DROPBOX, INC. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K. As discussed in the section titled "Note About Forward-Looking Statements," the following discussion and analysis contains forward-looking statements that involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements. Factors that could cause or contribute to these differences include, but are not limited to, those identified below and those discussed in the section titled "Risk Factors" under Part II, Item 1A in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K. Our fiscal year endsDecember 31 .
Overview
Our modern economy runs on knowledge. Today, knowledge lives in the cloud as digital content, and Dropbox is where businesses and individuals can create, access, and share this content globally. We serve more than 700 million registered users across 180 countries. Since our founding in 2007, our market opportunity has grown as we've expanded from keeping files in sync to keeping teams in sync. In a world where using technology at work can be fragmented and distracting, Dropbox makes it easy to focus on the work that matters. By solving these universal problems, we've become invaluable to our users. The popularity of our platform drives viral growth, which has allowed us to scale rapidly and efficiently. We've built a thriving global business with 16.49 million paying users. Our Subscription Plans We generate revenue from individuals, families, teams, and organizations by selling subscriptions to our platform, which serve the varying needs of our diverse customer base. Subscribers can purchase individual licenses through our Plus and Professional plans, or purchase multiple licenses through our Family plan or our Standard, Advanced, and Enterprise team plans. Each team or family represents a separately billed deployment that is managed through a single administrative dashboard. Teams must have a minimum of three users, but can also have more than tens of thousands of users. Families can have up to six users. Customers can choose between an annual or monthly plan, with a small number of large organizations on multi-year plans. A majority of our customers opt for our annual plans, although we have seen and may continue to see an increase in customers opting for our monthly plans. We typically bill our customers at the beginning of their respective terms and recognize revenue ratably over the term of the subscription period. International customers can pay inU.S. dollars or a select number of foreign currencies. Our premium subscription plans, such as Professional and Advanced, provide more functionality than other subscription plans and have higher per user prices. Our Standard and Advanced subscription plans offer robust capabilities for businesses, and the vast majority of Dropbox Business teams purchase our Standard or Advanced subscription plans. While our Enterprise subscription plan offers more opportunities for customization, companies can subscribe to any of these team plans for their business needs.
In the first quarter of fiscal 2021, we acquired DocSend, a secure document sharing and analytics company. The combination of Dropbox, HelloSign, and DocSend will help customers across industries manage end-to-end document workflows-from content collaboration to sharing and e-signature-giving them more control over their business results.
DocSend offers paid subscription plans, including a personal plan designed for individuals and Standard, Advanced, and Enterprise plans designed for business users and teams. Similar to Dropbox plans, pricing is based on the number of licenses purchased. Customers can choose between an annual or monthly plan, with a small number of large organizations on multi-year plans. We typically bill DocSend customers at the beginning of their respective terms and recognize revenue ratably over the subscription period. DocSend primarily sells withinthe United States , with the majority of sales inU.S. dollars. We also offer HelloSign, an e-signature solution. HelloSign has several product lines, and the pricing and revenue generated from each product line varies, with some product lines priced based on the number of licenses purchased (similar to Dropbox plans), while others are priced based on a customer's transaction volume. Depending on the product purchased, teams must have a minimum number of licenses, but can also have hundreds of users. Customers can choose between an annual or monthly plan, with a small number of large organizations on multi-year plans. We typically bill HelloSign customers at the 42 -------------------------------------------------------------------------------- Table of Contents beginning of their respective terms and recognize revenue ratably over the subscription period. We sell HelloSign products globally and sell primarily inU.S. dollars. Our Customers Our customer base is highly diversified, and in the period presented, no customer accounted for more than 1% of our revenue. Our customers include individuals, families, teams, and organizations of all sizes, from freelancers and small businesses to Fortune 100 companies. They work across a wide range of industries, including professional services, technology, media, education, industrials, consumer and retail, and financial services. Within companies, our platform is used by all types of teams and functions, including sales, marketing, product, design, engineering, finance, legal, and human resources. 43 --------------------------------------------------------------------------------
Table of Contents Our Business Model Drive new signups
We acquire users efficiently and at relatively low cost through word-of-mouth referrals, direct in-product referrals, and sharing of content. Anyone can create a Dropbox account for free through our website or app and be up and running in minutes. These users often share and collaborate with other non-registered users, attracting new signups into our network.
Increase conversion of registered users to our paid subscription plans
We generate over 90% of our revenue from self-serve channels-users who purchase a subscription through our app or website. To grow our recurring revenue base, we actively encourage our registered users to convert to one of our paid plans based on the functionality that best suits their needs. We do this via in-product prompts and notifications, time-limited free trials of paid subscription plans, email campaigns, and lifecycle marketing. Together, these enable us to generate increased recurring revenues from our existing user base.
Upgrade and expand existing customers
We offer a range of paid subscription plans, from Plus, Professional, and Family for individuals to Standard, Advanced, and Enterprise for teams. We analyze usage patterns within our network and run hundreds of targeted marketing campaigns to encourage paying users to upgrade their plans. We prompt individual subscribers who collaborate with others on Dropbox to purchase our Standard or Advanced plans for a better team experience, and we also encourage existing Dropbox Business teams to purchase additional licenses or to upgrade to premium subscription plans. We also aim to offer additional products that expand our content collaboration capabilities, such as through our acquisitions of HelloSign and DocSend.
