UPDATED 21:00 EDT / AUGUST 08 2019

CLOUD

Dropbox beats earnings estimates but stock falls on slower customer growth

Updated:

Shares in cloud storage company Dropbox Inc. took a beating today after it fell short on a key quarterly metric that indicates future growth and reported its slowest growth in paid users since going public.

Dropbox’s second-quarter results were pretty good, though. The company reported a profit before certain costs such as stock compensation of 10 cents per share on revenue of $401.5 million, up 18% from a year ago. Wall Street had forecast earnings of just 8 cents per share on revenue of $400.9 million.

But things quickly went pear-shaped from there on. The company’s positive earnings beat was marred by a wider net loss of $21.4 million for the quarter, compared with a net loss of $7.7 million in the previous three-month period.

Officials also had bad news on the customer acquisition front. They said the number of paying users grew to 13.6 million at the end of the quarter, up from 13.2 million three months ago and 11.9 million a year before.

Analysts had expected it to announce 13.4 million paying customers. Still, the growth rate was the slowest in quite a while, and follows the recent introduction of Dropbox’s try-to-buy “freemium” offering that was meant to help the company convert more of its free users into paying customers.

Even worse, Dropbox’s average revenue per user came in below expectations. The company said it was making $120.48 per user in the quarter, up from $116.66 per user in the same period one year ago. However, analysts had expected the company to report average revenue per user of $120.80.

Dropbox co-founder and Chief Executive Officer Drew Houston (pictured) tried to put a positive spin on the numbers, saying the company was balancing growth and profitability while delivering more useful product updates.

“We’re making great progress on our mission of designing a more enlightened way of working and are excited about the remainder of 2019 and beyond,” Houston said.

But investors were having none of it. In the after-hours trading session, Dropbox’s stock fell more than 6%. Update: Shares plunged more almost 13% in Friday trading.

Charles King of Pund-IT Inc. told SiliconANGLE that slowing growth of paying customers is never well-received by investors, especially with companies whose fortunes are tied to subscription growth. However, he said the real reason for today’s stock drop may have been Bernstein analyst Zane Chrane’s underperform rating on Dropbox. The analyst set a $19 target for Dropbox on Tuesday, well below its current value.

“How deeply or how long that will impact the company’s shares remains to be seen,” King said.

Analyst Holger Mueller of Constellation Research Inc. said he believed investors were punishing Dropbox for missing the path to profitability, adding that they’ve had their eyes on this for quite some time already.

“Though the dimensions of the challenge are not severe, it’s a step back for the vendor,” Mueller said. “Now it comes back to the management to show that they can grow and return back to be a profitable Business. The good news is that the products remain in demand and popular with users and has a ton of stickiness, up something that Dropbox can continue to build on.”

Dropbox did at least have some good news regarding its guidance for the next three-month period. It said it expects third-quarter revenue of between $421 million and $424 million, well above the analyst consensus of $419.2 million.

Photo: JD Lasica/Flickr

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