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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from________to________
For the fiscal year ended December 31, 2022
OR
Commission File Number 001-38434
Dropbox, Inc.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
26-0138832
(I.R.S. Employer
Identification Number)
Dropbox, Inc.
1800 Owens Street
San Francisco, California 94158
(Address of principal executive offices, including zip code)
(415) 857-6800
(Registrant's telephone number, including area code)
Title of each class
Class A Common Stock, par value $0.00001 per share
Trading Symbol(s)
DBX
Name of exchange on which registered
The NASDAQ Stock Market LLC
Securities registered pursuant to Section 12(g) of the Act
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934 (the "Exchange Act"). Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during
the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions
of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
Non-accelerated filer
Emerging growth
company
☒
☐
☐
Accelerated filer
Smaller reporting company
☐
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards
provided pursuant to Section 7(a)(2)(B) of the Securities Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section
404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to
previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers
during the relevant recovery period pursuant to §240.10D-1(b). ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The aggregate market value of the registrant's Class A common stock held by non-affiliates of the registrant, based on the closing price of a share of the registrant's Class A common stock on June 30,
2022 as reported by the NASDAQ Global Select Market on such date was approximately $4,690.5 million. Shares of the registrant’s Class A common stock held by each executive officer, director and
holder of 5% or more of the outstanding Class A common stock have been excluded as such persons may be deemed to be affiliates. This calculation does not reflect a determination that certain
persons are affiliates of the registrant for any other purpose.
As of February 17, 2023 there were 276,018,479 shares of the registrant's Class A common stock outstanding (which includes 8,266,666 shares of Class A common stock subject to restricted stock
awards that were granted pursuant to the Co-Founder Grant, and vest upon the satisfaction of a service condition and achievement of certain stock price goals, and 1,614,472 shares of Class A common
stock subject to restricted stock awards that were granted to other Dropbox executives and vest upon the satisfaction of a service condition and, as applicable, achievement of certain stock price goals),
81,839,831 shares of the registrant’s Class B common stock outstanding, and no shares of the registrant’s Class C common stock outstanding.
Portions of the registrant's definitive Proxy Statement relating to the 2023 Annual Meeting of Stockholders are incorporated herein by references in Part II and Part III of this Annual Report on Form
10-K to the extent stated herein. Such Proxy Statement will be filed with the Securities and Exchange Commission within 120 days of the registrant's fiscal year ended December 31, 2022.
DOCUMENTS INCORPORATED BY REFERENCE
Table of Contents
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
Item 9C.
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Item 15.
Item 16.
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
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Part I
Part II
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
[Reserved]
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
Part III
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accountant Fees and Services
Exhibits, Financial Statement Schedules
Form 10-K Summary
Part IV
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the
“Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which statements involve substantial risk and
uncertainties. Forward-looking statements generally relate to future events or our future financial or operating performance. In some cases, you can identify
forward-looking statements because they contain words such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “could,” “intends,” “target,”
“projects,” “contemplates,” “believes,” “estimates,” “predicts,” “potential,” or “continue” or the negative of these words or other similar terms or expressions
that concern our expectations, strategy, plans, or intentions. Forward-looking statements contained in this Annual Report on Form 10-K include, but are not
limited to, statements about:
• Our ability to retain and upgrade paying users;
• Our ability to attract new users or convert registered users to paying users;
• Our future financial performance, including trends in revenue, costs of revenue, gross profit or gross margin, operating expenses, paying users, annual
recurring revenue, average revenue per user, free cash flow, and the assumptions underlying such trends;
• Our expectations regarding general economic, political, and market trends and their respective impacts on our business;
• Our ability to compete successfully in competitive markets;
• Our expectations regarding the potential impacts of a more permanent global shift to remote or distributed work, on our business, the business of our
customers, suppliers and partners, and the economy;
•
The demand for our platform or for content collaboration solutions in general;
• Our ability to effectively integrate our platform with others;
• Our ability to respond to rapid technological changes, including our ability to take advantage of potential market opportunities arising from what we
believe to be a more permanent shift towards remote or distributed work;
• Our ability to achieve or maintain profitability;
• Our expectations around future growth;
• Our ability to successfully introduce new products and features;
• Our ability to effectively invest in the development of new products and technologies;
• Our ability to attract, retain, integrate, and manage key and other highly qualified personnel, including as a result of our transition to a Virtual First
model with an increasingly distributed workforce;
• Our ability to prevent security breaches and unauthorized access to customer data;
• Our capital allocation plans, including expected allocations of cash and timing for our share repurchases and other investments;
• Our expectations regarding the challenges and anticipated benefits to our business from our Virtual First work model as well as the impact to our
financial results and business operations as a result of this model;
•
The effects of new or modified laws, policies, taxes, and regulations on our business;
• Our ability to maintain, protect, and enhance our intellectual property;
•
The sufficiency of our cash and cash equivalents to meet our liquidity needs; and
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• Acquisitions of companies and assets.
We caution you that the foregoing list may not contain all of the forward-looking statements made in this Annual Report on Form 10-K.
You should not rely upon forward-looking statements as predictions of future events. We have based the forward-looking statements contained in this
Annual Report on Form 10-K primarily on our current expectations and projections about future events and trends that we believe may affect our business,
financial condition, results of operations, and prospects. The outcome of the events described in these forward-looking statements is subject to risks,
uncertainties, and other factors described in the section titled “Risk Factors” and elsewhere in this Annual Report on Form 10-K. Moreover, we operate in a very
competitive and rapidly changing environment. New risks and uncertainties emerge from time to time, and it is not possible for us to predict all risks and
uncertainties that could have an impact on the forward-looking statements contained in this Annual Report on Form 10-K. We cannot assure you that the results,
events, and circumstances reflected in the forward-looking statements will be achieved or occur, and actual results, events, or circumstances could differ
materially from those described in the forward-looking statements.
The forward-looking statements made in this Annual Report on Form 10-K relate only to events as of the date on which the statements are made. We
undertake no obligation to update any forward-looking statements made in this Annual Report on Form 10-K to reflect events or circumstances after the date of
this Annual Report on Form 10-K or to reflect new information or the occurrence of unanticipated events, except as required by law. We may not actually
achieve the plans, intentions, or expectations disclosed in our forward-looking statements, and you should not place undue reliance on our forward-looking
statements. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures, or investments
we may make.
SUMMARY OF RISK FACTORS
Below is a summary of the principal factors that could materially harm our business, operating results and/or financial condition, impair our future
prospects or cause the price of our Class A common stock to decline. This summary does not address all of the risks that we face. Additional discussion of the
risks summarized in this risk factor summary, and other risks that we face, can be found below under the heading “Risk Factors” and should be carefully
considered, together with other information in this Form 10-K and our other filings with the Securities and Exchange Commission ("SEC") before making an
investment decision regarding our Class A common stock.
• Our business depends on our ability to retain and upgrade paying users, and any decline in renewals or upgrades could adversely affect our future
results of operations.
• Our future growth could be harmed if we fail to attract new users or convert registered users to paying users.
• Our business could be damaged, and we could be subject to liability if there is any unauthorized access to our data or our users' content, including
through privacy and data security breaches or incidents.
• Our business may be significantly impacted by a change in general economic, political, and market conditions, including any resulting effect on
consumer or business spending.
• We operate in competitive markets, and we must continue to compete effectively.
• Our business depends upon the interoperability of our platform across devices, operating systems, and third-party applications that we do not control.
• Our business could be harmed by any significant disruption of service on our platform or loss of content.
• We generate revenue from sales of subscriptions to our platform, and any decline in demand for our platform, or for content collaboration solutions in
general, could negatively impact our business.
•
Failure to respond to rapid technological changes, extend our platform, or develop new features or products may harm our ability to compete
effectively, which would adversely affect our business.
• We may not successfully manage our growth or successfully execute our plan for future growth.
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• We depend on our key personnel and other highly qualified personnel, and if we fail to attract, integrate, and retain our personnel, and maintain our
unique corporate culture, our business could be harmed.
• We have a limited history of operating with a Virtual First workforce and the long-term impact on our financial results and business operations
remains uncertain.
• Our lack of a significant outbound sales force may limit the potential growth of our business.
• Our revenue growth rate has declined in recent periods and may continue to slow in the future.
• We have a history of net losses, we may increase expenses in the future, and we may not be able to achieve or maintain profitability.
•
Servicing our 2026 Notes and 2028 Notes (as defined below) may require a significant amount of cash, and we may not have sufficient cash flow or
the ability to raise the funds necessary to satisfy our obligations under the 2026 Notes or 2028 Notes.
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PART I.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 1. BUSINESS
Overview
Dropbox, Inc. (the “Company”, “we”, or “us”) is the one place to keep life organized and keep work moving.
We were founded in 2007 with a simple idea: Life would be a lot better if everyone could access their most important information anytime from any
device. Over the past decade, we’ve largely accomplished that mission by building tools to help people work from anywhere—and along the way we recognized
that for most of our users, sharing and collaborating on the Dropbox, Inc. platform (“Dropbox”) was even more valuable than storing files.
Our market opportunity grew as we’ve expanded from keeping files in sync to keeping teams in sync. Today, we are well-positioned to reimagine the way
work gets done. We're focusing on reducing the inordinate amount of time and energy the world spends on “work about work”—tedious tasks like searching for
content, switching between applications, and managing workflows. We believe the need for our platform will continue to grow as teams become more fluid and
global, and content is increasingly fragmented across incompatible tools and devices. Dropbox breaks down silos by centralizing the flow of information
between the products and services our users prefer, even if they’re not our own. In a world where using technology at work can be fragmented and distracting,
Dropbox makes it easy to focus on the work that matters.
The popularity of our platform promotes viral growth, which has allowed us to scale rapidly and efficiently. We’ve built a thriving global business with
17.77 million paying users as of December 31, 2022.
What Sets Us Apart
From our founding, we’ve focused on simplifying the lives of our users. In a world where business software can be frustrating to use, challenging to
integrate, and expensive to sell, we take a different approach. As businesses around the world adapt to a distributed environment, we are at the forefront of
developing the technology to support them. We provide tools to help distributed teams prioritize, get organized, and keep work moving securely—from
anywhere.
Simple and intuitive design
While traditional tools developed in the desktop age have struggled to keep up with evolving user demands, Dropbox was designed for the cloud era. We
build simple, beautiful products that bring joy to our users and make it easier for them to do their best work.
Open ecosystem
Because people use a wide variety of devices, tools and platforms, Dropbox works across the devices, operating systems, and apps users want—from
Android to iOS, Windows, Mac, desktop, and mobile. We also integrate seamlessly with other products, integrating with partners including Microsoft, Zoom,
Slack, BetterCloud, Atlassian, and Google.
Viral, bottom-up adoption
Every year, millions of users sign up for Dropbox at work. Bottom-up adoption within organizations has been critical to our strategy and success as users
increasingly choose their own tools at work. We generate over 90% of our revenue from self-serve channels—users who purchase a subscription through our
app or website.
Performance and security
Our custom-built infrastructure allows us to maintain high standards of performance, availability, and security. Dropbox is built on proprietary, block-
level sync technology to achieve industry-leading performance. We designed our platform with multiple layers of redundancy to guard against data loss and
deliver high availability. We also offer numerous layers of protection, from secure file data transfer and encryption to network configuration and application-
level controls.
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Our Solution
Dropbox allows individuals, teams, and organizations to collaborate more effectively and focus on the work that matters. Anyone can sign up for free
through our website or app, and upgrade to a paid subscription plan for premium features. 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, industrial, 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.
Key elements of our platform
• Unified home for content. We provide a unified home for the world’s content and the relevant context around it. To date, our users have added hundreds
of billions of pieces of content to Dropbox, totaling over multiple exabytes of data. When users adopt the Dropbox platform, they gain access to a
digital workspace that supports the full content lifecycle—they can create and organize their content, access it from anywhere, share it with internal
and external collaborators, and review feedback and history.
• Global sharing network. We’ve built one of the largest collaboration platforms in the world. We cater to the needs of dynamic, dispersed teams. The
overwhelming majority of our customers use Dropbox to share and collaborate. As we continue to grow, more users benefit from frictionless sharing,
and powerful network effects increase the utility and stickiness of our platform.