COVID-19 update
Although we did not experience material adverse impacts to our financial condition and results of operations during the three and nine months endedSeptember 30, 2021 as a result of the COVID-19 pandemic, we have seen and may continue to see impacts to certain components of results of operations, as described below. However, the full extent of the impact of the COVID-19 pandemic on our operational and financial performance will continue to depend on certain developments, including the duration and spread of the outbreak, new information about additional variants, the availability and efficacy of vaccine distributions, additional or renewed actions by government authorities and private businesses to contain the pandemic or respond to its impact and altered consumer behavior, the pace of reopening, impact on our customers and our sales cycles, impact on our business operations, impact on our customer, employee or industry events, and effect on our vendors, all of which are uncertain and cannot be predicted. In addition, the COVID-19 pandemic has created economic uncertainty, including disruption of the supply chain globally and labor shortages, which may adversely impact us directly or indirectly as a result of the effects on our customers and vendors. Accordingly, the full extent to which the COVID-19 pandemic may impact our business, financial condition or results of operations remains uncertain, but may include, without limitation, impacts to our paying user growth as well as disruptions to our business operations as a result of travel restrictions, shutdown of workplaces and potential impacts to our vendors. Additionally, our results of operations and cash flows are subject to fluctuations due to changes in foreign currency exchange rates relative toU.S. dollars, our reporting currency, as well as changes in interest rates. Volatile market conditions arising from the COVID-19 pandemic has, at times, and may in the future negatively impact our results of operations and cash flows, due to (i) a weakening of foreign currencies relative to theU.S. dollar, which may cause our revenues to decline relative to our costs, and (ii) government-initiated reductions in interest rates or maintaining low interest rates, which may reduce our interest income. Conversely, we have seen and may continue to see cost savings from the shift to remote work for all of our employees in areas including events, travel, utilities, and other benefits. We may continue to experience certain of these cost savings beyond the resolution of the COVID-19 pandemic as we shift to our Virtual First work model, as described below. Due to our subscription-based business model, the effect of the COVID-19 pandemic may not be fully reflected in our results of operations until future periods, if at all. Virtual First Furthermore, the effects of the COVID-19 pandemic have led us to reimagine the way we work, resulting in our announcement inOctober 2020 to shift to a new Virtual First work model pursuant to which remote work will become the primary experience for all of our employees. As a result, we intend for our workforce to become more distributed over time, although we will continue to offer our employees opportunities for in-person collaboration in all locations we currently have offices, either through our existing real-estate, or new on-demand, flexible spaces, which will be known as "Dropbox Studios ". 44 -------------------------------------------------------------------------------- Table of Contents Consistent with this strategy, we will retain a portion of our office space and a portion will be marketed for sublease. We engaged a third party to estimate the fair value of the office space to be subleased based on current market conditions and where the carrying value of the individual asset groups exceeded the fair value, an impairment charge was recognized for the difference. We recorded an impairment charge of$17.3 million during the nine months endedSeptember 30, 2021 related to the continued adoption of Virtual First, including impairment related to real estate assets acquired as part of our acquisition of DocSend. We recorded an impairment charge of$398.2 million in the year endedDecember 31, 2020 . See Note 9 "Leases" for additional information. We may incur additional charges related to certain European leases. In addition to generating sublease income, we expect that as a result of our shift to Virtual First we will continue to see certain savings that we experienced as a result of the COVID-19 pandemic in areas, including reductions in facilities related costs and depreciation expense due to the impairment charges related to the continued adoption of Virtual First. We seek to manage the implementation of this new work model carefully and we believe this model will help us reap the benefits of remote work, while maintaining a meaningful in-person experience. However, there is no guarantee that we will realize any anticipated benefits to our business, including any cost savings, operational efficiencies, increased employee satisfaction or increased productivity. In addition, given that we have a limited history of operating with a Virtual First workforce, the long-term impact on our financial results and business operations is uncertain. Please see Item 1A. "Risk Factors" in this Quarterly Report on Form 10-Q for a complete description of the material risks we currently face, including risks related to the COVID-19 pandemic and our shift to a Virtual First work model.
Reduction in Force
OnJanuary 13, 2021 , we announced a reduction of our global workforce by approximately 11% to streamline our team structure in support of our business priorities. As a result, during the nine months endedSeptember 30, 2021 , we incurred$14.3 million of expenses related to severance, benefits, and other related items. We do not expect to incur additional expenses of any significance related to our reduction in force in future periods. 45
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Key Business Metrics
We review a number of operating and financial metrics, including the following
key metrics to evaluate our business, measure our performance, identify trends
affecting our business, formulate business plans, and make strategic decisions.
Total annual recurring revenue
We primarily focus on total annual recurring revenue ("Total ARR") as the key
indicator of the trajectory of our business performance. Total ARR represents
the amount of revenue that we expect to recur annually, enables measurement of
the progress of our business initiatives, and serves as an indicator of future
growth. In addition, Total ARR is less subject to variations in short-term
trends that may not appropriately reflect the health of our business. Total ARR
is a performance metric and should be viewed independently of revenue and
deferred revenue, and is not intended to be a substitute for, or combined with,
any of these items.
Total ARR consists of contributions from all of our revenue streams, including
subscriptions and add-ons. We calculate Total ARR as the number of users who
have active paid licenses for access to our platform as of the end of the
period, multiplied by their annualized subscription price to our platform. We
include ARR related to acquired companies in our total ARR in the period of the
acquisition. We adjust the exchange rates used to calculate Total ARR on an
annual basis at the beginning of each fiscal year.
The below tables set forth our Total ARR using the exchange rates set at the beginning of each year, as well as on a constant currency basis using the exchange rates used in 2021.
As of
September 30, 2021 December 31, 2020 September 30, 2020
(In millions)
Total ARR $2,218 $2,022 $1,981
As of
Constant Currency September 30, 2021 December 31, 2020 September 30, 2020
(In millions)
Total ARR $2,218 $2,052 $2,010
Paying users
We define paying users as the number of users who have active paid licenses for
access to our platform as of the end of the period. One person would count as
multiple paying users if the person had more than one active license. For
example, a 50-person Dropbox Business team would count as 50 paying users, and
an individual Dropbox Plus user would count as one paying user. If that
individual Dropbox Plus user was also part of the 50-person Dropbox Business
team, we would count the individual as two paying users.
