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Can Dropbox Turn Its Losses into Profits?

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Mar. 27 2018, Published 8:05 a.m. ET

Dropbox goes public at $21 per share

Dropbox (DBX) is the first loss-making company to go public, and it had an overwhelming response from investors when it did on March 23, 2018. The company raised more than $750 million in funds by selling 36 million shares for $21 per share, which was higher than the expected range of $18–$20.

Dropbox was the first big technology company to have an IPO (initial public offering) since Snap (SNAP had its debut in March 2017.

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Dropbox making losses

It’s worth noting that Dropbox has reported losses in the past three years, although the losses have become narrower each year. It reported a loss of $325.9 million in 2015, $210.2 million in 2016, and $111.7 million in 2017 due to a steep rise in expenses. The company has been making massive investments and spending on research and development, which has increased its costs. With a growing user base and revenue opportunities, Dropbox continues to expect expenses to rise in the near term.

However, Dropbox posted positive free cash flow of $137.4 million and $305 million in 2016 and 2017, respectively. That compares to negative free cash flow of $63.9 million in 2015.

Dropbox has tried to reduce its operating expenses by shifting its data storage from Amazon’s (AMZN) cloud services to its own custom-built system. The company now has more than 90% of user data stored on its own cloud infrastructure. It uses Amazon Web Services for the remainder. In 2016, the company also made an effort to discard inactive non-paying users, which not only created free space but resulted in cost reductions.

Long-term profit outlook

According to a CNBC report, Dropbox expects its long-term gross margins to increase in the range of 76%–78%, up from 68% in 2017. Dropbox also plans to expand its operating margins to 18%–20%, up from only 5% in 2017. The improvement in gross and operating margins could turn around Dropbox’s losses over the long term.

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