•
Product experiences and integrations. The insights we glean from our community of users and our deep integrations with best-of-breed companies lead
us to develop or acquire new product experiences and extend the capabilities of our platform. Products like Dropbox Passwords, Vault, Computer
Backup, Dropbox Sign, DocSend, Dropbox Capture, and FormSwift and deep integrations with companies like Microsoft, Zoom, Atlassian, Slack, and
BetterCloud help us provide our users with the functionality they need to do their best work. Machine learning further improves the user experience by
enabling more intelligent search, better organization, and utility of information. This ongoing innovation broadens the value of our platform and
deepens user engagement.
These elements reinforce one another to produce a powerful flywheel effect. As users create and share more content with more people, they expand our global
sharing network. This network allows us to gather insights and feedback that help us create new product experiences. And with our scale, we can instantly put
these innovations in the hands of millions. This, in turn, helps attract more users and content, which further propels the flywheel.
Our Capabilities
Dropbox is a single organized place where individuals and teams can create content, access it from anywhere, and share it with collaborators. The power
of our platform lies in the breadth of our capabilities and the diverse ways our users make Dropbox work for them. We monetize through a range of subscription
plans. Our platform capabilities are described below:
Create
Paper. With Dropbox Paper, users can co-author content, tag others, create timelines, assign tasks with due dates, embed and comment on files, tables,
checklists, code snippets, and rich media—all in real-time. We designed Paper to be simple and beautiful so users can focus on the most important ideas and
tasks at hand.
Doc scanner. The doc scanner in our mobile app lets users create content in Dropbox from hard copies. This includes transforming everything from
printed materials to whiteboard brainstorming sessions into digital documents that users can edit and share. We apply proprietary machine learning techniques to
automatically detect the document being scanned, extract it from the background, fit it to a rectangular shape, remove shadows, adjust the contrast, and save it
as a PDF or image file. For Dropbox Business teams, scanned content is analyzed using Optical Character Recognition so text within these scans is searchable
in Dropbox.
Access and organize
Search. Dropbox has powerful search capabilities that allow users to quickly find the files and folders they need. Our autocomplete technology surfaces
and prioritizes content based on users’ previous activity. For Dropbox Plus, Professional, and Business users, full text search allows users to scan the entire
content of their files.
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Rich previews. Rich previews allow users to easily interact with files across any device without having to open different applications. Users can comment
on, annotate, review, and present files, and see who viewed and edited them. We support previews of over 300 file types, and Dropbox users currently preview
files tens of millions of times every day.
Smart Sync. With Smart Sync, users can access all of their content natively on their computers without taking up storage space on their local hard drives.
We intelligently sync files to a user’s computer as they need them, and users can control which files or folders are always synced locally. With Smart Sync, files
that are only stored in the cloud appear in the local file system and can be opened directly from Windows File Explorer or Mac Finder, instead of having to
navigate to our web interface. Smart Sync is available to Dropbox Plus, Professional, and Business users.
Version history. As paying users work on files, our servers keep snapshots of all their changes. Users can see a file’s complete version history so they can
reference and retrieve older versions, depending on the users’ subscription. Version histories are kept between 30 to 365 days for paying users, depending on the
users’ subscription.
Third-party ecosystem. Our open and thriving ecosystem fosters deeper relationships with our users and developers. Developers can build applications
that connect to Dropbox through our DBX Developer Platform. For example, email apps can plug into Dropbox to send attachments or shared links, video-
conferencing apps allow users to start meetings and share content natively from Dropbox, and eSignature apps give users the ability to manage and maintain
contract workflows all from within Dropbox. As of December 31, 2022, Dropbox was receiving over 75 billion API calls per month and just under 1,000,000
developers had registered and built applications on our platform. In addition, more than 80% of Dropbox Business teams have linked to one or more third-party
applications.
Rewind. Dropbox Rewind is a tool that lets a user take a folder, or their entire account, back to a specific point in time. The tool uses version history to
undo changes made to files and folders and can recover any file edits or deletions made within the last 30 to 365 days, depending on the users’ subscription.
Computer Backup. Computer backup automatically syncs folders on a user's computer to the cloud. When turned on, files on the user's PC or Mac are
continuously backed up on the cloud. Any changes made in synced folders are automatically updated in the Dropbox account and on the hard drive. Computer
backup allows users to get up-to-date versions of files stored on the user's PC or Mac from anywhere and from any device instantly. Content is secure in the
cloud, no matter what happens to the user's computer.
Passwords. Dropbox Passwords allows users to sign-in to websites and apps by creating and storing unique usernames and passwords across devices. The
app can autofill usernames and passwords for instant access anywhere within applications available for Windows, Mac, iOS, and Android.
Vault. Dropbox Vault helps secure and organize sensitive information in the cloud. Vault, which is only available for Dropbox Plus, Professional, and
Family plans, is a PIN-protected folder in Dropbox that a user can access any time. Sensitive data can be added and viewed from Windows and the Dropbox
mobile app.
Share
Folders. There are three types of folders in Dropbox: private, shared, and team folders. A private folder allows an individual to sync files between
devices. A shared folder allows users to quickly and easily start a project space for group collaboration. A team folder, which is only available for Dropbox
Business teams, is a central, administrator-managed hub where they can store and collaborate on content.
Shared links. Users can share files and folders with anyone, including non-Dropbox users, by creating a Dropbox link. Once created, the link can be sent
through email, text, Facebook, Twitter, instant message, or other channels. The recipient can view the file with a rich preview or see all the files in a shared
folder. Dropbox Professional subscribers and Dropbox Business teams can set passwords and expiration dates and specify whether recipients can comment on
or download the files.
Transfer. Dropbox Transfer gives users a quick and secure way to send large files or collections of files to anyone. With Transfer, users can send up to 100
GB of files in just a few clicks, depending on the users’ subscription. Users also have the option to drag and drop files to upload from their computer, or add
items stored in Dropbox. After creating a transfer, users receive a link that can be pasted anywhere and sent to anyone. Recipients receive copies of the files, so
the sender’s originals remain untouched.
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File requests. With file requests, users can invite anyone to submit files into a specified Dropbox folder through a simple link—regardless of whether the
recipient has a Dropbox account. File requests are ideal for tasks such as collecting bids from contractors or requesting submissions from coworkers and clients.
All submitted files are organized into a Dropbox folder that’s private to the requesting user.
Watermarking. Our Dropbox watermarking feature allows users to protect and share digital files quickly and easily. The watermark feature can be used to
protect graphic designs, confidential contracts, and personal photographs. Users can create their own custom watermark and watermark any file without leaving
Dropbox.
DocSend. DocSend is a secure document sharing and analytics platform that gives customers visibility into what happens to their documents after they
send them. DocSend technology enables customers to track who opens their documents and how much time they spend on each page, protect documents with
security features like email verification and viewer whitelisting, and share multiple documents with a single link.
Collaborate
Comments and annotations. Dropbox comments and annotations marry content with the conversations and relevant context around it. Instead of being
scattered across separate silos, such as email and chat, the editing and development of content are tied to a file. Users can give feedback on specific parts of files
through a rich, innovative overlay on our web and mobile platforms.
File activity stream. An activity feed lives next to every file preview on our web interface and in the desktop app, telling users what’s happening with a
file. The feed shows when someone opens a file, edits a file, or shares a file.
Notifications. We use real-time notifications across all our channels—web, desktop, email, and mobile—to keep users up-to-date on what’s happening
with their work. Users can choose to be notified when someone opens, edits, shares, or comments on a file, or adds a file to their shared folders.
Viewer information and presence. On both file previews and Paper docs, Dropbox shows users in real-time who’s viewing a doc and when a doc was last
viewed by other users. On desktop, the Dropbox badge is a subtle overlay to Microsoft Word, Excel, and PowerPoint that lets users know if someone opens or
edits the file they’re working in. The Dropbox badge gives users real-time insight into how others are interacting with their content, bringing modern
collaboration features often found only in web-based documents to desktop files.
Dropbox Sign. Dropbox Sign is an eSignature and document workflow platform that enables customers to easily sign, send, and receive documents
through its intuitive web and mobile based interfaces. Once documents are signed, copies automatically sync to the user's Dropbox account.
Capture. Dropbox Capture is an all-in-one visual communication tool that helps team members share their work and idea asynchronously. Dropbox
Capture allows users to visually present their work through easy-to-take screen recordings, GIFs, and screenshots.
FormSwift. FormSwift is a cloud-based service that gives individuals and businesses a simple solution to create, complete, edit, and save critical business
forms and agreements.
Secure
Security protections. We employ strong protections for all of the data on our platform.
•
•
Encryption. Dropbox file data at rest is encrypted using 256-bit Advanced Encryption Standard, or AES. To protect data in transit between Dropbox
apps such as desktop, mobile, API, or web and our servers, Dropbox uses Secure Sockets Layer, or SSL, and Transport Layer Security, or TLS, for data
transfer, creating a secure tunnel protected by 128-bit or higher AES encryption.
File recovery. Every deletion event in Dropbox is recorded, including when groups of files are deleted. Users can easily recover files through our web
interface. Dropbox Plus subscribers may recover prior versions for up to 30 days after deletion, and Dropbox Professional and Dropbox Business
subscribers may recover prior versions for up to 180 days after deletion.
Administrator controls. Dropbox Business team administrators have many ways to customize security settings in both global and granular ways, including
real-time detections of suspicious behavior, risky activity, and potential data leaks.
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•
•
•
Sharing permissions: Team administrators can set up and monitor how their members share team folders, and can set sharing permissions on all
folders, sub-folders, and links through the sharing tab.
Remote device wipe: Team administrators can delete their organization’s Dropbox content from a member’s linked devices, which is especially useful
should someone lose a device or leave the team.
Audit log: Team administrators can monitor which members are sharing files and logging into Dropbox, among other events. They can review activity
logs, create full reports for specific time ranges, and pull activity reports on specific members. Advanced and Enterprise team administrators have
access to audit logs with file-event tracking.
• Device approvals: Advanced and Enterprise team administrators can manage how members access Dropbox on their devices.
•
•
Tiered administrator roles: Advanced and Enterprise teams have the ability to set multiple administrator roles, each with a different set of permissions.
Network control: Enterprise team administrators can restrict personal Dropbox usage on their organization’s network.
Third-party security integrations. We’ve partnered with industry-leading third parties to enable us to provide a wide range of IT processes and satisfy
industry compliance standards, including:
•
Security information and event management: Allows Dropbox Business administrators to oversee and manage employee activity, and access sensitive
data through the administrator page.
• Data loss prevention: Protects sensitive data like personally identifiable information and payment card industry data stored in Dropbox Business
accounts.
•
eDiscovery and legal hold: Enables secure search and the ability to collect and preserve electronically stored information in Dropbox Business
accounts.
• Digital rights management: Provides third-party encryption for company data stored in Dropbox Business accounts.
• Data migration and on-premises backup: Assists in transferring large amounts of data between locations and securing sensitive information with on-
site data backup.
•
Identity management: Allows companies to keep their Dropbox Business team authenticated with an external identity provider like Active Directory.
Our Subscription Plans
We offer a range of subscription plans for our users, including a free, Basic plan, paid Personal plans, and Business plans.
Our Customers
We’ve built a thriving global business with 17.77 million paying users. As of December 31, 2022, we had more than 575,000 paying Dropbox Business
teams. Our customer base is highly diversified, and in 2020, 2021, and 2022, 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.
How we support our customers
All of our users can access support through the following resources:
• Help center: Provides an online repository of helpful information about our platform, responses to frequently asked questions, and best practices for
use.
•
•
Community support: Facilitates collaboration between users on answers, solutions, and ideas about our platform in an online community.
Social media support: Provides users real-time product and service updates, and offers tips and troubleshooting information.
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• Guided troubleshooting: Offers step-by-step instructions to resolve common questions and provides a portal to submit help requests for questions that
aren’t otherwise addressed.
We also offer additional levels of support for our paying users depending on the subscription plan they choose.
Our Sales and Marketing Approach
As users share content and collaborate on our platform, they introduce and invite new users, driving viral growth. We generate over 90% of our revenue
from self-serve channels, which limits customer acquisition costs.
We’ve developed an efficient marketing function that’s focused on building brand awareness and reinforcing our self-serve model.
