After quite a lot of time, a business pivot, two different credit lines, buckets of capital and a refocus on cost-control, Dropbox may be finally on the path to going public.
According to Reuters, the cloud storage — and I’m sure it would prefer us to add enterprise productivity shop — company is “seeking to hire underwriters for an initial public offering that could come later this year.”
The same article continues, saying that Dropbox’s IPO could be “the biggest U.S. technology company to go public since Snap Inc” according to “people familiar with the matter.” We care about those two lines in particular as they give us what we crave most when it comes to future IPOs: timing and scale.
More simply, if all that bears out, we know when the year ends, and we know how large Snap’s IPO was, so we have effectively constrained Dropbox’s potential debut twice.
But what you care about is revenue and valuation, so let’s give you what you desire.
Revenue, cash flow, fake profit, real losses
TechCrunch wrote a piece earlier this year concerning Dropbox’s 2017 disclosures relating to its financial performance with the following headline: “Dropbox really wants us to know its finances are healthy.”
That’s perfect, and I can’t improve on it. At the same time, let’s remind ourselves what Dropbox disclosed, on purpose or not, in this past year:
- July 2016: Dropbox is free cash-flow positive.
- January 2017: Dropbox “on pace for a $1 billion revenue run rate.”
- March 2017: Dropbox secures new, $600 million credit line.
- April 2017: Dropbox profitable on EBITDA basis, also subtracting share-based compensation expenses.
And now, in July, the company is said to be working toward its IPO.
We go over all of that not to bore each other, but to find what matters to draw a comparison. Recall that Box remains, for better or for worse, the best public market comp for Dropbox. And if we are going to compare revenues and valuations to find answers, we need to understand revenue quality.
What’s that worth?
Dropbox’s $1 billion result is not trailing. Here are the company’s official words: “Dropbox is proud to announce that our business has surpassed $1 billion in revenue run rate.”
That omits the usual language employed by software as a service (SaaS) companies to describe their revenue, namely monthly and annual recurring revenue (MRR and ARR, respectively).
But as Dropbox compares itself directly to other SaaS shops like Salesforce in the same blog post, companies that generate billions in recurring revenue, we are likely in good shape to derive an ARR number from Dropbox’s $1 billion figure.
So let’s give Dropbox a $1 billion ARR result in the first quarter. That, unless my brain is extra mushy, works out to a $250 million recurring revenue result in the first quarter of this year. (We’re working very loosely here, as private companies are damn shy. However, I hope you agree that we’re operating in good faith today.)
That gives us a working set of metrics for Dropbox: $250 million in first-quarter revenue and free cash-flow positive. It later tacks on EBITDA positivity.
Now, let’s observe Box’s most recent quarter, which ended April 30, 2017:
- Revenue: $117 million.
- Operating and free cash flow: Both positive.
- EBITDA status: Negative.
Box is smaller than Dropbox, hit free cash-flow positivity earlier than Dropbox and grew by 30 percent year-over-year. We don’t have Dropbox’s relative growth rate, but we can see enough crossover between the two companies’ results to derive an inference or two.
So what’s Box’s revenue worth? Its current revenue multiple (trailing) is 5.73. That comes down to 5.2 if you calculate its full-year revenue using its last quarter multiplied by four. We could lower it again by using a forward-revenue denominator, but let’s not be rude.
Regardless, that helps quite a bit. Presuming that Dropbox’s growth is in the ballpark of Box’s, we can quickly apply Box’s 5.2x revenue multiple to Dropbox’s $1 billion revenue pace and, voilà, Dropbox is worth around $5.2 billion.
Now, we can amend that result by noting that Dropbox is EBITDA positive, while Box is not. That’s points in Dropbox’s direction. And if it is growing more quickly than Box, it will get a bit more market respect from Wall Street. Finally, given its longer history of cash-flow positivity, the firm could simply have a stronger balance sheet, improving its inherent worth, and thus its market cap.
We’ll have to see. Meanwhile, it’s notable Dropbox is going public at record highs for tech stocks. A boom, really, and even after all that work, may be forced to go public for a smaller valuation than its last private price tag.
That brings us back to our opening lines:
The same article continues, saying that Dropbox’s IPO could be “the biggest U.S. technology company to go public since Snap Inc” according to “people familiar with the matter.” We care about those two lines in particular as they give us what we crave most when it comes to future IPOs: timing and scale.
And how big was that IPO? Here’s Forbes:
Snap Inc. priced its initial public offering on Wednesday at $17 per share, giving the company a valuation of $23.6 billion. Snap, which created the popular messaging app Snapchat, and selling stakeholders reportedly offloaded 200 million shares, raising $3.4 billion in the tech industry’s largest IPO since 2014.
Given the scale of the Snap debut, it doesn’t provide the best possible outer-boundary. But that’s about all the work we can do with what we have. More as we can.