We have experienced growth in the number of paying users across our products, with the majority of paying users for the periods presented coming from our self-serve channels.
We acquired DocSend in the first quarter of fiscal 2021. We define DocSend paying users as the number of users who have active paid licenses for access to our platform as of the end of the period.
We acquired HelloSign in the first quarter of fiscal 2019. HelloSign has several
product lines and the pricing and revenue generated from each product line
varies, with some product lines priced based on the number of licenses
purchased (similar to Dropbox plans), while others are priced based on a
customer's transaction volume. For purposes of HelloSign results, we include as
paying users either (i) the number of users who have active paid licenses for
access to the HelloSign platform as of the period end for those products that
are priced based on the number of licenses purchased (which is the same method
we use to evaluate existing Dropbox plans) or (ii) the number of customers for
those products that are priced based on transaction volumes.
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The below table sets forth the number of paying users as of September 30, 2021 ,
December 31, 2020 , and September 30, 2020 .
As of
September 30, 2021 December 31, 2020 September 30, 2020
(In millions)
Paying users 16.49 15.48 15.25
Average revenue per paying user
We define average revenue per paying user, or ARPU, as our revenue for the
period presented divided by the average paying users during the same period. For
interim periods, we use annualized revenue, which is calculated by dividing the
revenue for the particular period by the number of days in that period and
multiplying this value by 365 days. Average paying users are calculated based on
adding the number of paying users as of the beginning of the period to the
number of paying users as of the end of the period, and then dividing by two.
We experienced an increase in our average revenue per paying user for the three
and nine months ended September 30, 2021 , compared to the three and nine months
ended September 30, 2020 primarily due to an increased mix of sales toward our
higher-priced subscription plans as well as favorable foreign exchange rates
across multiple currencies.
The below table sets forth our ARPU for the three and nine months ended
Three Months Ended Nine Months Ended
September 30, September 30,
2021 2020 2021 2020
ARPU $ 133.79 $ 128.03 $ 133.19 $ 127.06
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In addition to our results determined in accordance with
Free cash flow We define FCF as GAAP net cash provided by operating activities less capital expenditures. We believe that FCF is a liquidity measure and that it provides useful information regarding cash provided by operating activities and cash used for investments in property and equipment required to maintain and grow our business. FCF is presented for supplemental informational purposes only and should not be considered a substitute for financial information presented in accordance with GAAP. FCF has limitations as an analytical tool, and it should not be considered in isolation or as a substitute for analysis of other GAAP financial measures, such as net cash provided by operating activities. Some of the limitations of FCF are that FCF does not reflect our future contractual commitments, excludes investments made to acquire assets under finance leases, includes capital expenditures, and may be calculated differently by other companies in our industry, limiting its usefulness as a comparative measure. Our FCF increased for the nine months endedSeptember 30, 2021 , compared to the nine months endedSeptember 30, 2020 , primarily due to an increase in cash provided by operating activities, which was driven by increased subscription sales, as a majority of our paying users are invoiced in advance, and a decrease in capital expenditures as a result of decreased spend on office build-outs. We expect our FCF to generally increase in future periods as we increase subscription sales and reduce our capital expenditures as we shift to a Virtual First environment. Although we expect to continue to purchase infrastructure equipment to support our user base, we anticipate that our capital expenditures related to building out our office spaces will continue to decline in future periods. The timing of our operating expenses as described below, may result in FCF to vary from period to period as a percentage of revenue.
The following is a reconciliation of FCF to the most comparable GAAP measure, net cash provided by operating activities:
Nine Months Ended
September 30,
2021 2020
(In millions)
Net cash provided by operating activities 567.1 400.1
Capital expenditures (20.8) (67.8)
Free cash flow $ 546.3 $ 332.3
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Revenue
We generate revenue from sales of subscriptions to our platform.
Revenue is recognized ratably over the related contractual term generally
beginning on the date that our platform is made available to a customer. Our
subscription agreements typically have monthly or annual contractual terms,
although a small percentage have multi-year contractual terms. Our agreements
are generally non-cancelable. We typically bill in advance for monthly contracts
and annually in advance for contracts with terms of one year or longer. Amounts
that have been billed are initially recorded as deferred revenue until the
revenue is recognized.
Our revenue is driven primarily by conversions and upsells to our paid plans. We
also generate revenue from transaction-based products and fees from the referral
of users to our partners. We generate over 90% of our revenue from self-serve
channels. No customer represented more than 1% of our revenue in the periods
presented.
Cost of revenue and gross margin
Cost of revenue. Our cost of revenue consists primarily of expenses associated
with the storage, delivery, and distribution of our platform for both paying
users and free users. These costs, which we refer to as infrastructure costs,
include depreciation of our servers located in co-location facilities that we
lease and operate, rent and facilities expense for those datacenters, network
and bandwidth costs, support and maintenance costs for our infrastructure
equipment, and payments to third-party datacenter service providers. Cost of
revenue also includes costs, such as salaries, bonuses, employer payroll taxes
and benefits, travel-related expenses, and stock-based compensation, which we
refer to as employee-related costs, for employees whose primary responsibilities
relate to supporting our infrastructure and delivering user support. Other
non-employee costs included in cost of revenue include credit card fees related
to processing customer transactions, and allocated overhead, such as facilities,
including rent, utilities, depreciation on leasehold improvements and other
equipment shared by all departments, and shared information technology costs. In
addition, cost of revenue includes amortization of developed technologies,
professional fees related to user support initiatives, and property taxes
related to the datacenters.