Our goal is to rapidly demonstrate the value of our platform to our users in order to convert them to paying users and upgrade them to our premium
offerings. We reach them through in-product prompts and notifications, time-limited trials of paid subscription plans, email, and lifecycle marketing. Each year,
hundreds of millions of devices—including computers, phones, and tablets—are actively connected to the Dropbox platform, representing a large number of
touchpoints to communicate with our users. We complement our self-serve strategy with a focused outbound sales effort targeted at organizations with existing
organic adoption of Dropbox.
Once prospects are identified, our sales team works to broaden adoption of our platform into wider-scale deployments. We also acquire some users
through paid marketing and distribution partnerships in which hardware manufacturers pre-install our software on their devices.
Our Technology Infrastructure and Operations
Our users trust us with their most important content, and we focus on providing them with a secure and easy-to-use platform. More than 90% of our users’
data is stored on our own custom-built infrastructure, which has been designed from the ground up to be reliable and secure, and to provide annual data
durability of at least 99.999999999%. We have datacenter co-location facilities in California, Oregon, Texas, and Virginia.
We also utilize Amazon Web Services, or AWS, for the remainder of our users’ storage needs and to help deliver our services. These AWS datacenters are
located in the United States, Australia, Europe, and Japan, which allows us to localize where content is stored. Our technology infrastructure, combined with
select use of AWS resources, provides us with a distributed and scalable architecture on a global scale.
We designed our platform with multiple layers of redundancy to guard against data loss and deliver high availability. Incremental backups are performed
hourly and full backups are performed daily. In addition, as a default, redundant copies of content are stored independently in at least two separate geographic
regions and replicated reliably within each region.
Our Commitment to Security, Privacy and Legal Compliance
Trust is the foundation of our relationship with our users, and we take significant measures every day to protect their privacy and security.
Security
Our sophisticated infrastructure is designed to protect our users’ content while it is transferred, stored, and processed. We offer multiple layers of
protection, including secure file data transfer, encryption, network configuration, and application-level controls. For Dropbox Business teams, our tools also
empower administrators with control and visibility features that allow them to customize our platform to their organizations’ needs. Our information security
policies and management framework are designed to build a culture of security, and we continually assess risks and improve the security, confidentiality,
integrity, and availability of our systems. We voluntarily engage third-party security auditors to test our systems and controls at least annually against the most
widely recognized security standards and regulations. We also encourage and support independent research through our bug bounty program, where we work
with leading security researchers from around the world to maintain the high standards of security our users have come to expect.
Dropbox supports HIPAA and HITECH compliance. We sign business associate agreements with our customers who require them in order to comply with
the Health Insurance Portability and Accountability Act, or HIPAA, and the Health Information Technology for Economic and Clinical Health Act, or HITECH.
We also offer a HIPAA assessment report performed by an independent third party.
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Privacy
We are committed to keeping user data private, and are subject to a number of privacy laws and regulations such as the European Union's General Data
Protection Regulation ("GDPR") and the California Consumer Privacy Act ("CCPA") in the U.S. These laws and regulations impose increasingly numerous,
complex obligations on us. To comply with and manage our obligations under such privacy laws and regulations, we operate a robust privacy program and have
appointed a Data Protection Officer. Our privacy policy details how we process our users’ personal data as well as the steps we take to protect it. For third-party
developers that create applications that connect to Dropbox, we also set forth terms and guidelines that explain their obligation to protect the privacy of our
users' personal data.
Other Government Regulations
We are subject to compliance with various laws and regulations. These include those covering copyright, indecent content, child protection, and similar
matters regarding the content stored and created on our platform as well as consumer protection laws that may impact our sales and marketing efforts, including
laws related to subscriptions, billing, and auto renewal. In addition to laws and regulations governing content stored and created on our platform and consumer
protection, we are also subject to anti-corruption laws and export and import regulations. The laws in these areas are often in a state of flux and can vary widely
between jurisdictions. To comply with and manage our obligations under such laws and regulations, we track relevant legislative, regulatory, and contractual
requirements. In addition, we have instituted processes and policies to ensure we review our business practices for appropriate compliance with such
requirements.
Our Competition
The market for content collaboration platforms is competitive and rapidly changing. Certain features of our platform compete in the cloud storage market
with products offered by Microsoft, Amazon, Apple, Slack, Google, and Adobe and in the content collaboration market with products offered by Microsoft,
Atlassian, and Google. On a more limited basis, we compete with Box in the cloud storage market for deployments by large enterprises and with Adobe and
DocuSign in the e-signature market. We also compete with smaller private companies that offer point solutions in the cloud storage market or the content
collaboration market.
We believe that the principal competitive factors in our markets include the following:
•
•
•
•
•
•
•
•
•
•
•
•
user-centric design;
ease of adoption and use;
scale of user network;
features and platform experience;
performance;
brand;
security and privacy;
accessibility across several devices, operating systems, and applications;
third-party integration;
customer support;
continued innovation;
pricing; and
• macroeconomic trends.
We believe we compete favorably across these factors, however, some of our competitors may have greater name recognition, longer operating histories,
more varied services, the ability to bundle a broader range of products and services, larger marketing budgets, established marketing relationships, access to
larger user bases, major distribution agreements with hardware manufacturers and resellers, and greater financial, technical, and other resources.
Intellectual Property
We believe that our intellectual property rights are valuable and important to our business. We rely on patents, patent applications, trademarks, copyrights,
trade secrets, know-how license agreements, confidentiality procedures, non-disclosure
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agreements, employee disclosure and invention assignment agreements, and other contractual rights to establish and protect our proprietary rights. In addition,
from time to time we’ve purchased patents, inbound licenses, trademarks, domain names, and patent applications from third parties.
We have over 1,550 issued patents and more than 300 pending patent applications in the United States and abroad. These patents and patent applications
seek to protect our proprietary inventions relevant to our business. In addition, we license a number of key third-party patents in the file collaboration, storage,
syncing, and sharing markets.
We have trademark rights in our name, our logo, and other brand indicia, and have trademark registrations for select marks in the United States and many
other jurisdictions around the world. We also have registered domain names for websites that we use in our business, such as www.dropbox.com, and similar
variations.
We intend to pursue additional intellectual property protection to the extent we believe it would be beneficial and cost effective. Despite our efforts to
protect our intellectual property rights, they may not be respected in the future or may be invalidated, circumvented, or challenged. In addition, the laws of
various foreign countries where our products are distributed may not protect our intellectual property rights to the same extent as laws in the United States.
Human Capital
At Dropbox, we believe that the world can work better. But that starts with us: building a team that emphasizes the kindness and collaboration needed to
grow. We believe the strength of our workforce is one of the most significant contributors to our success. As of December 31, 2022, we had 3,118 full-time
employees. Of our full-time employees, 2,583 were located in the United States and 535 were employees located outside of the United States. None of our
employees are represented by a labor union. We have not experienced any work stoppages, and we believe that our employee relations are strong.
Virtual First
In October 2020, we announced our Virtual First work model pursuant to which remote work has become the primary experience for all of our employees.
As a result, we expect that our workforce will continue to become more distributed over time, although we are continuing to offer our employees opportunities
for in-person collaboration in all locations where we currently have offices, either through our existing real-estate, or new on-demand, flexible spaces, which are
known as “Dropbox Studios”. We also promote work-life balance by empowering our employees to adopt flexible working arrangements and providing tools
for efficient remote collaboration and continuing to provide opportunities for in-person collaboration at our “Dropbox Studios” locations. Additionally, we
provide our employees with a flexible quarterly allowance that can be used to cover expenses related to health and fitness, family and caregiver support,
productivity and ergonomics, financial wellness, and learning and development programs, as well as resources to support Dropboxer effectiveness in their work
environments.
Compensation and Benefits Program
Our compensation program is designed to attract and reward talented individuals who possess the skills necessary to support our business, contribute to
our strategic goals and create long-term value for our stockholders. We provide employees with competitive compensation packages that include base salary,
annual incentive bonuses, 401(k) with a company match up to a specific threshold, and equity awards which align the interests of our employees with our
stockholders. Our highly competitive benefits package includes medical, dental, vision, life and disability plans. In addition to these core benefits, Dropbox also
provides enhanced mental health benefits, family formation benefits and our adoption and surrogacy assistance program. Our comprehensive programs also
provide various leave benefits - including 24 weeks of leave for new parents.
Employee Wellness and Safety
We recognize the importance of the well-being of our employees. With the shift to our Virtual First work model, we remain committed to supporting their
well-being and development. A component of our comprehensive health and wellness benefits package to all employees includes additional time-off
opportunities as well as mental and physical wellness benefits. We conduct a bi-annual employee satisfaction survey to gather candid feedback from employees
with focus on areas such as experience with our managers, wellness initiatives, career and company initiatives. Survey results are reviewed extensively and
become part of our action plans at all levels of the organization.
In addition, the safety of our employees is paramount to our success. We have a physical security policy applicable to all our employees with a global
physical security team that is empowered to protect the safety of our employees in the event of emergencies or disasters. We also established and regularly
update Global COVID-19 Workplace Health & Safety Standards,
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based on guidance from public health authorities, to ensure we minimize risk for employees entering our offices. This is driven through a centralized, cross-
functional Crisis Management Team dedicated to Dropbox’s COVID-19 response.
Learning and Development
We want all of our employees to have thriving careers where they grow and develop in meaningful ways. We develop and provide access to internal
learning and development resources to assist in professional development in various ways such as skills-building programs, on-demand learning options,
mentoring programs, and leadership development courses. We also offer extensive onboarding and training programs to prepare our employees at all levels for
career progression and individual development.
Diversity and Inclusion
We believe that an equitable and inclusive environment comprised of diverse teams produces more creative solutions, results in better and more innovative
products, and is crucial to our efforts to attract and retain key talent. We are focused on building an inclusive culture and sustaining a diverse workforce through
a variety of company initiatives. As part of that effort we have a number of executive-sponsored Employee Resource Groups, or ERGs, that provide support for
diverse members of our workforce by fostering an inclusive environment and providing community-building opportunities. In addition, we provide resources
and training to employees at all levels to ensure that we are cultivating diverse and inclusive teams, as well as sponsor a number of professional development
opportunities that support underrepresented employees at our Company.
Community
We empower our employees to give back to their communities by providing paid volunteer time off, matching a portion of employee donations to
nonprofits and making product donations to nonprofit organizations nominated by our employees.
Corporate Information
We were incorporated in May 2007 as Evenflow, Inc., a Delaware corporation, and changed our name to Dropbox, Inc. in October 2009. Our principal
offices are located at 1800 Owens Street, San Francisco, California, 94158, and our telephone number is (415) 857-6800. Our Class A common stock is listed
on the Nasdaq Global Select Market under the symbol “DBX.”
Available Information
Our website is located at http://www.dropbox.com/, our investor relations website is located at http://investors.dropbox.com/, and our blog is located at
https://blog.dropbox.com/topics/news. We have used, and intend to continue to use, our investor relations website, our blog, press releases, public conference
calls and webcasts to disclose material non-public information and to comply with our disclosure obligations under Regulation FD. The following filings are
available through our investor relations website after we file them with the SEC: Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, current
reports on Form 8-K, and our Proxy Statement for our annual meeting of stockholders. These filings are also available for download free of charge on our
investor relations website. The SEC also maintains an Internet website that contains reports, proxy statements and other information about issuers, like us, that
file electronically with the SEC. The address of that website is www.sec.gov. The contents of these websites are not incorporated into this filing. Further, the
Company’s references to the URLs for these websites are intended to be inactive textual references only.
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ITEM 1A. RISK FACTORS
Investing in our Class A common stock involves a high degree of risk. In addition to the other information set forth in this Annual Report, you should
carefully consider the risks and uncertainties described below, together with all of the other information in this Annual Report on Form 10-K, including the
section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related
notes, before making a decision to invest in our Class A common stock. Our business, results of operations, financial condition, or prospects could also be
harmed by risks and uncertainties that are not presently known to us or that we currently believe are not material. If any of the risks actually occur, our business,
results of operations, financial condition, and prospects could be materially and adversely affected. In that event, the market price of our Class A common stock
could decline, and you could lose all or part of your investment. In addition, any worsening of the economic environment may exacerbate the risks described
below, any of which could have a material impact on us. This situation continues to evolve, and additional impacts may arise that we are not currently aware of.
Risks Related to Our Business and Our Industry
Our business depends on our ability to retain and upgrade paying users, and any decline in renewals or upgrades could adversely affect our future results
of operations.
