Dropbox tumbles as ARR and paying users decline sequentially

Dropbox (NASDAQ:) reported its fourth-quarter earnings, revealing a slight revenue beat but facing a sharp decline in stock value due to concerns over its Annual Recurring Revenue (ARR) and the number of paying users. The company’s Q4 earnings per share (EPS) of $0.50 exceeded analysts’ expectations by $0.02, while revenue saw a modest increase to $635 million, surpassing the consensus estimate of $631.57 million.

Despite a 6.0% increase in revenue compared to the same quarter last year, Dropbox’s stock plummeted by 12.85% following the earnings release, indicating investor unease with the company’s performance. The decline in ARR and the number of paying users, which fell by 0.05 million from the previous quarter, are seen as key factors driving the negative market response.

Dropbox CEO Drew Houston highlighted the company’s strides in profitability and the introduction of AI-powered products like Dash. Houston emphasized the focus on driving cash flow and improving efficiency in the core File Sync and Share (FSS) business, alongside strategic investments in the burgeoning AI market.

The company’s total ARR witnessed a marginal YoY increase of 0.3%, with a constant currency basis growth of 3.8%. However, the quarter-over-quarter decrease of $2.2 million in ARR has raised concerns among investors. Furthermore, Dropbox’s paying user base grew to 18.12 million from 17.77 million the previous year, with an increase in average revenue per user from $134.53 to $138.83.

Dropbox also reported a GAAP net income of $227.3 million, down from $328.3 million in the same period last year, influenced by a one-time net gain on real estate assets. The adjusted net income rose to $170.8 million from $141.2 million YoY. The company’s free cash flow improved slightly to $190.3 million from $181.7 million in the previous year.

In the wake of the report, investors are weighing the company’s revenue growth against the backdrop of the declining ARR and user base. The market’s reaction underscores the challenges Dropbox faces as it seeks to navigate a competitive landscape while capitalizing on new opportunities in AI.

Reacting to the report, analysts at JMP Securities downgraded Dropbox to Market Perform from Market Outperform, noting that the company reported a sequential decline in ARR and the number of paying users “along with mixed 4Q23 results.” that included non-GAAP EPS According to the firm, the company’s ARR of $2.52B (consensus $2.57B) was up 0% year-on-year and down slightly sequentially, while paying users of 18.12 million missed the consensus of 18.2 million and was down 50,000 sequentially.

Analysts at JPMorgan cut DBX to Neutral from Overweight, lowering the price target to $30 from $33 per share. The bank stated that the stock has risen 72% in the last 11 months and they see a tough setup for growth over the next few years.