We plan to continue increasing the capacity and enhancing the capability and
reliability of our infrastructure to support user growth and increased use of
our platform. We expect that cost of revenue will increase in absolute dollars
in future periods.
Gross margin. Gross margin is gross profit expressed as a percentage of revenue.
Our gross margin may fluctuate from period to period based on the timing of
additional capital expenditures and the related depreciation expense, or other
increases in our infrastructure costs, as well as revenue fluctuations. We
generally expect our gross margin to remain relatively constant in both the near
term and the long term.
Operating expenses
Research and development. Our research and development expenses consist
primarily of employee-related costs for our engineering, product, and design
teams, compensation expenses related to key personnel from acquisitions and
allocated overhead. These groups are responsible for the design, development,
testing, delivery of new technologies and features, and support of our
self-serve platform. We continue to focus our product development efforts on
adding new features and enhancing the functionality and ease of use of our
offerings. Additionally, research and development expenses include internal
development-related third-party hosting fees. We have expensed almost all of our
research and development costs as they were incurred.
We plan to continue hiring employees for our engineering, product, and design
teams to support our research and development efforts. We expect that research
and development costs will increase in absolute dollars in future periods and
fluctuate from period to period as a percentage of revenue.
Sales and marketing. Our sales and marketing expenses relate to both self-serve
and outbound sales activities, and consist primarily of employee-related costs,
brand marketing costs, lead generation costs, sponsorships and allocated
overhead. Sales commissions earned by our outbound sales team and the related
payroll taxes, as well as commissions earned by third-party resellers that we
consider to be incremental and recoverable costs of obtaining a contract with a
customer, are deferred and are typically amortized over an estimated period of
benefit of five years. Additionally, sales and marketing expenses include
non-employee costs related to app store fees, fees payable to third-party sales
representatives and amortization of acquired customer relationships.
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We plan to continue to invest in sales and marketing to grow our user base and
increase our brand awareness, including marketing efforts to continue to drive
our self-serve business model. We expect that sales and marketing expenses will
generally increase in absolute dollars in future periods and fluctuate from
period to period as a percentage of revenue. The trend and timing of sales and
marketing expenses will depend in part on the timing of marketing campaigns.
General and administrative. Our general and administrative expenses consist
primarily of employee-related costs for our legal, finance, human resources, and
other administrative teams, as well as certain executives. In addition, general
and administrative expenses include allocated overhead, outside legal,
accounting and other professional fees, and non income-based taxes.
We expect to incur additional general and administrative expenses to support the
growth of the Company. General and administrative expenses include the
recognition of stock-based compensation expense related to the grant of
restricted stock made to our co-founder. We expect that general and
administrative expenses will fluctuate in absolute dollars in future periods and
will generally decrease as a percentage of revenue.
Interest income (expense), net
Interest income (expense), net consists primarily of interest income earned on
our money market funds classified as cash and cash equivalents and short-term
investments, partially offset by interest expense related to our finance lease
obligations for infrastructure and amortization of debt issuance costs.
Other income, net
Other income, net consists of other non-operating gains or losses, including
those related to equity investments, lease arrangements, which include sublease
income, foreign currency transaction gains and losses, and realized gains and
losses related to our short-term investments.
Benefit from (provision for) income taxes
Provision for income taxes consists primarily of U.S. federal and state income
taxes and income taxes in certain foreign jurisdictions in which we conduct
business. For the periods presented, the difference between the U.S. statutory
rate and our effective tax rate is primarily due to the valuation allowance on
deferred tax assets. Our effective tax rate is also impacted by earnings
realized in foreign jurisdictions with statutory tax rates lower than the
federal statutory tax rate. We maintain a full valuation allowance on our net
deferred tax assets for federal, state, and certain foreign jurisdictions as we
have concluded that it is not more likely than not that the deferred assets will
be realized.
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Results of Operations
The following tables set forth our results of operations for the periods
presented:
Three Months Ended Nine Months Ended
September 30, September 30,
2021 2020 2021 2020
(In millions)
Revenue $ 550.2 $ 487.4 $ 1,592.4 $ 1,409.8
Cost of revenue(1) 112.0 103.2 328.4 308.8
Gross profit 438.2 384.2 1,264.0 1,101.0
Operating expenses(1):
Research and development 187.3 183.3 554.0 550.9
Sales and marketing 115.7 105.8 319.2 312.9
General and administrative 57.9 65.1 169.3 167.6
Impairment related to real estate
assets - - 17.3 -
Total operating expenses 360.9 354.2 1,059.8 1,031.4
Income from operations 77.3 30.0 204.2 69.6
Interest income (expense), net (1.7) 0.1 (3.8) 2.6
Other income, net 0.5 3.5 13.1 23.1
Income before income taxes 76.1 33.6 213.5 95.3
Provision for income taxes (0.5) (0.9) (2.3) (5.8)
Net income $ 75.6 $ 32.7 $ 211.2 $ 89.5 (1) Includes stock-based compensation as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
2021 2020 2021 2020
(In millions)
Cost of revenue $ 6.0 $ 4.6 $ 17.3 $ 12.6
Research and development 48.7 46.9 141.7 131.1
Sales and marketing 5.9 8.9 19.0 25.1
General and administrative(2) 12.2 15.3 36.6 23.3
Total stock-based compensation $ 72.8 $ 75.7 $ 214.6$ 192.1 (2) OnMarch 19, 2020 , one of the Company's co-founders resigned as a member of the board and as an officer of the Company, resulting in the reversal of$23.8 million in stock-based compensation expense. Of the total amount reversed,$21.5 million related to expense recognized prior toDecember 31, 2019 . See Note 12 "Stockholders' (Deficit) Equity" for further information. 51
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The following table sets forth our results of operations for each of the periods
presented as a percentage of revenue:
Three Months Ended Nine Months Ended
September 30, September 30,
2021 2020 2021 2020
(As a % of revenue)
Revenue 100 % 100 % 100 % 100 %
Cost of revenue(1) 20 21 21 22
Gross profit 80 79 79 78
Operating expenses(1):
Research and development 34 38 35 39
Sales and marketing 21 22 20 22
General and administrative 11 13 11 12
Impairment related to real estate
assets - - 1 -
Total operating expenses 66 73 68 73
Income from operations 14 6 13 5
Interest income (expense), net - - - -
Other income, net - 1 1 2
Income before income taxes 14 7 13 7
Provision for income taxes - - - -
Net income 13 % 7 % 13 % 6 %
(1) Includes stock-based compensation as a percentage of revenue as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
2021 2020 2021 2020
(As a % of revenue)
Cost of revenue 1 % 1 % 1 % 1 %
Research and development 9 10 9 9
Sales and marketing 1 2 1 2
General and administrative(2) 2 3 2 2
Total stock-based compensation 12 % 16 %
12 % 14 %
(2) On March 19, 2020 , one of the Company's co-founders resigned as a member of
the board and as an officer of the Company, resulting in the reversal of $23.8
million in stock-based compensation expense. Of the total amount reversed, $21.5
million related to expense recognized prior to December 31, 2019 . See Note 12
"Stockholders' (Deficit) Equity" for further information.