Our business depends upon our ability to maintain and expand our relationships with our users. Our business is subscription-based, and paying users are
not obligated to and may not renew their subscriptions after their existing subscriptions expire. As a result, we cannot provide assurance that paying users will
renew their subscriptions utilizing the same tier of our products or upgrade to premium offerings. Renewals and upgrades of subscriptions to our platform have
fluctuated, and may decline in any period or over time, or paying users may downgrade or not renew their subscriptions because of several factors, such as
dissatisfaction with our products, support, pricing, or mix of features, a user no longer having a need for our products, the availability of competitive products
that are, or are perceived to be, less expensive, shifts in the mix of monthly and annual subscriptions or the impact of macroeconomic trends or catastrophic
events on our paying users and their willingness or ability to pay for subscriptions. Any decrease in renewals or downgrade of subscriptions to our platform
could harm our ability to grow revenue.
We encourage both basic and paying users to upgrade to our premium offerings by recommending additional features and through in-product prompts and
notifications. We are focused on increasing recurring revenue and we believe that users that subscribe to our premium paid offerings demonstrate a propensity to
retain and expand their deployments over time. We seek to expand within organizations through viral means by adding new users, having workplaces purchase
additional products, or expanding the use of Dropbox into other departments within a workplace. We often see enterprise IT decision-makers deciding to adopt
Dropbox after noticing substantial organic adoption by individuals and teams within the organization. However, if our paying users cancel their subscriptions or
fail to renew, or if we fail to upgrade our paying users to premium offerings or expand within organizations, our business, results of operations, and financial
condition may be harmed. In addition, certain of our enterprise licenses have a large number of seat licenses. Accordingly, an enterprise decision not to renew
its license may have a large impact on our number of paying users and therefore, our business, results of operations, and financial condition. Furthermore, we
have and may continue to see an increase in customers opting for our monthly plans rather than our annual plans, including from users who upgrade to paid
plans using mobile devices. As a result, to the extent more of our users subscribe to our paid plans through mobile devices or otherwise opt for monthly plans,
subscription renewals may fluctuate or decline.
Although it is important to our business that our users renew their subscriptions after their existing subscriptions expire and that we expand our
commercial relationships with our users, given the volume of our users, we may be unable to address any retention issues with specific users in a timely manner,
which could harm our business.
Our future growth could be harmed if we fail to attract new users or convert registered users to paying users.
We must continually add new users to grow our business beyond our current user base and to replace users who choose not to continue to use our
platform. In particular, in order to grow our revenue, we must attract paying users and convert registered users to paying users. Historically, our revenue has
been driven by our self-serve model, and we generate more than 90% of our revenue from self-serve channels. Any decrease in user satisfaction with our
products or support could harm our brand, word-of-mouth referrals, and ability to grow.
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Additionally, many of our users initially access our platform free of charge. We strive to demonstrate the value of our platform to our registered users,
thereby encouraging them to convert to paying users through in-product prompts and notifications, and time-limited trials of paid subscription plans. As of
December 31, 2022, we served over 700 million registered users but only 17.77 million paying users. The actual number of unique users is lower than we report
as one person may register more than once for our platform. As a result, we have fewer unique registered users that we may be able to convert to paying users.
A majority of our registered users may never convert to a paid subscription to our platform, and failure to convert users to a paid subscription will restrict our
ability to grow our revenue.
Our paying and registered user growth rates have declined and may continue to decline in the future as our pricing strategy changes, our market
penetration rates increase and we turn our focus to converting registered users to paying users rather than growing the total number of registered users. The
availability of less expensive and bundled competitive products also has slowed and may continue to slow our user growth rate and negatively impact our ability
to convert registered users to paying users. If we are not able to continue to expand our user base or fail to convert our registered users to paying users, demand
for our paid services and our revenue may grow more slowly than expected or decline. Furthermore, events that financially impact our registered users and other
prospective paying users, such as macroeconomic factors, layoffs, inflation, increased interest rates, or catastrophic events, may cause these users to delay or
reduce technology spending, which may impact our ability to convert registered users or otherwise attract new paying users, restricting our ability to grow our
revenue. If we are unable to increase our paying user growth rates or to offset declines in the number of new paying users with increased revenue per paying
user, our revenue growth rate will decline and operating results will be adversely affected.
Our business could be damaged, and we could be subject to liability, if there is any unauthorized access to our data or our users’ content, including through
privacy and data security breaches or incidents.
Unauthorized parties have in the past gained access, and may in the future gain access, to systems, networks, or facilities used in our business through
various means, including gaining unauthorized access to our systems, networks, or facilities, attempting to fraudulently induce our employees, users, or others
into disclosing user names, passwords, or other sensitive information. Any unauthorized or inadvertent access to, or an actual or perceived security breach of or
incident impacting, our systems, or networks, or facilities, or those of third parties on which we rely, or those of any businesses or technologies we have
acquired, could result in an actual or perceived loss of, or unauthorized access to or disclosure, modification, misuse, loss, corruption, unavailability, or
destruction of, our data or our users’ content, regulatory investigations, proceedings, and orders, claims, demands, and litigation, indemnity obligations,
damages, penalties, fines, and other costs in connection with actual and alleged contractual breaches, violations of applicable laws and regulations or other
actual or asserted obligations, and other liabilities. Any such incident could also materially damage our reputation and market position and harm our business,
results of operations, and financial condition, including reducing our revenue, causing us to issue credits to users, negatively impacting our ability to accept and
process user payment information, eroding our users’ trust in our services and payment solutions, subjecting us to costly user notification or remediation,
harming our ability to retain users, harming our brand, or increasing our cost of acquiring new users. We maintain errors, omissions, and cyber liability
insurance policies covering certain security and privacy damages. However, we cannot be certain that our coverage will be adequate for liabilities actually
incurred or that insurance will continue to be available to us on economically reasonable terms, or at all. Further, if a high-profile security breach or incident
occurs with respect to another content collaboration solutions provider, our users and potential users could lose trust in the security of content collaboration
solutions providers generally, which could adversely impact our ability to retain users or attract new ones.
The use of our platform involves the transmission, storage, and processing of user content, some of which may be considered personal, confidential, or
sensitive information of users or their organizations. We also process, store and transmit our own data as part of our business and operations. This data may
include personal, confidential, or sensitive information. We have previously faced and will continue to face security threats from malicious third parties that
could obtain unauthorized access to our systems, infrastructure, and networks. We anticipate that these threats will continue to grow in scope and complexity
over time. Although we have taken corrective actions in response to past incidents, and have developed systems and processes that are designed to protect the
personal data of users and their organizations, protect our systems, prevent data loss, and prevent other security breaches and security incidents, these security
measures have not fully protected our systems in the past and cannot guarantee security in the future.
Emerging and evolving cybersecurity threats such as the attack on SolarWinds and the Log4j vulnerability reported in December 2021 pose unique
challenges and involve sophisticated threat actors. Computer malware, ransomware, cyber viruses, social engineering (phishing attacks), denial of service or
other attacks, employee theft or misuse and increasingly sophisticated network attacks have become more prevalent, particularly against cloud services. In this
fast-changing threat environment, we are continuously assessing our security posture, including through the use of penetration testing and red team exercises, to
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identify gaps, threats, and vulnerabilities and, where we believe appropriate, we actively take additional and ongoing steps that are intended to strengthen our
cybersecurity capabilities and mitigate the risk of a breach or incident. If we fail to respond appropriately to any identified gaps, threats or vulnerabilities,
including by providing adequate funding and prioritizing strategic initiatives, or if we fail to adequately identify the gaps, threats or vulnerabilities, we face
greater risk that an unauthorized party will obtain access to, or disrupt, our systems or networks or obtain access to data or content that we or third parties on
which we rely store or otherwise process. Notwithstanding our efforts, we may fail to detect the existence of security breaches or incidents, including breaches
or compromises of user content, and may be unable to prevent unauthorized access to user content. Malicious third parties might use techniques that we are
unable to defend against to compromise and infiltrate our systems, infrastructure, and networks. The techniques used to obtain unauthorized access to, and to
disable or degrade service, or sabotage systems change frequently and are often not recognized until launched against a target. They may originate from less
regulated or remote areas around the world, or from state-sponsored actors, and the risks could also be elevated in connection with the conflict between Russia
and Ukraine. If our security measures are breached or compromised or we, our systems, facilities or networks, or those of third parties on which we rely
otherwise are subject to a security breach or incident, or our users’ content or other data is otherwise accessed, misused, modified, rendered unavailable,
destroyed, or otherwise processed through unauthorized means, or if any such actions are believed to occur, our platform may be perceived as insecure, and we
may lose existing users or fail to attract and retain new users. Moreover, public announcements concerning any cybersecurity-related incidents and steps we
may take to respond to or remediate any such incidents could be perceived by securities analysts or investors to be negative, and such perception could, among
other things, have an adverse effect on the price of our Class A common stock.
We may rely on third parties when deploying our infrastructure, and in doing so, expose it to security risks outside of our direct control. We rely on outside
vendors and contractors to perform services necessary for the operation of the business, and they may fail to adequately secure our user and company content
data. This risk may increase when vendors and contractors work remotely, including as part of our Virtual First model.
In addition, certain developers or other partners who create applications that integrate with our platform, may receive or store information provided by us
or by our users through these applications. If these third parties or developers fail to adopt or adhere to adequate data security practices, or in the event of a
breach or other compromise of their networks or systems, our data or our users' data may be improperly accessed, used, or disclosed.
Third parties may attempt to compromise our employees and their privileged access into internal systems to gain access to accounts, our information, our
networks, or our systems or those of third parties on which we rely. Employee error, malfeasance, or other errors in the storage, use, transmission, or other
processing of personal information could result in an actual or perceived breach of user privacy. These risks may be heightened in connection with our transition
to Virtual First and an increasingly distributed workforce. In addition, our users may also disclose or lose control of their passwords, or use the same or similar
passwords on third parties’ systems, which could lead to unauthorized access to their accounts on our platform.
Our business may be significantly impacted by a change in general economic, political, and market conditions, including any resulting effect on consumer
or business spending.
Our business may be affected by general economic, political, and market conditions, including any resulting negative impact on spending by our business
and consumer users. Some of our users may view a subscription to our platform as a discretionary purchase, and our paying users may reduce their discretionary
spending on our platform during an economic downturn, especially in the event of a prolonged recessionary period. Concerns about inflation, rising interest
rates, unemployment trends, geopolitical issues, such as the conflict between Russia and Ukraine, lasting adverse effects of the COVID-19 pandemic or a
widespread economic slowdown or recession (in the United States or internationally) have and could continue to lead to increased market volatility and
economic uncertainty, which could cause current and prospective paying users to delay, decrease, or cancel purchases of our products and services, or delay or
default on their payment obligations. In response to economic uncertainty, we have been more disciplined in our hiring and operating expenses, either of which
could negatively impact our ability to grow and invest in our business. As a result, our business, results of operations, and financial condition may be
significantly affected by changes in the economy generally.
We operate in competitive markets, and we must continue to compete effectively.
The market for content collaboration platforms is competitive and rapidly changing. Certain features of our platform compete in the cloud storage market
with products offered by Microsoft, Amazon, Apple, Google, and Adobe and in the content collaboration market with products offered by Microsoft, Atlassian,
Slack, and Google. On a more limited basis, we compete with Box in the cloud storage market for deployments by large enterprises, as well as in the e-signature
market along
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with Adobe and DocuSign. We also compete with smaller private companies that offer point solutions in the cloud storage market or the content collaboration
market. We believe the principal competitive factors in our markets include the following:
•
•
•
•
•
•
•
•
•
•
•
•
user-centric design;
ease of adoption and use;
scale of user network;
features and platform experience;
performance;
brand;
security and privacy;
accessibility across several devices, operating systems, and applications;
third-party integration;
customer support;
continued innovation;
pricing; and
• macroeconomic trends.
With the introduction of new technologies and market entrants, we expect competition to intensify. Many of our actual and potential competitors or alliances
among competitors benefit from competitive advantages over us, such as greater name recognition, longer operating histories, more varied products and
services, larger marketing budgets, more established marketing relationships, access to larger user bases, major distribution agreements with hardware
manufacturers and resellers, and greater financial, technical, and other resources. Some of our competitors may make acquisitions or enter into strategic
relationships to offer a broader range of products and services than we do. These combinations may make it more difficult for us to compete effectively. We
expect these trends to continue as competitors attempt to strengthen or maintain their market positions.
