Dropbox Earnings: Solid Revenue and Margins Amid a Tough Macroenvironment; Maintain Valuation

We maintain our $24 fair value estimate for no-moat Dropbox DBX, after the firm reported second-quarter results which came in above our revenue and adjusted operating margin expectations. Management guided for sequentially stronger third-quarter sales and raised its full-year revenue and margin outlooks. Despite the strong results, macro headwinds continue to bear down on Dropbox’s financials with customers reticent to spend money on Dropbox’s solutions during a time when their own budgets are squeezed. At the same time, we are encouraged by the firm’s reallocation of resources toward strategic initiatives around artificial intelligence enablement and improving its core portfolio, including a pivot away from commoditized cloud storage. With shares up more than 4% after hours, we view Dropbox as fairly valued.

Revenue for the first quarter clocked in at $623 million, up 9% year over year. Revenue upside was supported by outperformance in FormSwift, offset in part by currency headwinds of approximately $14 million. While the near-term outlook remains cloudy, we were impressed with the firm’s ability to drive revenue growth despite the turbulent macroeconomic backdrop. Average revenue per user was $138.94, up $5.00 from the year-ago period. The ARPU expansion was spearheaded by Teams customers renewing at higher prices as well as added FormSwift sales.

Turning to profitability, Dropbox reported an adjusted operating margin of 34.2%, compared with 31.9% in the prior-year period. Margin expansion was bolstered by revenue outperformance as well as the firm’s workforce reduction in April, partially offset by currency headwinds and investments in AI talent to further strategic initiatives.