Category: Independent Stock Research
Dropbox: Keeping Teams in Sync
Founded in 2007 by Andrew Houston and Arash Ferdowsi, and based in San Francisco, Dropbox (NASDAQ: DBX) provides a cloud-based content collaboration software platform that enables users to share, synchronize, and access digital files. Consensus estimates call for revenue of $1.3 billion and EPS of $0.20 in 2018, followed by $1.6 billion and $0.31 in 2019.
Dropbox debuted on the NASDAQ on March 23, 2018, in a 36 million Class A share IPO priced at $21, with 26.8 million shares offered by the company, and roughly 9.2 million shares sold by selling shareholders. Thus, the company netted roughly $540 million in the process. The IPO was led by a veritable army of 12 investment banks, including Goldman Sachs, J.P. Morgan Securities, BofA Merrill Lynch, Deutsche Bank Securities, Allen & Company, RBC Capital Markets, and others. Post-offering, there are 53 million Class A shares and 339 million Class B shares for a total of roughly 392 million shares outstanding. At a recent share price of $30, Dropbox’s market cap is roughly $11.8 billion.
With over 500 million registered users, Drop Box has created a digital collaboration platform that enables consumers and businesses to share, synchronize and access digital files. It does so by utilizing proprietary block-level sync technology to speed the process of file uploads and downloads. The company embeds multiple levels of redundancy and security to protect against data loss. Dropbox helps geographically-dispersed work teams stay in synch and share files, a feat which is increasingly important to businesses of all sizes, as 30 percent of full-time employees work primarily on a remote basis, with 20 percent of the workforce comprised of temp workers, contractors, and freelancers, according to a 2016 Deloitte study. Dropbox currently stores over one billion gigabytes of data.
Dropbox is a pioneer of the “freemium” business model, through which a company offers a free version of its product, and attempts to up-sell and cross-sell customers to paid plans. Of the company’s 500 million registered users, 11 million are paying customers. Dropbox offers two subscription services for individuals and microbusinesses, and three plans for businesses. Of the 11 million paying users, 30 percent subscribe to a Dropbox Business plan, while 50 percent of subscribers to its individual plans use Dropbox for work purposes.
Dropbox is as much focused on converting free members to paid memberships as it is converting lower-tier paid subscribers to its higher priced, and more feature rich plans. 40 percent of new Dropbox business teams included a member who was previously a subscriber to a paid individual plan. 300 million of the company’s 500 million users are, according to Dropbox, “more likely than other registered users” to pay over time, based on Dropbox’s analysis of their email domains, devices, and geographies.
Dropbox recorded revenue of $1.1 billion in 2017, growth of 31 percent over the prior year. The company’s gross margin improved to 67 percent, from 54 percent a year earlier. Dropbox narrowed its operating loss from $194 million in 2016, to $114 million in 2017. As the majority of customers opt for an annual plan, Dropbox typically bills customers at the beginning of their subscription term, and thus generates a fair amount of cash up-front. Thus, the company has been free cash flow positive for each of the last two years, with free cash flow of $137 million in 2016, and $305 million in 2017.
Roku
Taking a Switzerland-style Approach to Internet Television
Roku (NASDAQ: ROKU), a provider of television streaming devices, and advertising services, becomes the most recent addition to our Battle Road IPO Review Hardware coverage. Founded in 2002, and based in Los Gatos California, the company is best known for its Roku family of internet streaming devices, having been a pioneer in the field. The company is led by founder and CEO Anthony Wood. Steve Louden, CFO, joined Roku in June of 2015, after having held various finance roles at Expedia, between 2009 and 2015, including VP of corporate finance, and treasurer. Consensus estimates call for revenue of $485 million and a Loss Per Share of $0.64 in the current year, while next year, the company is expected to reach $625 million in revenue, and record a loss of $0.50.