Demand for our platform is also sensitive to price. Many factors, including our marketing, user acquisition and technology costs, and our current and
future competitors’ pricing and marketing strategies, can significantly affect our pricing strategies. Certain of our competitors offer, or may in the future offer,
lower-priced or free products or services that compete with our platform or may bundle and offer a broader range of products and services.
Similarly, certain competitors may use marketing strategies that enable them to acquire users at a lower cost than us. There can be no assurance that we
will not be forced to engage in price-cutting initiatives or to increase our marketing and other expenses to attract and retain users in response to competitive
pressures, either of which could materially and adversely affect our business, results of operations, and financial condition.
Our business depends upon the interoperability of our platform across devices, operating systems, and third-party applications that we do not control.
One of the most important features of our platform is its broad interoperability with a range of diverse devices, operating systems, and third-party
applications. Our platform is accessible from the web and from devices running Windows, Mac OS, iOS, Android, WindowsMobile, and Linux. We also have
integrations with Microsoft, Adobe, Apple, Salesforce, Atlassian, Slack, BetterCloud, Google, IBM, Cisco, VMware, Okta, Symantec, Palo Alto Networks,
Zoom, and a variety of other productivity, collaboration, data management, and security vendors. We are dependent on the accessibility of our platform across
these third-party operating systems and applications that we do not control. Third-party services and products are constantly evolving, and we may not be able
to modify our platform to assure its compatibility with that of other third parties
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following development changes. If we are unable to ensure compatibility of our platform with desired third party services, our business may be adversely
impacted.
In addition, several of our competitors own, develop, operate, or distribute operating systems, app stores, third-party datacenter services, and other
software, and also have material business relationships with companies that own, develop, operate, or distribute operating systems, applications markets, third-
party datacenter services, and other software that our platform requires in order to operate. Some of these competitors have inherent advantages developing
products and services that more tightly integrate with their software and hardware platforms or those of their business partners.
In addition, some of our competitors may be able to disrupt the operations or compatibility of our platform with their products or services, or exert strong
business influence on our ability to, and terms on which we, operate and distribute our platform. For example, we currently offer products that directly compete
with several large technology companies that we rely on to ensure the interoperability of our platform with their products or services. We also rely on these
companies to make our mobile applications available through their app stores. As our respective products evolve, we expect this level of competition to
increase. Should any of our competitors modify their products or standards in a manner that degrades the functionality of our platform or gives preferential
treatment to competitive products or services, whether to enhance their competitive position or for any other reason, the interoperability of our platform with
these products could decrease and our business, results of operations, and financial condition could be harmed.
Our business could be harmed by any significant disruption of service on our platform or loss of content.
Our brand, reputation, and ability to attract, retain, and serve our users are dependent upon the reliable performance of our platform, including our
underlying technical infrastructure. Our users rely on our platform to store digital copies of their valuable content, including financial records, business
information, documents, photos, and other important content. Our technical infrastructure may not be adequately designed with sufficient reliability and
redundancy to avoid performance delays or outages that could be harmful to our business, and turnover in our personnel, may additionally impact our ability to
respond to any such delays or outages. If our platform is unavailable when users attempt to access it, or if it does not load as quickly as they expect, users may
not use our platform as often in the future, or at all.
As our user base and the amount and types of information stored, synced, and shared on our platform continue to grow, we will need an increasing amount
of technical infrastructure, including network capacity and computing power, to continue to satisfy the needs of our users. The vast majority of user content is
stored at our own custom-built infrastructure in co-location facilities that we directly lease and operate. As we add to our infrastructure, we may move or
transfer additional content.
Further, as we continue to evolve our business to meet the needs of our users, we may overestimate or underestimate our infrastructure capacity
requirements, which could adversely affect our results of operations. The costs associated with leasing and maintaining our custom-built infrastructure in co-
location facilities and third-party datacenters already constitute a significant portion of our capital and operating expenses. We continuously evaluate our short-
and long-term infrastructure capacity requirements to ensure adequate capacity for new and existing users while minimizing unnecessary excess capacity costs.
If we overestimate the demand for our platform and therefore secure excess infrastructure capacity, our operating margins could be reduced. If we underestimate
our infrastructure capacity requirements, we may not be able to service the expanding needs of new and existing users, and our hosting facilities, network, or
systems may fail. Additionally, our ability to accurately perform capacity planning is dependent on the reliability of the global supply chain for hardware,
network, and platform infrastructure equipment. Due to the current macro environment and related price increases and competition for a limited supply of such
equipment, our global supply chain for datacenter equipment has experienced challenges, and such challenges could adversely impact our infrastructure
capacity. Our datacenter equipment is primarily manufactured by third-party manufacturers, some of which utilize certain components for which there are few
qualified suppliers. Prolonged disruptions at these suppliers could lead to a disruption in our ability to manufacture datacenter equipment on time to meet
demand. Furthermore, our competitors use some of the same suppliers and their demand for hardware components can affect the capacity available to us
resulting in inadequate datacenter capacity. Furthermore, our efforts to mitigate such disruptions and compete for such equipment may impact the timing and
magnitude of our infrastructure spending, resulting in unexpected increases in shorter-term or longer-term costs than originally projected.
In addition, the datacenters that we use are vulnerable to damage or interruption from human error, intentional bad acts, security breaches and incidents,
including computer malware, ransomware, cyber viruses, social engineering (phishing attacks), denial of service or other attacks, employee theft or misuse and
other network attacks, earthquakes, floods, fires, war, terrorist attacks, power losses, hardware failures, systems failures, telecommunications failures, and
similar events, any of which could disrupt our service, destroy user content, or prevent us from being able to continuously back up or record changes in our
users’
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content. In the event of significant physical damage to one of these datacenters, it may take a significant period of time to achieve full resumption of our
services, and our disaster recovery planning may not account for all eventualities. Damage or interruptions to these datacenters could harm our platform and
business.
We generate revenue from sales of subscriptions to our platform, and any decline in demand for our platform, or for content collaboration solutions in
general, could negatively impact our business.
We generate, and expect to continue to generate, revenue from the sale of subscriptions to our platform. As a result, widespread acceptance and use of
content collaboration solutions in general, and our platform in particular, is critical to our future growth and success. If the content collaboration market fails to
grow or grows more slowly than we currently anticipate, or if the recent trends toward remote or distributed work does not materialize into a longer-term shift,
demand for our platform could be negatively affected.
Changes in user preferences for content collaboration may have a disproportionately greater impact on us than if we offered multiple platforms or
disparate products. Demand for content collaboration solutions in general, and our platform in particular, is affected by a number of factors, many of which are
beyond our control. Some of these potential factors include:
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awareness of the content collaboration category generally;
availability of products and services that compete with ours;
the impact, scale, and duration, of trends towards or away from remote or distributed work;
ease of adoption and use;
features and platform experience;
performance;
brand;
security and privacy;
customer support;
pricing; and
• macroeconomic trends.
The content collaboration market is subject to rapidly changing user demand and trends in preferences. If we fail to successfully predict and address these
changes and trends, meet user demands, or achieve more widespread market acceptance of our platform, our business, results of operations, and financial
condition could be harmed.
Failure to respond to rapid technological changes, extend our platform, or develop new features or products may harm our ability to compete effectively,
which would adversely affect our business.
The content collaboration market is characterized by rapid technological change and frequent new product and service introductions. Our ability to grow
our user base and increase revenue from existing users will depend heavily on our ability to enhance and improve our platform, introduce new features and
products, increase our strategic partnerships with third parties, and interoperate across an increasing range of devices, operating systems, and third-party
applications. Users may require features and capabilities that our current platform does not have. The need to respond to technological changes may require
investments in our business that could impact short-term growth or profitability. In addition, while we believe trends towards remote or distributed work will
prove to be significant and long lasting, and that these trends will open up increased market opportunities for us, such trends or opportunities may not
materialize or, if they do, we may not be able to develop new features or products, or enhance our existing offerings, sufficiently to take advantage of them. We
invest significantly in research and development, and our goal is to focus our spending on measures that improve quality and ease of adoption and create organic
user demand for our platform. For example, in 2021 we launched Dropbox Transfer as a way for users to safely and securely send large files, Dropbox Replay,
which allows users to review, approve and collaborate on video workflows, Dropbox Backup, which allows users to securely back up their computer or external
hard drives with an automated cloud backup solution, and
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Dropbox Capture which allows users to visually present their work through easy-to-take screen recordings, GIFs, and screenshots. There is no assurance that
our enhancements to our platform or our new product experiences, partnerships, features, or capabilities will be compelling to our users or gain market
acceptance. If our research and development investments do not accurately anticipate user demand, we are unsuccessful in establishing or maintaining our
strategic partnerships, or if we fail to develop our platform in a manner that satisfies user preferences in a timely and cost-effective manner, we may fail to retain
our existing users or increase demand for our platform.
The introduction of new products and services by competitors or the development of entirely new technologies to replace existing offerings could make
our platform obsolete or adversely affect our business, results of operations, and financial condition. We may experience difficulties with software development,
design, or marketing that could delay or prevent our development, introduction, or implementation of new product experiences, features, or capabilities. We also
may experience broad-based business or economic disruptions that could adversely affect the productivity of our employees and result in delays in the
development or implementation process. For example, in response to the COVID-19 pandemic, we transitioned to a Virtual First work model, which may lead
to disruptions and decreased productivity that could result in delays in our product development process. The risk of such disruptions and decreased productivity
may persist as our workforce operates under a Virtual First model. We have in the past experienced delays in our internally planned release dates of new
features and capabilities, and there can be no assurance that new product experiences, features, or capabilities will be released according to schedule. Any
delays could result in adverse publicity, loss of revenue or market acceptance, or claims by users brought against us, all of which could have a material and
adverse effect on our reputation, business, results of operations, and financial condition. Moreover, new features may require substantial investment, and we
have no assurance that such investments will be successful. If users do not widely adopt our new product experiences, features, and capabilities, we may not be
able to realize a return on our investment. If we are unable to develop, license, or acquire new features and capabilities to our platform on a timely and cost-
effective basis, or if such enhancements do not achieve market acceptance, our business, results of operations, and financial condition could be adversely
affected.
We may not successfully manage our growth or successfully execute our plan for future growth.
The growth and expansion of our business, including the introduction of new features and products, places a continuous significant strain on our
management, operational, and financial resources. As we introduce new products and features, and our user base and third-party relationships expand, our
information technology systems, organizational structures, and internal controls and procedures may not be adequate to support our operations. In addition, we
face challenges of integrating, developing, and motivating an increasingly distributed employee base in various countries around the world. These challenges
may be heightened in connection with our Virtual First work model and our need to align our resources in order to create a more nimble and streamlined
organization. Managing our growth will also require significant expenditures and allocation of valuable management resources.
Our ability to forecast our future results of operations is subject to a number of uncertainties, including our ability to effectively plan for and model future
growth, and we may not receive our expected return on investments that we make in our business in the time we expect or at all. We have encountered in the
past, and may encounter in the future, risks and uncertainties frequently experienced by growing companies in rapidly changing industries. If we fail to achieve
the necessary level of efficiency in our organization as it grows, or if we are not able to accurately forecast future growth, or our investments do not result in the
growth we expect, our business, results of operations, and financial condition could be harmed.
We depend on our key personnel and other highly qualified personnel, and if we fail to attract, integrate, and retain our personnel, and maintain our
unique corporate culture, our business could be harmed.
We depend on the continued service and performance of our key personnel. In particular, Andrew W. Houston, our Chief Executive Officer and one of our
co-founders, is critical to our vision, strategic direction, culture, and offerings. From time to time, there have been changes in our management team resulting
from the hiring or departure of our executives, and there may be additional changes in the future. For example, Timothy Young stepped down as our President in
February 2023. While we seek to manage these transitions carefully, such changes may result in a loss of institutional knowledge and may cause disruptions to
our business. If we fail to successfully integrate new key personnel into our organization or if key employees are unable to successfully transition into new
roles, our business could be adversely affected.
