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Dropbox has evolved into a cloud-based content management software company
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Dropbox: Keeping Teams in Sync

Dropbox-logoFounded 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.

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Spotify Technology: Taking an Unusual Path to Public Ownership

SpotifyFounded in 2006 by Martin Lorentzon and Daniel Ek, and based in Stockholm, Spotify Technology (NYSE: SPOT) is the world’s largest provider of music streaming services. Consensus estimates call for revenue of €5.2 billion in 2018, followed by €6.6 billion Euros in 2019. The company is expected to report a loss per share of €1.49 in 2018, followed by another loss of €0.75 per share.

Spotify took an unconventional path to public ownership by directly listing its shares directly on the New York Stock Exchange, thus choosing to work without a team of investment banks to underwrite and support its stock in the after-market. The company’s shares began trading on April 3, at an initial listing price of $132, in line with its valuation on private stock exchanges. At a recent share price of $160, the stock’s market cap is roughly $27 billion.

Spotify’s music streaming service allows listeners to access songs from among the company’s library of 35 million tracks. The company places a great deal of emphasis on personalizing the music listening experience through its music search and discovery engines, along with playlists that are created by the company, based on listener interests. The company counts 170 million monthly active users (MAUs), of which 75 million are premium subscribers, who pay a monthly fee for its service, while 99 million are ad-supported MAUs. Premium subscribers account for roughly 91 percent of revenue, while ad-supported listeners account for the remainder. In addition to the lack of commercial interruption, premium subscribers can access a wider range of the company’s 35 million tracks. In the first quarter of 2018, Premium revenue grew by 25 percent, while ad-supported revenue grew by 38 percent, for a weighted average growth rate of 26 percent. Premium subscriber growth has been driven in part by the company’s family plan, which allows up to six premium subscribers for a flat monthly fee.

Based on its internal estimates and outside industry reports, Spotify estimates that it holds a 42 percent global revenue market share of the music streaming business, with the US, Brazil, and the U.K. its three largest markets. The company believes that its 75 million paid global subscribers are more than double that of Apple, its next closest competitor. However in the US, Apple is gaining ground with its Apple Music service, and the company may surpass Spotify in US market share this summer.

Spotify’s business model, like that of other streaming services, such as Pandora Media, is heavily influenced by royalty and other payments that Spotify must pay to the musical artists whose songs are accessed by its listeners. Thus, in the most recent quarter, Spotify’s gross margin was 25 percent, the same level as the preceding quarter. In Q1, Spotify reported an operating loss of €41 million, versus €139 million in the prior year. Spotify has a decent balance sheet, with €1.6 billion in cash and investments, along with convertible notes of €1 billion. The company, by its calculation, is free cash flow positive, and intends to remain so, with the exception of capital expenditures associated with the build out of new and expanded offices in New York, London, Los Angeles, Stockholm, Boston, and other cities.