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Table of Contents Comparison of the three months endedSeptember 30, 2021 and 2020 Revenue Three Months Ended September 30, 2021 2020 $ Change % Change (In millions) Revenue$ 550.2 $ 487.4 $ 62.8 12.9 % Revenue increased$62.8 million or 12.9% during the three months endedSeptember 30, 2021 , as compared to the three months endedSeptember 30, 2020 . The increase in revenue was driven primarily by an increase in paying users, favorable foreign exchange rates across multiple currencies and an increased mix of sales towards our higher-priced subscription plans.
Cost of revenue, gross profit, and gross margin
Three Months Ended
September 30,
2021 2020 $ Change % Change
(In millions)
Cost of revenue $ 112.0 $ 103.2 $ 8.8 8.5 %
Gross profit 438.2 384.2 54.0 14.1 %
Gross margin 80 % 79 %
Cost of revenue increased $8.8 million or 8.5% during the three months ended
September 30, 2021 , as compared to the three months ended September 30, 2020 ,
primarily due to increases of $6.3 million in infrastructure costs due to an
increase in depreciation expense and $1.9 million in credit card transaction
fees due to higher sales.
Our gross margin increased during the three months ended September 30, 2021
compared to the three months ended September 30, 2020 , primarily due to a 12.9%
increase in revenue during the period, which was offset by a lower percentage
increase in our cost of revenue described above.
Research and development
Three Months Ended
September 30,
2021 2020 $ Change % Change
(In millions)
Research and development $ 187.3 $ 183.3 $ 4.0 2.2 %
Research and development expenses increased $4.0 million or 2.2% during the
three months ended September 30, 2021 , as compared to the three months ended
September 30, 2020 , primarily due to increases of $7.7 million in
employee-related costs and $2.2 million in outside services. These increases
were offset by a decrease of $6.3 million in allocated overhead, which includes
facilities-related costs for our corporate headquarters.
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Sales and marketing
Three Months Ended
September 30,
2021 2020 $ Change % Change
(In millions)
Sales and marketing $ 115.7 $ 105.8 $ 9.9 9.4 %
Sales and marketing expenses increased $9.9 million or 9.4% during the three
months ended September 30, 2021 , as compared to the three months ended September
30, 2020 , primarily due to $18.4 million related to brand and other marketing
related expenses primarily due to our marketing campaigns during the three
months ended September 30, 2021 , $1.8 million in app store fees due to increased
sales and $0.5 million in amortization of intangible assets as a result of our
acquisition of DocSend during the three months ended March 31, 2021 . These
increases were offset by decreases of $6.5 million in allocated overhead, which
includes facilities-related costs for our corporate headquarters and $5.2
million in employee-related costs driven by a reduction in headcount including
the impact of our reduction in force during the three months ended March 31,
2021 .
General and administrative
Three Months Ended
September 30,
2021 2020 $ Change % Change
(In millions)
General and administrative $ 57.9 $ 65.1 $ (7.2) (11.1) %
General and administrative expenses decreased $7.2 million or 11.1% during the
three months ended September 30, 2021 , as compared to the three months ended
September 30, 2020 , primarily due to decreases of $4.3 million in allocated
overhead, which includes facilities-related costs for our corporate
headquarters, $2.5 million in employee-related costs due to a reduction in
headcount as a result of our reduction in force during the three months ended
March 31, 2021 and $2.0 million in legal fees.
Impairment related to real estate assets
There was no impairment related to real estate assets during the three months
ended
Interest income (expense), net
Interest income (expense), net decreased$1.8 million during the three months endedSeptember 30, 2021 , as compared to the three months endedSeptember 30, 2020 , primarily due to a decrease in interest income from our money market funds and short-term investments as a result of government-initiated interest rate reductions in response to the COVID-19 pandemic and an increase in interest expense due to the amortization of debt issuance costs incurred as part of our convertible debt offering during the three months endedMarch 31, 2021 .
Other income, net
Other income, net decreased$3.0 million during the three months endedSeptember 30, 2021 , as compared to the three months endedSeptember 30, 2020 , primarily due to a decrease of$3.5 million in foreign currency transaction gains. This decrease was offset by$1.0 million in gains related to the disposal of infrastructure assets.
