3 years ago. It’s coming off the heels of generating $1.1B in revenue in its most recent fiscal year — a feat many publicly traded software companies have yet to achieve! The company is also much more financially disciplined than Box, when it made its public debut 3 years ago.

Box priced its IPO at $14/share and closed at $23.23 on its first day of trading. It’s been a bumpy ride for the company since its public debut having only recently returned to that value. The stock is currently up 66% above its IPO price.

A successful Dropbox IPO could pave the way for a busy tech IPO market in 2018!

If you want to get high quality images of these charts, or just chat about Dropbox’s S-1 filing, tech, (or anything really), DM me on Twitter: @ shubham

Shubham Datta is passionate about technology, startups, sports, and investing. He is a Director at SurePath Capital Partners, where he helps fund, grow and exit startups. You can find out more at www.shubhamdatta.com.

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