Dropbox (DBX, Financial) reported its first post-IPO earnings yesterday, beating the top line and bottom line consensus. Revenue came in at $316.3 million, up 27.6% year-over-year, beating the analyst consensus by $7.6 million. Earnings for the quarter were 8 cents a share; analysts were looking for earnings per share of 6 cents.
For the second quarter, Dropbox is guiding for mid-point revenue of $329.5 million, translating into 4% sequential growth. Wall Street is modeling for revenue of $324.9 million. For the full year 2018, Dropbox is guiding for revenue in the range of $1.34 billion and $1.36 billion, which is above the consensus of $1.33 billion.
The market is showing mixed reaction as the stock jumped on better than expected results in after-hours yesterday, only to retreat today in the pre-market trading.
What does Dropbox do?
The company operates in the cloud storage and collaboration market. It serves consumers and enterprise customers in cloud storage and file management while competing with the likes of Google (GOOG, Financial) and Microsoft (MSFT, Financial) on the consumer side. On the enterprise front, the company is competing with Box Inc (BOX, Financial). Atlassian (TEAM, Financial) is a direct competitor of Dropbox in the cloud collaboration space. Moreover, collaboration space is packed with many able competitors. Sixty-six percent of the collaboration revenue was shared between the top 10 cloud collaborators during 2016.
What contributed to year-over-year revenue growth?
Increase in paying users and average revenue-per-ser (ARPU) is boosting revenue growth. Paying users increased 23.6% during the trailing 12 months to reach 11.5 million. The company increased its average revenue per user to $114.30, up 3% on a year-over-year basis. Moreover, average revenue per user is the highest compared to historical ARPU. 
It can be seen the Dropbox posted the highest ARPU ever during its first quarter of 2018. ARPU growth was primary driven by the adoption of premium professional and advanced plans offered by the company, said the COO during the latest earnings call.
What about sequential revenue growth?
Sequential growth isn’t very impressive as Dropbox only added half-a-million paying users during the quarter. This translates to a sequential growth of merely 4.5%. Consequently, the company is guiding for sequential revenue growth of around 4%. On an annualized basis, 4% sequential growth will translate into 21% annual growth during 2018.
Sequential growth is slowing down
Based on the sequential additions during the first quarter, the annual run rate of subscriber additions comes to around 2 million. If the projection holds, the company will be able to grow its user base by around 18% during 2018. This is indicative of a slowdown in subscriber uptake since the company grew subscribers at a higher rate in preceding years.
*Annualized growth based on the quarterly paying users added during the first quarter of 2018
The declining growth in subscribers will affect revenue growth going forward. The company is guiding for $1.34 billion in revenue, which is below the revenue consensus at the time of IPO. Note that the revenue consensus has dropped down from $1.5 billion to $1.3 billion after the IPO. Revenue growth trends looks like this now.
The chart clearly depicts that revenue growth is slowing down for Dropbox. Growth is expected to drop to 21.4% during 2018 as compared to about 40% during 2016.
Why is the growth slowing down?
The market is crowded in cloud collaboration while there is strong competition from Google and Microsoft on the consumer storage side. Dropbox is a consumer-oriented company, and industry growth is relatively lower on the consumer side. Moreover, consumer cloud storage space is driven by price competition.
Enterprise cloud storage is being dominated by Box for now. Enterprise requires a targeted marketing strategy. Dropbox isn’t focusing on that for now. Ninety percent of the company’s revenue comes from self-serve users, who may never talk to a sales person, according to a spokesperson of the company. All in all, competition, pricing and lack of advertisement are among the contributors of slowing revenue growth.
All is not bad, though
Dropbox belongs to an industry that is set to witness double-digit growth going forward. Cloud storage is set to grow at more than 20% per year during the next three years. The cloud collaboration market is projected to grow 13.2% to reach $55.5 billion by 2023.
In line with industry growth, the company is posting healthy revenue growth, with revenue increasing by about 40% and 31% during 2016 and 2017, respectively. Moreover, Dropbox is among the leaders in content collaboration, according to Gartner. In short, Dropbox has the tools to compete in the highly competitive market of content collaboration.
Bottom line
Although the company reported stellar year-over-year growth, sequential growth doesn’t look so good. The slowdown in paying subscriber growth can translate into lower revenues going forward. Given that the stock is already trading at a high multiple, it’s better for investors to stay away for now.
Disclosure: I have no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.