All of our officers and key personnel are at-will employees. In addition, many of our key technologies and systems are custom-made for our business by
our key personnel. The loss of key personnel, including key members of our management team, as well as certain of our key marketing, sales, product
development, or technology personnel, could disrupt our operations and have an adverse effect on our ability to grow our business. In addition, while we believe
our Virtual First strategy will give us the opportunity to align our resources to create a more nimble and streamlined organization, we can provide no assurance
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that we will be able to successfully execute on these plans, and failure to successfully manage these transitions may cause disruptions to our business.
Additionally, we will need to adapt and respond to frequently changing circumstances that may impact our workforce, such as natural disasters or pandemics, or
our ability to maintain an effective workforce may be impacted.
To execute our business plan, we must attract and retain highly qualified personnel. Competition for these employees is intense and we may not be
successful in attracting and retaining qualified personnel. We have experienced, and we may continue to experience, difficulty in hiring and retaining highly
skilled employees with appropriate qualifications. As we continue to operate in a Virtual First model, our recent hires and planned hires may not become as
productive as we expect, and we may be unable to hire, integrate, or retain sufficient numbers of qualified individuals. Many of the companies with which we
compete for experienced personnel have greater resources than we have. In addition, in making employment decisions, particularly in the internet and high-
technology industries, job candidates often consider the value of the equity they are to receive in connection with their employment. Employees may be more
likely to leave us if the shares they own or the shares underlying their equity incentive awards have significantly appreciated or significantly reduced in value.
Many of our employees may receive significant proceeds from sales of our equity in the public markets, which may reduce their motivation to continue to work
for us. If we fail to attract new personnel, or fail to retain and motivate our current personnel, our business and growth prospects could be harmed.
Additionally, if we do not maintain and continue to develop our corporate culture as we grow and evolve, it could harm our ability to foster the innovation,
creativity, and teamwork we believe that we need to support our growth. Additions of executive-level management, significant numbers of new and remote
employees, and higher employee turnover could significantly and adversely impact our culture, as could our transition to a Virtual First workforce.
We have a limited history of operating with a Virtual First workforce and the long-term impact on our financial results and business operations remains
uncertain.
In October 2020, we announced a Virtual First work model pursuant to which remote work has become the primary experience for all of our employees
and our intention is for our workforce to continue being more distributed over time. However, we have a limited history of operating with a Virtual First
workforce and, although we anticipate that our Virtual First work model will have a long-term positive impact on our financial results and business operations,
the impact remains uncertain. Additionally, there is no guarantee that we will realize the anticipated benefits to our business, including cost savings, increased
employee satisfaction or ability to attract and retain employees. We may also not achieve operational efficiencies, or increased productivity.
Our continuing shift to a Virtual First work model could make it increasingly difficult to manage our business and adequately oversee our employees and
business functions, potentially resulting in harm to our company culture, increased employee attrition, and the loss of key personnel, as well as potentially
negatively impacting product research and development and the growth of our business. We may also experience an increased risk of privacy and data security
breaches and incidents involving our data or our users’ content. Any of these factors could adversely affect our financial condition and operating results.
In addition, as we continue our shift to Virtual First, we will need less office space than we are currently contractually committed to leasing and as a result,
we have recorded and may in the future record impairment charges related to the office spaces we no longer expect to need, which has impacted and may in the
future impact our ability to achieve GAAP profitability. Furthermore, any prolonged recessionary period and industry shifts towards remote or distributed work,
declines in rent prices or increased availability of open office space, may prevent us from finding subtenants for our unused office space on favorable terms or at
all. In the event that we are unable to sublease our space on favorable terms or at all, or if we are able to sublease space but our subtenants fail to make lease
payments to us or otherwise default on their obligations to us, we may generate less sublease income than we have currently estimated, continue to incur
substantial payment obligations under our leases and incur additional or higher impairment charges than we have currently estimated, any of which could
materially and adversely affect our business, cash flows, results of operations, profitability, and financial condition.
Our lack of a significant outbound sales force may limit the potential growth of our business.
Historically, our business model has been driven by organic adoption and viral growth, with more than 90% of our revenue generated from self-serve
channels. As a result, we do not have a significant outbound sales force, which has enabled us to be more efficient with our sales and marketing spend.
Although we believe our business model can continue to scale without a large outbound sales force, our word-of-mouth and user referral marketing model may
not continue to be as successful as we anticipate, and our limited experience selling directly to large organizations through our outbound sales force
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may impede our future growth. As we continue to scale our business, an enhanced sales infrastructure could assist in reaching larger organizations and growing
our revenue. Identifying and recruiting additional qualified sales personnel and training them would require significant time, expense, and attention, and would
significantly impact our business model. Further, adding more sales personnel would change our cost structure and results of operations, and we may have to
reduce other expenses in order to accommodate a corresponding increase in sales and marketing expenses. If our limited outbound sales force and lack of
experience selling and marketing to large organizations prevents us from reaching larger organizations and growing our revenue, and if we are unable to hire,
develop, and retain talented sales personnel in the future, our business, results of operations, and financial condition could be adversely affected.
We may expand sales to large organizations, which could lengthen sales cycles and result in greater deployment challenges.
As our business evolves, we may need to invest more resources into sales to large organizations. Large organizations may undertake a significant
evaluation and negotiation process, which can lengthen our sales cycle. We may also face unexpected deployment challenges with large organizations or more
complicated deployment of our platform. Large organizations may demand more configuration and integration of our platform or require additional security
management or control features. We may spend substantial time, effort, and money on sales efforts to large organizations without any assurance that our efforts
will produce any sales. Additionally, our ability to sell via an outbound sales force has been, and may continue to be, impeded by events, such as
macroeconomic factors, tighter technology spending, layoffs at our potential customers, public health epidemics, and other catastrophic events. As a result, sales
to large organizations may lead to greater unpredictability in our business, results of operations, and financial condition.
Any failure to offer high-quality customer support may harm our relationships with our users and our financial results.
We have designed our platform to be easy to adopt and use with minimal to no support necessary. Any increased user demand for customer support could
increase costs and harm our results of operations. In addition, as we continue to grow our operations and support our global user base, we need to be able to
continue to provide efficient customer support that meets our customers’ needs globally at scale. Paying users receive additional customer support features and
the number of our paying users has grown significantly, which will put additional pressure on our support organization. For example, the number of paying
users has grown from 8.81 million as of December 31, 2016, to 17.77 million as of December 31, 2022. If we are unable to provide efficient customer support
globally at scale, our ability to grow our operations may be harmed and we may need to hire additional support personnel, which could harm our results of
operations. Our new user signups are highly dependent on our business reputation and on positive recommendations from our existing users. Any failure to
maintain high-quality customer support, or a market perception that we do not maintain high-quality customer support, could harm our reputation, business,
results of operations, and financial condition.
Our business depends on a strong brand, and if we are unable to maintain and enhance our brand, our ability to expand our base of users will be impaired
and our business, results of operations, and financial condition will be harmed.
We believe that our brand identity and awareness have contributed to our success and have helped fuel our efficient go-to-market strategy. We also believe
that maintaining and enhancing the Dropbox brand is critical to expanding our base of users. We anticipate that, as our market becomes increasingly
competitive, maintaining and enhancing our brand may become increasingly difficult and expensive. Any unfavorable publicity or consumer perception of our
platform or the providers of content collaboration solutions generally could adversely affect our reputation and our ability to attract and retain users.
Additionally, if we fail to promote and maintain the Dropbox brand, our business, results of operations, and financial condition will be materially and adversely
affected.
We are continuing to expand our operations outside the United States, where we may be subject to increased business and economic risks that could impact
our results of operations.
We have paying users across approximately 180 countries and approximately half of our revenue in the year ended December 31, 2022 was generated
from paying users outside the United States. We expect to continue to expand our international operations, which may include employees working in new
jurisdictions and providing our platform in additional languages. Any new markets or countries into which we attempt to sell subscriptions to our platform may
not be receptive. For example, we may not be able to expand further in some markets if we are unable to satisfy certain government- and industry-specific
requirements. In addition, our ability to manage our business and conduct our operations internationally requires considerable management attention and
resources and is subject to the particular challenges of supporting a rapidly growing business in an environment of multiple languages, cultures, customs, legal
and regulatory systems, alternative dispute systems, and commercial markets. International expansion has required, and will continue to require, investment of
significant funds and
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other resources. Expanding and operating internationally subjects us to regulatory, economic, geographic, social, and political risks and may increase risks that
we currently face, including risks associated with:
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compliance with applicable international laws, regulations, and standards including laws and regulations with respect to labor and
employment, privacy, data protection, cybersecurity, consumer protection, tax, export control and sanctions, and unsolicited email, and the
risk of penalties to our users and individual members of management or employees if our practices are deemed to be out of compliance;
recruiting and retaining talented and capable employees in locations outside the United States, and maintaining our company culture across all
of our locations, including in light of our Virtual First work model and an increasingly distributed workforce;
providing our platform and operating our business across a significant distance, in different languages and among different cultures, including
the potential need to modify our platform and features to ensure that they are culturally appropriate and relevant in different countries;
• management of an employee base in jurisdictions that may not give us the same employment and retention flexibility as does the United
States;
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operating in jurisdictions that do not protect intellectual property rights in the same manner or to the same extent as does the United States;
compliance by us and our business partners with anti-corruption laws, import and export control laws, tariffs, trade barriers, economic
sanctions, and other regulatory limitations on our ability to provide our platform in certain international markets;
foreign exchange controls that might require significant lead time in setting up operations in certain geographic territories and might prevent
us from repatriating cash earned outside the United States;
political, social, and economic instability, conflicts, and wars, such as the conflict between Russia and Ukraine and its regional and global
ramifications;
changes in diplomatic and trade relationships, including the imposition of new trade restrictions, trade protection measures, import or export
requirements, trade embargoes and other trade barriers;
double taxation of our international earnings and potentially adverse tax consequences due to changes in the income and other tax laws of the
United States or the international jurisdictions in which we operate;
higher costs of doing business internationally, including increased accounting, travel, infrastructure, and legal compliance costs; and
the impact of natural disasters and public health epidemics on employees, travel and the global economy.
If we continue to invest substantial time and resources to expand our operations internationally and are unable to manage these risks effectively, our
business, financial condition, and results of operations could be adversely affected. In addition, continued international expansion may subject our business to
broader economic, political, and other international risks, including economic volatility, security risks, and geopolitical conflicts. Further, compliance with laws,
regulations, and standards applicable to our global operations substantially increases our cost of doing business in international jurisdictions. We may be unable
to keep current with changes in laws, regulations, or standards as they change. Although we have implemented policies and procedures designed to support
compliance with these laws, regulations, and standards there can be no assurance that we will always maintain compliance or that all of our employees,
contractors, partners, and agents will comply with the varying and sometimes conflicting laws, regulations and standards in all jurisdictions. Any violations
could result in regulatory investigations and enforcement actions, fines, civil and criminal penalties, damages, injunctions, restrictions on our ability to conduct
business, or reputational harm. If we are unable to comply with these laws and regulations or manage the complexity of our global operations successfully, our
business, results of operations, and financial condition could be adversely affected.
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We depend on our infrastructure and third-party datacenters, and any disruption in the operation of these facilities or failure to renew the services could
adversely affect our business.
We host our services and serve all of our users using a combination of our own custom-built infrastructure that we lease and operate in co-location
facilities and third-party datacenter services such as Amazon Web Services. While we typically control and have access to the servers we operate in co-location
facilities and the components of our custom-built infrastructure that are located in those co-location facilities, we control neither the operation of these facilities
nor our third-party service providers. Furthermore, we have no physical access or control over the services provided by Amazon Web Services.
Datacenter leases and agreements with the providers of datacenter services expire at various times. The owners of these datacenters and providers of these
datacenter services may have no obligation to renew their agreements with us on commercially reasonable terms, or at all. Problems faced by datacenters, with
our third-party datacenter service providers, with the telecommunications network providers with whom we or they contract, or with the systems by which our
telecommunications providers allocate capacity among their users, including us, could adversely affect the experience of our users or result in unexpected
increases in our costs. Our third-party datacenter operators could decide to close their facilities or cease providing services without adequate notice. In addition,
any financial difficulties, such as bankruptcy, faced by our third-party datacenter operators or any of the service providers with whom we or they contract may
have negative effects on our business, the nature and extent of which are difficult to predict.