Roku made its debut on the NASDAQ on September 28, in a 15.7 million Class A share IPO, priced at $14 per share. The IPO closed on October 1st, with the underwriters having exercised the option to purchase an additional 2.4 million shares. In all, the company sold 10.4 million shares, while selling shareholders sold 7.7 million shares. Importantly, the company’s Class B shares contain 10x the voting power of the Class B shares sold to the public, and Class B shareholders retain 98 percent of the voting rights post offering. Combined, there are now roughly 97 million shares outstanding. At a recent price of $38, Roku has a market cap of roughly $3.8 billion. The IPO was led by Morgan Stanley, Citigroup Capital Markets, Allen & Company, RBC Capital Markets, Needham & Company, Oppenheimer, and William Blair. Roku has a 180 day lock-up period that expires on March 27, 2018.
Best known for its family of internet streaming devices, Roku, in its current incarnation, was essentially a spin-out from Netflix (NASDAQ: NFLX), which had conducted work to develop and manufacture its own television streaming device about a decade ago. Upon further reflection, however, Netflix concluded that selling its own streaming device would undercut its efforts to persuade other manufacturers of such devices to support Netflix’s television and movie streaming content. A new company was created, under the name Roku, and each party was free to pursue its rivals to support its devices and content separately.
With Anthony Wood at the helm, therefore, grew up alongside Netflix, as one of the first commercially successful streaming device manufacturers in the early days of internet TV. Though Roku continues to garner the largest installed base of internet streaming devices, its success has since drawn numerous competitors into the market, including Apple, Amazon.com, and Google, all of which offer internet television streaming devices.
Today, Roku offers five different devices, priced between $29.99 and $99.99 at retail. For all of 2016, the company’s devices accounted for roughly 74 percent of revenue, with advertising and subscription revenue sharing accounting for the remainder. In 2016, device revenue grew by nine percent over the prior year. Gross margin from devices was roughly 15 percent, attesting to the price competitiveness of the category. In the first half of 2017, device revenue contracted by two percent versus the prior year, while gross margin fell from 17 percent to just 12 percent.
The more exciting part of Roku’s business is what it refers to as “platform,” which includes advertising and subscription revenue sharing. Using its position as a Switzerland-style provider of streaming services, unencumbered by ties to any of the cable network or internet streaming service providers, Roku has developed relationships with advertisers that are eager to take part in the trend toward internet television, and provide ads to internet television watchers. Through its opt in system, Roku is able to record the preferences of viewers, presumably capturing important demographic data that enables advertisers to reach their intended audience more efficiently. Roku claims 15 million such subscribers from among the total number of devices sold.
Today, advertising accounts for 67 percent of the company’s platform revenue, which totaled $82 million in the first half of 2017, up 91 percent from the prior year. Platform revenue grew from 27 percent of sales in the first half of 2016 to 41 percent in the first half of 2017. Platform gross margin was 76 percent in the first half of 2017, up from 71 percent in the first half of 2016. As a result of the shift in revenue mix, the company was able to achieve 23 percent revenue growth in the first half of 2017, along with a gross margin of 38 percent, considerably higher than the 31 percent achieved in the prior year.
While the above-mentioned trends narrowed the company’s operating losses, Roku still has much work ahead if it intends to run a profitable business. The company’s operating loss was $43 million in 2016. Its operating loss was $21 million in the first half of 2017, an improvement over the $32 million operating loss of 1H 2016. Despite the favorable trends in revenue and gross margin, Roku ramped up its R&D spending by 25 percent, reaching $48 million in the first half of the year, or 24 percent of total revenue, an exorbitant sum, which calls into question its desire or plan to improve profitability.
Over the last few years, the competitive landscape has intensified, with Apple, Amazon.com, and Google having introduced a variety of new devices into the market, as the battle for the living room spawned by the rise of internet television viewing continues. Overall, we are intrigued by Roku’s approach, which provides benefits for viewers, advertisers, and content creators. Nevertheless, we would prefer to see solid evidence of reaching and sustaining profitability, particularly given its current valuation, which has rallied dramatically in the last week, after reporting results for its first quarter as a public company.
Post IPO, Roku has a very good balance sheet with an estimated net cash position of $245 million post-offering, inclusive of $23 million in long term debt. Nonetheless, given the expectation for continued losses this year and next, the stock ranks near the very bottom of our Hardware sector coverage.