Provision for income taxes
Provision for income taxes decreased$0.4 million during the three months endedSeptember 30, 2021 , as compared to the three months endedSeptember 30, 2020 , primarily due to a foreign tax reserve release during the three months endedSeptember 30, 2021 . 54
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Comparison of the nine months ended
Revenue
Nine Months Ended
September 30,
2021 2020 $ Change % Change
(In millions)
Revenue $ 1,592.4 $ 1,409.8 $ 182.6 13.0 %
Revenue increased $182.6 million or 13.0% during the nine months ended September
30, 2021 , as compared to the nine months ended September 30, 2020 . The increase
in revenue was driven primarily by an increase in paying users, an increased mix
of sales towards our higher-priced subscription plans and favorable foreign
exchange rates across multiple currencies.
Cost of revenue, gross profit, and gross margin
Nine Months Ended
September 30,
2021 2020 $ Change % Change
(In millions)Cost of revenue$ 328.4 $ 308.8 $ 19.6 6.3 % Gross profit 1,264.0 1,101.0 163.0 14.8 % Gross margin 79 % 78 % Cost of revenue increased$19.6 million or 6.3% during the nine months endedSeptember 30, 2021 , as compared to the nine months endedSeptember 30, 2020 , primarily due to increases of$9.2 million in infrastructure costs due to an increase in depreciation expense,$5.8 million in credit card transaction fees due to higher sales and$5.4 million in employee-related costs including the impact of our reduction in force during the three months endedMarch 31, 2021 . These increases were offset by a decrease of$3.1 million in allocated overhead, which includes facilities-related costs for our corporate headquarters. Our gross margin increased during the nine months endedSeptember 30, 2021 compared to the nine months endedSeptember 30, 2020 , primarily due to a 13.0% increase in revenue during the period, which was offset by a lower percentage increase in our cost of revenue described above. Research and development Nine Months Ended September 30, 2021 2020 $ Change % Change (In millions) Research and development$ 554.0 $ 550.9 $ 3.1 0.6 % Research and development expenses increased$3.1 million or 0.6% during the nine months endedSeptember 30, 2021 , as compared to the nine months endedSeptember 30, 2020 , primarily due to an increase of$20.2 million in employee-related costs and$2.3 million in software license subscriptions. These increases were offset by a decrease of$19.8 million in allocated overhead, which includes facilities-related costs for our corporate headquarters. 55
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Sales and marketing
Nine Months Ended
September 30,
2021 2020 $ Change % Change
(In millions)
Sales and marketing $ 319.2 $ 312.9 $ 6.3 2.0 %
Sales and marketing expenses increased $6.3 million or 2.0% during the nine
months ended September 30, 2021 , as compared to the nine months ended September
30, 2020 , primarily due to $28.8 million related to brand and other marketing
related expenses primarily due to our marketing campaigns during the three
months ended September 30, 2021 , $5.7 million in app store fees due to increased
sales, and $1.0 million in amortization of intangible assets due to our
acquisition of DocSend. These increases were offset by decreases of $22.0
million in allocated overhead, which includes facilities-related costs for our
corporate headquarters and $7.4 million in employee-related costs driven by a
reduction in headcount including the impact of our reduction in force during the
three months ended March 31, 2021 .
General and administrative
Nine Months Ended
September 30,
2021 2020 $ Change % Change
(In millions)
General and administrative
1.0 %
General and administrative expenses increased$1.7 million or 1.0% during the nine months endedSeptember 30, 2021 , as compared to the nine months endedSeptember 30, 2020 , primarily due to an increase of$15.6 million due to employee-related costs, including$13.3 million in stock-based compensation driven by the resignation of one of the co-founders and the forfeiture of his Co-Founder Grant during the three months endedMarch 31, 2020 . This increase was offset by decreases of$13.1 million in allocated overhead, which includes facilities-related costs for our corporate headquarters and$3.1 million in non income-based taxes and$0.1 million in legal fees and acquisition expenses.
Impairment related to real estate assets
Impairment related to real estate assets was$17.3 million during the nine months endedSeptember 30, 2021 , due to an impairment charge as a result of our continued adoption of our Virtual First strategy, including the acquisition of DocSend.
Interest income (expense), net
Interest income (expense), net decreased$6.4 million during the nine months endedSeptember 30, 2021 , as compared to the nine months endedSeptember 30, 2020 , primarily due to a decrease in interest income from our money market funds and short-term investments as a result of government-initiated interest rate reductions in response to the COVID-19 pandemic and an increase in interest expense due to the amortization of debt issuance costs incurred as part of our convertible debt offering during the three months endedMarch 31, 2021 .