If the datacenters and service providers that we use are unable to keep up with our growing needs for capacity, or if we are unable to renew our agreements
with datacenters, and service providers on commercially reasonable terms, we may be required to transfer servers or content to new datacenters or engage new
service providers, and we may incur significant costs, and possible service interruption in connection with doing so. Any changes in third-party service levels at
datacenters or any real or perceived errors, defects, disruptions, or other performance problems with our platform could harm our reputation and may result in
damage to, or loss or compromise of, our users’ content. Interruptions in our platform might, among other things, reduce our revenue, cause us to issue refunds
to users, subject us to potential liability, harm our reputation, or decrease our renewal rates.
We have relationships with third parties to provide, develop, and create applications that integrate with our platform, and our business could be harmed if
we are unable to continue these relationships.
We use software and services licensed and procured from third parties to develop and offer our platform. We may need to obtain future licenses and
services from third parties to use intellectual property and technology associated with the development of our platform, which might not be available to us on
acceptable terms, or at all. Any loss of the right to use any software or services required for the development and maintenance of our platform could result in
delays in the provision of our platform until equivalent technology is either developed by us, or, if available from others, is identified, obtained, and integrated,
which could harm our platform and business. Any errors or defects in third-party software or services could result in errors or a failure of our platform, which
could harm our business, results of operations, and financial condition.
We also depend on our ecosystem of developers to create applications that will integrate with our platform. As of December 31, 2022, Dropbox was
receiving over 75 billion API calls per month, and just under 1,000,000 developers had registered and built applications on our platform. Our reliance on this
ecosystem of developers creates certain business risks relating to the quality of the applications built using our APIs, service interruptions of our platform from
these applications, lack of service support for these applications, and possession of intellectual property rights associated with these applications.
We may not have the ability to control or prevent these risks. As a result, issues relating to these applications could adversely affect our business, brand,
and reputation.
Our use of open source software could negatively affect our ability to offer and sell subscriptions to our platform and subject us to possible litigation.
A portion of the technologies we use incorporates open source software, and we may incorporate open source software in the future. Open source software
is generally licensed by its authors or other third parties under open source licenses. These licenses may subject us to certain unfavorable conditions, including
requirements that we offer our platform that incorporates the open source software for no cost, that we make publicly available source code for modifications or
derivative works we create based upon, incorporating or using the open source software, or that we license such modifications or derivative works under the
terms of the particular open source license. Additionally, if a third-party software provider has incorporated open source software into software that we license
from such provider, we could be required to disclose any of our source code that incorporates or is a modification of our licensed software. If an author or other
third party that distributes open source software
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that we use or license were to allege that we had not complied with the conditions of the applicable license, we could be required to incur significant legal
expenses defending against those allegations and could be subject to significant damages, enjoined from offering or selling our solutions that contained the open
source software, and required to comply with the foregoing conditions. Any of the foregoing could disrupt and harm our business, results of operations, and
financial condition.
Our ability to sell subscriptions to our platform could be harmed by real or perceived material defects or errors in our platform.
The software technology underlying our platform is inherently complex and may contain material defects or errors, particularly when first introduced or
when new features or capabilities are released. We have from time to time found defects or errors in our platform, and new defects or errors in our existing
platform or new software may be detected in the future by us or our users. There can be no assurance that our existing platform and new software will not
contain defects. Any real or perceived errors, failures, vulnerabilities, or bugs in our platform could result in negative publicity or lead to data security, access,
retention, or other performance issues, all of which could harm our business. The costs incurred in correcting such defects or errors may be substantial and
could harm our results of operations and financial condition. Moreover, the harm to our reputation and legal liability related to such defects or errors may be
substantial and could harm our business, results of operations, and financial condition.
We also utilize hardware purchased or leased and software and services licensed from third parties on our platform. Any defects in, or unavailability of,
our or third-party software, services, or hardware that cause interruptions to the availability of our services, loss of data, or performance issues could, among
other things:
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cause a reduction in revenue or delay in market acceptance of our platform;
require us to issue refunds to our users or expose us to claims for damages;
cause us to lose existing users and make it more difficult to attract new users;
divert our development resources or require us to make extensive changes to our platform, which would increase our expenses;
increase our technical support costs; and
harm our reputation and brand.
We have acquired, and may in the future acquire, other businesses and technologies which could require significant management attention, disrupt our
business operations, cause us to incur debt or dilute stockholder value.
As part of our business strategy, we have acquired, and may in the future acquire, other companies, employee teams, or technologies to complement or
expand our products, obtain personnel, or otherwise complement or grow our business. For example, in the fourth fiscal quarter of 2022, we acquired key assets
from Boxcryptor, a provider of end-to-end "zero knowledge" encryption for cloud storage services, with plans to embed these capabilities natively within
Dropbox to provide an additional layer of data protection for certain of our customers on paid plans. Additionally, in the fourth fiscal quarter of 2022, we
acquired FormSwift, a cloud-based service that provides users the ability to create, edit, and save critical business forms and agreements.
The pursuit of acquisitions may divert the attention of management and cause us to incur various expenses in identifying, investigating, and pursuing
suitable acquisitions, whether or not they are consummated.
We may not be able to find suitable acquisition candidates and we may not be able to complete acquisitions on favorable terms, if at all, and even if we are
able to identify suitable acquisition candidates, we may not be able to receive approval from the applicable competition authorities, or such target may be
acquired by another company, including one of our competitors. If we do complete acquisitions, we may not ultimately strengthen our competitive position or
achieve the anticipated benefits from such acquisitions, due to a number of factors, including:
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acquisition-related costs, liabilities, or tax impacts, some of which may be unanticipated;
difficulty utilizing or integrating the acquired intellectual property, technology infrastructure, and operations;
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difficulty integrating and retaining key employees of acquired businesses and related challenges motivating and retaining our key employees
after such acquisition;
ineffective or inadequate, controls, procedures, or policies at an acquired business;
inability to effectively offer, price, and support multiple product lines or services offerings of acquired businesses;
potential unknown liabilities or risks associated with an acquired business, including those arising from existing contractual obligations,
security vulnerabilities, cybersecurity incidents, or litigation matters;
inability to maintain relationships with key customers, suppliers, and partners of an acquired business;
failure to accurately forecast the financial impact of an acquisition transaction, including accounting charges;
challenges integrating accounting, finance and forecasting practices of acquired business within our business;
lack of experience in new markets, products or technologies;
inability to effectively integrate brand identity of acquired businesses within those of our business;
diversion of management's attention from other business concerns; and
use of resources that are needed in other parts of our business.
We may have to pay a substantial portion of our available cash, incur debt, or issue equity securities to pay for any such acquisitions, each of which could
affect our financial condition or the value of our capital stock. The sale of equity to finance any such acquisitions could result in dilution to our stockholders. If
we incur more debt, it would result in increased fixed obligations and could also subject us to covenants or other restrictions that would impede our ability to
flexibly operate our business.
In addition, we may not be able to integrate acquired businesses successfully or effectively manage the combined company following an acquisition. If we
fail to successfully integrate acquisitions, or the people or technologies associated with those acquisitions, the results of operations of the combined company
could be adversely affected. Any integration process will require significant time, resources, and attention from management, and disrupt the ordinary
functioning of our business, and we may not be able to manage the process successfully, which could adversely affect our business, results of operations, and
financial condition.
A significant portion of the purchase price of companies we acquire may be allocated to acquired goodwill. We review goodwill for impairment at least
annually. If our acquisitions do not yield expected returns, we may be required to record impairment charges based this assessment, which could adversely
affect our results of operations.
Any acquisition we complete could be viewed negatively by users, developers, partners, or investors, and could have adverse effects on our existing
business relationships, financial condition, or the value of our capital stock.
If we fail to address the foregoing risks or other problems encountered in connection with past or future acquisitions of businesses, new technologies,
services and other assets, strategic investments or other transactions, or if we fail to successfully integrate such acquisitions or investments, or if we are unable
to successfully complete other transactions or such transactions do not meet our strategic objectives, our business, results of operations and financial condition
could be adversely affected.
Our current and future indebtedness may limit our operating flexibility or otherwise affect our business.
Our current indebtedness, including our 2026 Notes, 2028 Notes and our revolving credit facility, place significant restrictions on our business and could
have important consequences to our stockholders and effects on our business, as could any future indebtedness.
For example, the terms of our revolving credit and guarantee agreement, as amended, contain a number of covenants that limit our ability and our
subsidiaries’ ability to, among other things, incur additional indebtedness, pay dividends, make
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redemptions and repurchases of stock, make investments, loans and acquisitions, create liens, engage in transactions with affiliates, merge or consolidate with
other companies, or sell substantially all of our assets. We are also required to maintain certain financial covenants, including a consolidated leverage ratio
incurrence covenant and a minimum liquidity balance.
In addition, such current and future indebtedness could:
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increase our vulnerability to general adverse economic and industry conditions;
require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing the
availability of our cash flow to fund working capital and other general corporate purposes;
limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;
restrict our current and future operations, make it more difficult to successfully execute our business strategy, or restrict us from exploiting
business opportunities;
place us at a competitive disadvantage compared to our competitors that have less indebtedness or are not subject to restrictive covenants;
restrict or otherwise impact the pace and timing of repurchases under our stock repurchase program; and
limit our availability to borrow additional funds for working capital, capital expenditures, acquisitions, debt service requirements, execution of
our business strategy, or other general purposes.
Any of the foregoing could have a material adverse effect on our business, cash flows, results of operations, and financial condition.
Our operations may be interrupted and our business, results of operations, and financial condition could be adversely affected if we default on our leasing
or credit obligations.
We finance a significant portion of our expenditures through leasing arrangements, and we may enter into additional similar arrangements in the future. As
of December 31, 2022, we had an aggregate of $1,157.6 million of commitments to settle contractual obligations. In particular, we utilize both finance and
operating leases to finance some of our equipment, datacenters and offices. In addition, we may draw upon our revolving credit facility to finance our operations
or for other corporate purposes. If we default on these leasing or credit obligations, our leasing partners and lenders may, among other things:
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require repayment of any outstanding lease obligations;
terminate our leasing arrangements;
terminate our access to the leased datacenters we utilize;
stop delivery of ordered equipment;
sell or require us to return our leased equipment;
require repayment of any outstanding amounts drawn on our revolving credit facility;
terminate our revolving credit facility; or
require us to pay significant fees, penalties, or damages.
If some or all of these events were to occur, our operations may be interrupted and our ability to fund our operations or obligations, as well as our
business, results of operations, and financial condition, could be adversely affected. In particular, if
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the debt under our revolving credit facility were to be accelerated, we may not have sufficient cash or be able to borrow sufficient funds to refinance the debt or
sell sufficient assets to repay the debt, which could immediately materially and adversely affect our business, cash flows, results of operations, and financial
condition. Even if we were able to obtain new financing, it may not be on commercially reasonable terms or on terms that are acceptable to us.
Our revenue growth rate has declined in recent periods and may continue to slow in the future.
Risks Related to Our Financial Performance or Results
Our rates of revenue growth have slowed and may continue to slow in future periods. Many factors may contribute to declines in our growth rates,
including higher market penetration, increased competition, particularly from the availability of less expensive and bundled competitive products, slowing
demand for our platform and declines in our rate of growth in paying users, a decrease in the growth of the overall content collaboration market, resource
allocation across our business, including investments in new technologies or products that may not drive growth in the short term, a failure by us to continue
capitalizing on growth opportunities, the impact of catastrophic events on economic conditions or on our current and prospective paying users, fluctuations in
foreign currency exchange rates, and the maturation of our business, among others. You should not rely on the revenue growth of any prior quarterly or annual
period as an indication of our future performance. If our growth rates decline further, investors’ perceptions of our business and the trading price of our Class A
common stock could be adversely affected.
We have a history of net losses, we may increase expenses in the future, and we may not be able to achieve or maintain profitability.
