After positive first-quarter results, what’s in store for Dropbox (DBX)

The technology sector is probably the worst affected by the economic downturn that has put pressure on companies to streamline operations through measures like cost-cutting and headcount reduction. Cloud service provider Dropbox, Inc. (NASDAQ: DBX) is the latest tech firm to announce layoffs as part of its efforts to stay competitive.

The San Francisco-headquartered company’s stock is currently trading in line with its long-term average. The shares got a much-needed boost after the company released first-quarter report last week. The stock has reversed a part of the losses it suffered following the last earnings announcement. Of late, DBX’s performance has been lackluster, despite the company doing well financially. Nevertheless, Dropbox’s encouraging prospects as a growing software-as-a-service company should lift investor sentiment going forward.

Investing in DBX

The company has been maintaining healthy cash flow and pursuing an aggressive share buyback program, which in turn would translate into long-term shareholder value. The valuation is favorable – it is one of the cheapest tech stocks as per the last closing price. The share count has fallen significantly in the last couple of years, while revenues grew at a high rate.

That said, macro headwinds and the stagnating business have made the management take the hard decision to terminate around 16% of employees. Currently, the company is focused on shifting to to AI-powered products to prepare the business to tap into long-term opportunities.

“For years, we’ve invested in AI and ML technologies to improve our infrastructure, improve our search functionality, image recognition, and many others. And now we can apply the same principles and techniques to organizing our customers’ working lives. And our customers can rely on us as a trusted brand that integrates seamlessly with all of their work tools, and we’re committed to ensuring the privacy and security of our customers’ content and using AI responsibly.” – Dropbox’s CEO Drew Houston at last week’s earnings call.

Financials

The company has an impressive track record of beating earnings estimates, with the bottom line surpassing/matching the Street View in every quarter since reporting started about five years ago. The trend continued in the March quarter, though adjusted profit dropped 11% from last year to $0.42 per share during the three-month period.

The company had 17.9 million paying users at the end of the quarter, which is up 5%. The user growth translated into an increase in revenues to $611.1 million, beating the market’s forecast. Over the years, the top line expanded steadily, reflecting the growing demand for file hosting services. Average Revenue Per Paying User rose at an accelerated pace in the first quarter, aided by the management’s prudent pricing policy, and the gross margin more than doubled from last year to 80.9%.

DBX, which had lost momentum ahead of earnings, regained strength after last week’s announcement. It traded slightly higher on Monday afternoon.