Other income, net
Other income, net decreased$10.0 million during the nine months endedSeptember 30, 2021 , as compared to the nine months endedSeptember 30, 2020 , primarily due to$17.5 million in gains related to an equity investment during the nine months endedSeptember 30, 2020 and decreases of$2.9 million in foreign currency transaction gains, offset by$10.3 million in gains related to the disposal of infrastructure assets. Provision for income taxes 56
-------------------------------------------------------------------------------- Table of Contents Provision for income taxes decreased$3.5 million during the nine months endedSeptember 30, 2021 , as compared to the nine months endedSeptember 30, 2020 , primarily due to tax benefits from the DocSend acquisition and a decrease in state taxes during the nine months endedSeptember 30, 2021 . 57 -------------------------------------------------------------------------------- Table of Contents Liquidity and Capital Resources As ofSeptember 30, 2021 , we had cash and cash equivalents of$688.9 million and short-term investments of$1,239.8 million , which were held for working capital purposes. Our cash, cash equivalents, and short-term investments consist primarily of cash, money market funds, corporate notes and obligations,U.S. Treasury securities, certificates of deposit, asset-backed securities, commercial paper, foreign government securities,U.S. agency obligations, supranational securities, and municipal securities. As ofSeptember 30, 2021 , we had$147.6 million of our cash and cash equivalents held by our foreign subsidiaries. We do not expect to incur material taxes in the event we repatriate any of these amounts. Since our inception, we have financed our operations primarily through cash generated from our operations, the issuance of the Notes and equity issuances, and finance leases to finance infrastructure-related assets in co-location facilities that we directly lease and operate. We enter into finance leases in part to better match the timing of payments for infrastructure-related assets with that of cash received from our paying users. In our business model, some of our registered users convert to paying users over time, and consequently there is a lag between initial investment in infrastructure assets and cash received from some of our users. InFebruary 2021 , we issued approximately$1.4 billion in aggregate principal amount of convertible senior notes, comprised of$695.8 million in aggregate principal amount of 2026 Notes and$693.3 million in aggregate principal amount of 2028 Notes. The net proceeds from the issuance of the 2026 Notes and 2028 Notes were$684.8 million , net of debt issuance costs, and$682.3 million , net of debt issuance costs, respectively. The 2026 Notes mature onMarch 1, 2026 and the 2028 Notes mature onMarch 1, 2028 . The Notes of each series will not bear regular interest and the principal will not accrete. The Notes of each series may bear special interest as the remedy relating to the Company's failure to comply with certain of its reporting obligations. These notes can be converted or repurchased prior to maturity if certain conditions are met. Our principal uses of cash in recent periods have been funding our operations, purchases of short-term investments, the satisfaction of tax withholdings in connection with the settlement of restricted stock units and awards, making principal payments on our finance lease obligations, repurchases of our Class A common stock, and capital expenditures. InFebruary 2020 , our Board of Directors approved a stock repurchase program for the repurchase of up to$600 million of the outstanding shares of our Class A common stock. InFebruary 2021 , our Board of Directors authorized the repurchase of up to an additional$1 billion of the outstanding shares of our Class A common stock. Share repurchases will be made from time to time in private transactions or open market purchases as permitted by securities laws and other legal requirements and will be subject to a review of the circumstances in place at that time, including prevailing market prices. The program does not obligate us to repurchase any specific number of shares and has no specified time limit; it may be discontinued at any time. During the three and nine months endedSeptember 30, 2021 , we repurchased and subsequently retired 5.8 million and 29.9 million shares, respectively, of our Class A common stock for an aggregate amount of$181.0 million and$763.7 million , respectively. This includes$200.0 million used to repurchase 8.6 million shares of our Class A common stock in conjunction with the issuance of the Notes, which was outside of our stock repurchase program. We previously announced, and executed on, our intention to increase the pace of our share repurchases under the current program. However, the pace of our share repurchases may vary due to various circumstances, including market conditions and our stock price. InApril 2017 , we entered into a$600.0 million credit facility with a syndicate of financial institutions. Pursuant to the terms of the revolving credit facility, we may issue letters of credit under the revolving credit facility, which reduce the total amount available for borrowing under such facility. The revolving credit facility terminates onApril 4, 2022 . InFebruary 2018 , we amended our revolving credit facility to, among other things, permit us to make certain investments, enter into an unsecured standby letter of credit facility, and increase our standby letter of credit sublimit to$187.5 million . We also increased our borrowing capacity under the revolving credit facility from$600.0 million to$725.0 million . InFebruary 2021 , we amended our revolving credit facility to decrease our borrowing capacity from$725.0 million to$500.0 million . We may from time to time request increases in the borrowing capacity under the revolving credit facility of up to$250.0 million , provided no event of default has occurred or is continuing or would result from such increase. Interest on borrowings under the revolving credit facility accrues at a variable rate tied to the prime rate or the LIBOR rate, at our election. Interest is payable quarterly in arrears. Pursuant to the terms of the revolving credit facility, we are required to pay an annual commitment fee that accrues at a rate of 0.20% per annum on the unused portion of the borrowing commitments under the revolving credit facility. In addition, we are required to pay a fee in connection with letters of credit issued under the revolving credit facility that accrues at a rate of 1.375% per annum on the amount of such letters of credit outstanding. There is an additional fronting fee of 0.125% per annum multiplied by the average aggregate daily maximum amount available under all letters of credit. The revolving credit facility contains customary conditions to borrowing, events of default, and covenants, including covenants that restrict our ability to incur indebtedness, grant liens, make distributions to our holders or our subsidiaries' equity interests, make investments, or engage in transactions with our affiliates. In addition, the revolving credit facility contains 58 -------------------------------------------------------------------------------- Table of Contents financial covenants, including a consolidated leverage ratio incurrence covenant and a minimum liquidity balance. We were in compliance with all covenants under the revolving credit facility as ofSeptember 30, 2021 . As ofSeptember 30, 2021 , we had no amounts outstanding under the revolving credit facility and an aggregate of$52.2 million in letters of credit issued under the revolving credit facility. Our total available borrowing capacity under the revolving credit facility was$447.8 million as ofSeptember 30, 2021 . We believe our existing cash and cash equivalents, together with our short-term investments, cash provided by operations and amounts available under the revolving credit facility, will be sufficient to meet our needs for the foreseeable future. Our future capital requirements will depend on many factors including our revenue growth rate, subscription renewal activity, billing frequency, the