It was also able to hire a team that had the technical chops to implement and operate low-cost storage at a scale most companies never get to. It essentially duplicated the data first, and then began deleting it from AWS S3. This is also an impressive feat of execution, because it was able to migrate one exabyte of data off AWS without users noticing, and without losing a single bit. If the company was still using S3, we would have expected its storage costs (cost of revenue) to have risen in line with the growth of its usage - but in fact, it was able to spend less on storage in 2017 than it did in 2016. For most companies, this would be a mistake - but for Dropbox with an exabyte (one quintillion bytes) of data to store, it is the source of the company’s doubling of gross margins in the last 2 years and impressive resulting unit economics. Crucially, it completed a move off Amazon’s Simple Storage Service (S3) in December 2016, choosing to lease colocation space (data centers) and build out its own storage infrastructure. Strategically, the company is also impressive in its technical decision-making. Losing money on a GAAP basis is just fine when your net margin is 33% and you’re rapidly growing cash reserves. Remember: cash is fact and profit is a matter of opinion. On the face of it, this is a very healthy business that it throwing off meaningful cash and growing well at 30%, which is very good for a $1.1Bn business. Gross margin doubled from 2016 to 2017, now at 66%, because cost of revenue (COGS) fell from $391m to $369m 2016->2017 despite 30% growth in top-line.For the full year, it expects its revenue to grow 13%-15%, and for its non-GAAP operating margin to rise to 17.5%-18%.ĭropbox didn't provide any earnings guidance, but Wall Street expects its non-GAAP earnings to rise 46% for the year - which is a high growth rate for a stock that trades at 31 times forward earnings. A rosy forecast and a reasonable valuationĭropbox expects its second-quarter revenue to rise 15%-16% annually, and for its non-GAAP operating margin to expand to 16.5%-17.5%. Furthermore, Dropbox expects to remain profitable on a GAAP basis for the full year - while its rival Box remains deep in the red. Those higher margins, along with its stable revenue growth, enabled Dropbox to post a GAAP profit of $39.3 million in the first quarter, marking its first-ever quarter of GAAP profitability.
Lower marketing expenses, which it attributed to "greater efficiencies" in spending, lifted its operating margin. Dropbox attributed its gross margin improvement to its expanding scale and infrastructure and expects that expansion to continue for the full year.
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