Dropbox Makes Strategy Switch Ahead of Potential IPO

Surpasses $1 billion in annual revenue run rate with over 200,000 paying business customers

The US IPO market is expected to bounce back in 2017 as the Trump administration takes over with promises to boost growth through tax cuts, spending, and deregulation. Public listings will also get a boost in 2017 from private equity firms looking to exit their investments. The potential pipeline of companies set to make their debuts in 2017 includes messaging app Snapchat’s parent Snap Inc. and ride-hailing company Uber Technologies Inc. Snap could go public as soon as March 2017 and is expected to be valued at $20 billion to $25 billion. Investors also widely expect Uber to file for an IPO in 2017. The company was valued at about $63 billion after its latest round of funding in June 2016. Investors are also expecting the IPO of Altice USA, the US arm of the multinational Dutch cable company, with an estimated valuation of $25 billion, and most recently, cloud storage firm Dropbox.

In 2016, the US IPO market clocked its worst performance since the financial crisis in 2009, mainly due to economic uncertainty surrounding the US presidential elections, the Fed’s rate hike decision, and the Brexit vote in 2Q FY16. In all, the US IPO market witnessed 105 IPOs being priced, raising a total of $18.8 billion in 2016. Annual IPO proceeds dropped 37% Y-o-Y to their lowest level since 2003, according to Renaissance Capital, an IPO research firm. The Healthcare sector dominated the US IPO market for the third straight year, accounted for 42 deals or 40% of the total number of IPOs in 2016.

Dropbox changes business strategy ahead of IPO

San Francisco-based cloud storage startup Dropbox Inc. is inching toward an IPO in 2017, according to Bloomberg. Dropbox currently has 500 million users globally, about double the number two years ago. Gearing up for its potential IPO, the company has met with its financial advisors for initial discussions, including talks over a potential valuation. Two years ago, Dropbox was said to be valued at $10 billion, having raised a total of $600 million in funding, but it’s not yet profitable.

Dropbox CEO and Co-founder Drew Houston stated on January 30th, 2017, that the company has passed $1 billion in annual revenue run rate with over 200,000 paying business customers. Paying customers pay for either Dropbox Pro or Dropbox Business for cloud storage and file synchronization. Some of Dropbox’s big accounts include Hewlett-Packard Enterprise Company (NYSE: HPE), News Corp. (NASDAQ: NWS), and Expedia Inc. (NASDAQ: EXPE). CEO Drew Houston also claims that it is the fastest software-as-a-service (SAAS) company to reach this goal. Public competitor Box Inc. (NYSE: BOX) had just over $300 million in revenue its last full annual results. Dropbox is also working to cut deals with large corporations and government agencies that provide substantial recurring revenue.

Dropbox started as a free service for consumers to share and store photos, music and other large files. However, that business became a commodity as technology giants Alphabet Inc.’s (NASDAQ: GOOGL) Google, Microsoft Corp. (NASDAQ: MSFT) and Amazon.com Inc. (NASDAQ: AMZN) also began offering storage for free.

Dropbox unveils new products

In a strategy switch aimed at differentiating itself, the highly valued digital storage firm unveiled two team collaboration tools – file synch and content collaboration tools – as part of a years-long effort to build its business offerings, on January 30th, 2017. Dropbox unveiled Smart Sync, a feature that allows users to see and access all of their files, whether stored in the cloud or on a local hard drive, from their desktop. Smart Sync is part of Dropbox Business, which requires companies to pay a fee based on the number of employees who use it. Dropbox also rolled out Dropbox Paper, which allows groups to create, edit and collaborate on projects in a single workspace, to users globally and in 21 languages.

The company also announced an array of new features and upgrades all aimed at better employee collaboration and efficiency. However, the team collaboration tools space is also crowded with competitors including Box, Slack, Facebook Inc. (NASDAQ: FB), Microsoft, Atlassian Corp. PLC (NASDAQ: TEAM) and Google already offer similar products. Many of these companies also have key partnerships with each other. It remains to be seen how Dropbox would garner market share in this space through its differentiated offerings.

Is Dropbox’s valuation justified?

Over the last couple of years, Dropbox has struggled to justify its $10 billion valuation, based on the price tag it earned in its last round of private financing. Wall Street values Box, which has a run rate over $400 million, at a $2.25 billion market capitalization. At the same multiples, Dropbox’s newly announced run rate would imply a value for the company around $5 billion to $6 billion. Sequoia Capital venture investor Bryan Schreier, who led the firm’s investment in Dropbox, said its new business strategy was working, especially since Dropbox started generating positive cash flow in 2016.

Despite these projections, Dropbox has cause for worry since its potential IPO launch comes at a time when shares of technology firms such as Square Inc. (NYSE: SQ) and Box Inc. (NYSE: BOX) that went public over the last two years are trading well below their private market valuation. Moreover, public cloud computing companies are trading at 4.9 times revenue, on average, according to data from Bessemer Venture Partners. According to that standard, Dropbox would have to reach roughly $2 billion a year in sales to justify its current valuation. With $1 billion in expected annual revenue, Dropbox is two-and-a-half times the size of Box, which has about $400 million in annual revenue.

While Dropbox continues to face stiff competition in an already crowded market, it remains to be seen how the company wins over revenue-generating business accounts even as it tries to keep a foothold in the consumer market.

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