timing and extent of spending to support further infrastructure development and research and development efforts, the timing and extent of additional capital expenditures to invest in collaboration spaces, our ability to sublease space at office locations where we have unused spaces, the satisfaction of tax withholding obligations for the release of restricted stock units and awards, the expansion of sales and marketing and international operation activities, the introduction of new product capabilities and enhancement of our platform, the continuing market acceptance of our platform, and the volume and timing of our share repurchases. We have and may in the future enter into arrangements to acquire or invest in complementary businesses, services, and technologies, including intellectual property rights. We may be required to seek additional equity or debt financing. In the event that additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us or at all. If we are unable to raise additional capital when desired, our business, results of operations, and financial condition could be materially and adversely affected. Our cash flow activities were as follows for the periods presented: Nine Months Ended September 30, 2021 2020 (In millions) Net cash provided by operating activities$ 567.1 $ 400.1 Net cash used in investing activities (560.1)
(191.6)
Net cash provided by (used in) financing activities 368.5
(307.9)
Effect of exchange rate changes on cash and cash equivalents (1.5)
0.8
Net increase (decrease) in cash and cash equivalents$ 374.0 $ (98.6) Operating activities Our largest source of operating cash is cash collections from our paying users for subscriptions to our platform. Our primary uses of cash from operating activities are for employee-related expenditures, infrastructure-related costs, and marketing expenses. Net cash provided by operating activities is impacted by our net income adjusted for certain non-cash items, including depreciation and amortization expenses, stock-based compensation, and impairment related to real estate assets, as well as the effect of changes in operating assets and liabilities. For the nine months endedSeptember 30, 2021 , net cash provided by operating activities was$567.1 million , which primarily consisted of our net income of$211.2 million , adjusted for stock-based compensation expense of$214.6 million , depreciation and amortization expenses of$110.3 million , impairment related to real estate assets of$17.3 million , and net cash outflow of$7.2 million from operating assets and liabilities. The outflow from operating assets and liabilities was primarily due to the payment of our corporate bonus and key employee holdback payments related to the acquisition of HelloSign, offset by an increase in deferred revenue from increased subscription sales, as a majority of our paying users are invoiced in advance. The increase in net cash provided by operating activities during the nine months endedSeptember 30, 2021 , compared to the nine months endedSeptember 30, 2020 , was primarily due to an increase in net income, as adjusted for stock-based compensation, depreciation and amortization expenses, and impairment related to real estate assets. This was partially offset by an increase in cash outflows from changes in operating assets and liabilities. Investing activities Net cash used in investing activities is primarily impacted by purchases of short-term investments, purchases of property and equipment to make improvements or modifications to existing and new office spaces, and for purchasing infrastructure equipment in co-location facilities that we directly lease and operate. 59 -------------------------------------------------------------------------------- Table of Contents For the nine months endedSeptember 30, 2021 , net cash used in investing activities was$560.1 million , which primarily related to$442.4 million in net investment activity outflows, driven by the purchases of short-term investments, net of sales and maturities and$125.3 million related to cash paid for our acquisition of DocSend. The increase in cash used in investing activities during the nine months endedSeptember 30, 2021 , compared to the nine months endedSeptember 30, 2020 , was primarily due to higher outflows related to net investment activity during the nine months endedSeptember 30, 2021 , and the acquisition of DocSend, offset by the decrease in cash paid for capital expenditures during the nine months endedSeptember 30, 2021 as a result of decreased spend on office build-outs. Financing activities Net cash used in financing activities is primarily impacted by cash used for tax withholding obligations for the release of RSUs and RSAs, principal payments on finance lease obligations for our infrastructure equipment, and repurchases of common stock. Additionally, in connection with the issuance of convertible senior notes, proceeds from the issuance of convertible notes, proceeds from the issuance of warrants, purchases of convertible senior note hedges, and debt issuance costs impacted net cash used in financing activities. For the nine months endedSeptember 30, 2021 , net cash provided by financing activities was$368.5 million , which primarily consisted of$1,303.0 million in net proceeds from the 2026 Notes and 2028 Notes, offset by offering costs, and the concurrent Note Hedges and Warrants transaction,$763.7 million for the repurchase of our common stock,$98.2 million for the satisfaction of tax withholding obligations for the release of restricted stock units and awards, and$79.2 million in principal payments on finance lease obligations. The increase in cash provided by financing activities during the nine months endedSeptember 30, 2021 , compared to the nine months endedSeptember 30, 2020 , was primarily due to the net proceeds from the 2026 Notes and 2028 Notes, offset by offering costs, and the concurrent Note Hedges and Warrants transaction during the nine months endedSeptember 30, 2021 , as well as by the increase in repurchases of our common stock and the increase in the satisfaction of tax withholding obligations for the release of restricted stock units and awards during the nine months endedSeptember 30, 2021 . 60 -------------------------------------------------------------------------------- Table of Contents Contractual Obligations Our principal commitments consist of obligations under the Notes, operating leases for office space and data center operations, and finance leases for data center and office equipment. For additional information on the Notes, operating leases for office space and data center operations, and finance leases for data center and office equipment, see Note 8 "Debt" and Note 9 "Leases" to our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for further information. Except for the Notes, there have been no material changes in our contractual obligations and commitments, as disclosed in our Annual Report. 61 -------------------------------------------------------------------------------- Table of Contents Off-Balance Sheet Arrangements As ofSeptember 30, 2021 , we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or variable interest entities, which would have been established for the purpose of facilitating off balance sheet arrangements or other contractually narrow or limited purposes. 62 -------------------------------------------------------------------------------- Table of Contents Critical Accounting Policies and Judgments See Part II, Item 7, "Critical Accounting Policies and Judgments" in our Annual Report on Form 10-K for the year endedDecember 31, 2020 . There have been no material changes to our critical accounting policies and estimates since our Annual Report on Form 10-K for the year endedDecember 31, 2020 . 63 -------------------------------------------------------------------------------- Table of Contents Recent Accounting Pronouncements See Note 1 "Description of the Business and Summary of Significant Accounting Policies" to our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for recently adopted accounting pronouncements as of the date of this Quarterly Report on Form 10-Q. 64
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