Earnings Results: Dropbox stock falls nearly 10% after earnings easily beat expectations, COO steps down

Earnings Results: Dropbox stock falls nearly 10% after earnings easily beat expectations, COO steps down

Dropbox Inc. reported better quarterly earnings and revenue than expected Thursday, as the cloud-storage company grew its paying customer base and earned more from each user than Wall Street projected, but shares still dropped in late trading.

Dropbox stock DBX, +9.13%   fell nearly 10% in the extended session after the second-quarter earnings report, which also included news that Chief Operating Officer Dennis Woodside was stepping down and a post-IPO lockup on shares would expire earlier than previously planned.

“Dropbox was up 9% in today’s trading, and it’s giving that back in the after market,” JMP Securities analyst Greg McDowell theorized in a phone interview after the earnings call. “Certainly losing Dennis Woodside is a part of that. He joined years ago when they were at a $400 million run-rate business, and now they’re a $1.4 billion run-rate business. Certainly a part of it could be a reaction to Dennis leaving.”

Second-quarter net losses were $4.1 million, which amounts to 1 cent a share, narrowing from losses of $26.8 million, or 14 cents a share, in the year-ago quarter. Adjusted for items such as stock-based compensation, Dropbox reported profit of $48 million, or 11 cents a share, compared with adjusted net income of $20 million, or 6 cents a share, in the year-earlier period. Wall Street analysts had expected adjusted earnings of 6 cents a share, according to FactSet.

The company’s revenue grew to $339.2 million, 27% growth compared with the year-ago quarter and well ahead of the average analyst estimate of $331 million, according to FactSet. Free cash flow was $102.2 million, ahead of the consensus estimate of $96 million.

Dropbox said user growth increased as well, boasting 11.9 million paying users at the end of the second quarter, up from 9.9 in the year-earlier period. And its average revenue per user also grew to $116.66 compared with $111.19 in the year-earlier quarter.

“Net-net, when you cut the numbers, what stands out is that first of all, this is the best average revenue per user we’ve seen in the publicly available quarters,” McDowell said. “ARPU growth accelerated on a year-over-year basis.”

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The company’s announcement of COO Woodside’s departure appeared to catch the market off-guard. Woodside will remain at the company through early September and serve as an adviser until the end of the year. The company is not replacing Woodside at this point, but instead promoting Dropbox veteran Yamini Rangan to chief customer officer and Ling-Hua Wu to vice president of communications. Both will report directly to Chief Executive Drew Houston and take on Woodside’s responsibilities.

“We’re grateful for everything Dennis has done for us,” Houston said in a statement.

McDowell says that given the fact that Woodside spoke and answered analyst questions on the earnings call, it’s likely the separation was amicable.

“These guys have a deep bench,” he said, “I don’t think there’s anything untoward going on.”

In the company’s earnings release, Dropbox said it has moved its lockup period expiration to the close of market on Aug. 23 from Sept. 7, due to the company’s quarterly blackout period.

Dropbox went public earlier this year and priced its stock at $21, above the expected range. It raised more than $750 million at an initial market valuation of $8.24 billion. The company was founded in 2007 and had previously raised more than $600 million in private cash. Prior to Dropbox going public, it moved its cloud storage from Amazon.com Inc.’s AMZN, +0.64%  systems to a system of its own design, which has benefited the company’s bottom line.

That system, called Magic Pocket, is one of the pieces of tech that makes the company stand out from competitors who rely on Amazon, Microsoft Corp. MSFT, +0.16%  or Google Cloud Platform owned by Alphabet Inc. Running Magic Pocket results in great capital expenditures — to build out its data centers — as well as research and development costs, but also allows it to benefit from the decreasing costs of cloud computing.

During the second quarter, Dropbox said it adopted Shingled Magnetic Recording devices for its data centers, a technology that lets it squeeze more data into the same amount of physical disk space. Costing less per gigabyte of storage, it is part of an effort by the company to add hundreds of petabytes of capacity.

Dropbox shares have gained 9.8% in the past three months before Thursday’s aftermarket action, as the S&P 500 index SPX, -0.14%  rose 5.9%.

Said McDowell, about the stock’s after-hours drop, “You can’t look at it in isolation. Over a three-month period, it’s been an extremely volatile stock — I personally am not reading too much into it.”

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