Although we had been profitable on a GAAP basis in prior fiscal quarters, 2021 was our first profitable full fiscal year. We may, however, not achieve or
maintain profitability in future periods, or, if we are profitable, we may not fully achieve our profitability targets. We incurred net losses on an annual basis from
our inception through 2020. We generated net income of $553.2 million and $335.8 million during the years ended December 31, 2022 and 2021, respectively
and we had an accumulated deficit of $2,772.1 million as of December 31, 2022. As we strive to grow our business, expenses may increase, particularly as we
continue to make investments to scale our business, reposition our products or respond to new technologies. For example, we will need an increasing amount of
technical infrastructure to continue to satisfy the needs of our user base. Our research and development expenses may also increase as we plan to continue to
hire employees for our engineering, product, and design teams to support these efforts. These investments may not result in increased revenue or growth in our
business or our revenue may not grow to the extent we expect and expense growth may outpace revenue. Further, we have created mobile applications and
mobile versions of Dropbox that are distributed to users primarily through app stores operated by Apple and Google, each of whom charge us in-application
purchase fees. As a result, if more of our users subscribe to our products through mobile applications, these fees may have an adverse impact on our results of
operations. In addition, although we anticipate that our shift to a Virtual First work model will have a long-term positive impact on our financial results and
business operations, the impact remains uncertain. We have incurred impairment charges related to our facilities and may incur additional or unanticipated
expense related to subleasing our facilities, including lower than anticipated sublease income that may result in additional or higher impairment charges than we
have currently estimated, particularly if we are unable to sublease our unused office space on favorable terms or at all or if our subtenants fail to make lease
payments to us in connection with our shift to a Virtual First model. We may also encounter unforeseen or unpredictable factors, including fluctuations in
foreign currency exchange rates, unforeseen operating expenses, complications, or delays, which may result in increased costs, or cause us to generate less
sublease income than we have currently estimated. Furthermore, it is difficult to predict the size and growth rate of our market, user demand for our platform or
for any new features or products we develop, user adoption and renewal of our platform or of any new features or products we develop, the entry of competitive
products and services, or the success of existing competitive products and services. As a result, we may not achieve or maintain profitability in future periods, or
we may not otherwise achieve our goals related to profitability. If we fail to grow our revenue sufficiently to keep pace with our investments and other expenses,
our results of operations and financial condition would be adversely affected.
Servicing our 2026 Notes and 2028 Notes may require a significant amount of cash, and we may not have sufficient cash flow or the ability to raise the
funds necessary to satisfy our obligations under the 2026 Notes or 2028 Notes.
Our ability to make scheduled payments of the principal of, to pay interest on or to refinance our indebtedness, including the 2026 Notes and 2028 Notes,
or to make cash payments in connection with any conversion of the 2026 Notes, 2028 Notes or upon any fundamental change if holders of the applicable series
of notes require us to repurchase their notes for cash, depends on our future performance, which is subject to economic, financial, competitive and other factors
beyond our control. Our
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business may not generate cash flow from operations in the future sufficient to service our indebtedness and make necessary capital expenditures. If we are
unable to generate such cash flow, we may be required to adopt one or more alternatives, such as selling assets, restructuring indebtedness or obtaining
additional equity capital on terms that may be onerous or highly dilutive. Our ability to refinance our indebtedness will depend on the capital markets and our
financial condition at such time. We may not be able to engage in any of these activities or engage in these activities on desirable terms, which could result in a
default on our debt obligations, which would materially and adversely impact our business, financial condition and operating results.
Our quarterly results may fluctuate significantly and may not fully reflect the underlying performance of our business.
Our quarterly results of operations, including our revenue, gross margin, operating margin, profitability, cash flow from operations, and deferred revenue,
may vary significantly in the future and period-to-period comparisons of our results of operations may not be meaningful. Accordingly, the results of any one
quarter should not be relied upon as an indication of future performance. For example, while we have been profitable on a GAAP basis in prior fiscal quarters,
our quarterly operating results have fluctuated in the past and will fluctuate in the future. Our quarterly results of operations may fluctuate as a result of a variety
of factors, many of which are outside of our control, and as a result, may not fully reflect the underlying performance of our business. Factors that may cause
fluctuations in our quarterly results of operations include, without limitation, those listed below:
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our ability to retain and upgrade paying users;
our ability to attract new paying users and convert registered to paying users;
the timing of expenses and recognition of revenue;
the amount and timing of operating expenses related to the maintenance and expansion of our business, operations, and infrastructure, as well
as entry into operating and finance leases;
the timing of expenses related to acquisitions;
any large indemnification payments to our users or other third parties;
changes in our pricing policies or those of our competitors;
the timing and success of new product feature and service introductions by us or our competitors;
network outages or actual or perceived security breaches;
changes in the competitive dynamics of our industry, including consolidation among competitors;
changes in laws and regulations that impact our business;
general economic and market conditions;
fluctuations in foreign currency exchange rates;
catastrophic events, including earthquakes, fires, floods, tsunamis, or other weather events, power loss, telecommunications failures, software
or hardware malfunctions, cyber-attack, war, or terrorist attacks, and pandemics;
changes in reserves or other non-cash credits or charges, such as the impairment charges as a result of adverse changes in the corporate real
estate market which has impacted our subleasing strategy in conjunction with our shift to Virtual First, and releases of deferred tax asset
valuation allowances; and
any other impacts of shifting our operations to a Virtual First work model.
Fluctuation in quarterly results may negatively impact the value of our securities.
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Our results of operations may not immediately reflect downturns or upturns in sales because we recognize revenue from our users over the term of their
subscriptions with us.
We recognize revenue from subscriptions to our platform over the terms of these subscriptions. Our subscription arrangements generally have monthly or
annual contractual terms, and we also have a small percentage of multi-year contractual terms. Amounts that have been billed are initially recorded as deferred
revenue until the revenue is recognized. As a result, a large portion of our revenue for each quarter reflects deferred revenue from subscriptions entered into
during previous quarters, and downturns or upturns in subscription sales, or renewals and potential changes in our pricing policies may not be reflected in our
results of operations until later periods. Our subscription model also makes it difficult for us to rapidly increase our revenue through additional sales in any
period, as subscription revenue from new users is recognized over the applicable subscription term. By contrast, a significant majority of our costs are expensed
as incurred, which occurs as soon as a user starts using our platform. As a result, an increase in users could result in our recognition of more costs than revenue
in the earlier portion of the subscription term. We may not attain sufficient revenue to maintain positive cash flow from operations or achieve profitability in any
given period.
Our results of operations, which are reported in U.S. dollars, could be adversely affected if currency exchange rates fluctuate substantially in the future.
We conduct our business across approximately 180 countries around the world. As we continue to expand our international operations, we will become
more exposed to the effects of fluctuations in currency exchange rates. This exposure is the result of selling in multiple currencies and operating in foreign
countries where the functional currency is the local currency. In 2022, 27% of our sales were denominated in currencies other than U.S. dollars. Our expenses,
by contrast, are primarily denominated in U.S. dollars. As a result, any increase in the value of the U.S. dollar against these foreign currencies has in the past
and could in the future cause our revenue to decline relative to our costs, thereby decreasing our margins. Our results of operations are primarily subject to
fluctuations in the Euro and British pound sterling. Because we conduct business in currencies other than U.S. dollars, but report our results of operations in
U.S. dollars, we also face translation exposure to fluctuations in currency exchange rates, which could hinder our ability to predict our future results and
earnings and could materially impact our results of operations. We do not currently maintain a program to hedge exposures to non-U.S. dollar currencies.
We are subject to counterparty risk with respect to the convertible note hedge transactions.
In connection with the pricing of the 2026 Notes and 2028 Notes, we entered into convertible note hedge transactions with certain financial institutions or
affiliates of financial institutions, which we refer to as the “option counterparties,” and we will be subject to the risk that one or more of such option
counterparties may default under the convertible note hedge transactions. Our exposure to the credit risk of the option counterparties will not be secured by any
collateral. If any option counterparty becomes subject to insolvency proceedings, we will become an unsecured creditor in those proceedings with a claim equal
to our exposure at that time under the convertible note hedge transaction. Our exposure will depend on many factors but, generally, the increase in our exposure
will be correlated to the increase in the market price of our Class A common stock and in the volatility of the market price of our Class A common stock. In
addition, upon a default by the option counterparty, we may suffer adverse tax consequences and dilution with respect to our Class A common stock. We can
provide no assurance as to the financial stability or viability of any option counterparty.
Our ability to use our net operating loss carryforwards and certain other tax attributes may be limited.
As of December 31, 2022, we had federal, state, and foreign net operating loss carryforwards and federal and state research credit carryforwards available
to reduce our future taxable income and/or tax liabilities. It is possible that we will not generate sufficient taxable income in time to use all of these net
operating loss carryforwards and/or tax credits before their expiration. Under Sections 382 and 383 of the Internal Revenue Code of 1986, as amended, or the
Code, if a corporation undergoes an “ownership change,” the corporation’s ability to use its pre-change net operating loss carryforwards and other pre-change
attributes, such as research tax credits, to offset its post-change income may be limited. In general, an “ownership change” will occur if there is a cumulative
change in our ownership by “5-percent stockholders” that exceeds 50 percentage points over a rolling three-year period. Similar rules and other limitations may
apply under state tax laws. We have determined that we have experienced multiple ownership changes and, as a result, the annual utilization of our net operating
loss carryforwards and other pre-change attributes will be subject to limitation. However, we do not expect that the annual limitations will significantly impact
our ability to utilize our net operating loss or tax credit carryforwards prior to expiration.
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Our operating results may be harmed if we are required to collect sales or other related taxes for our subscription services in jurisdictions where we have
not historically done so.
We collect sales and value-added tax as part of our subscription agreements in a number of jurisdictions. One or more states or countries may seek to
impose incremental or new sales, use, or other tax collection obligations on us, including for past sales by us or our resellers and other partners. A successful
assertion by a state, country, or other jurisdiction that we should have been or should be collecting additional sales, use, or other taxes on our services could,
among other things, result in substantial tax liabilities for past sales, create significant administrative burdens for us, discourage users from purchasing our
platform, or otherwise harm our business, results of operations, and financial condition.
Our results of operations and financial condition could be materially affected by the enactment of legislation implementing changes in the U.S. or foreign
taxation of international business activities or the adoption of other tax reform policies.
Due to the increasing focus by government taxing authorities on multinational companies, the tax laws of certain countries in which we do business could
change on a prospective or retroactive basis or there could be changes in taxing jurisdictions' administrative interpretations, decisions, policies, and positions
with respect to current law. Any such changes could increase our liabilities for taxes, interest and penalties, lead to higher effective tax rates, and harm our cash
flows, results of operations and financial condition.
For example, many countries and the Organization for Economic Cooperation and Development (“OECD”) have proposed to reallocate some portion of
profits of large multinational companies with global revenues exceeding EUR20 billion to markets where sales arise (“Pillar One”), as well as enact a global
minimum tax rate of at least 15% for multinationals with global revenue exceeding EUR750 million (“Pillar Two”), and many countries are considering or
intend to adopt these proposals. In December 2022, the Council of the European Union ("EU") formally adopted the EU Minimum Tax Directive, which would
require member states to adopt Pillar Two into their domestic law by December 31, 2023. In addition, the United States recently enacted the “Inflation
Reduction Act” (“IRA”), which includes a 15% book-income alternative minimum tax for corporations with financial accounting profits over $1 billion and a
1% excise tax on the value of certain stock repurchases by publicly traded corporations. The alternative minimum tax is not expected to have a material adverse
impact on our business, results of operations, financial conditions, and cash flows; however, if we repurchase stock pursuant to our stock repurchase program or
otherwise, the 1% excise tax on stock repurchases generally will increase the costs to us of such repurchases. Other changes to U.S. or non-U.S. tax laws could
have an adverse impact on our business, results of operations, financial condition and cash flows.
We have publicly disclosed market opportunity estimates, growth forecasts, and key metrics, including the key metrics included in this Annual Report on
Form 10-K which could prove to be inaccurate, and any real or perceived inaccuracies may harm our reputation and negatively affect our business.
Market opportunity estimates and growth forecasts are subject to significant uncertainty and are based on assumptions and estimates that may not prove to
be accurate. The estimates and forecasts we disclose relating to the size and expected growth of our target market may prove to be inaccurate. Even if the
markets in which we compete meet the size estimates and growth we have forecasted, our business could fail to grow at similar rates, if at all. We also rely on
assumptions and estimates to calculate certain of our key metrics, such as annual recurring revenue, paying users, average revenue per paying user and free cash
flow. We regularly review and may adjust our processes for calculating our key metrics to improve their accuracy. Our key metrics may differ from estimates
published by third parties or from similarly titled metrics of our competitors due to differences in methodology. If investors or analysts do not perceive our
metrics to be accurate representations of our business, or if we discover material inaccuracies in our metrics, our reputation, business, results of operations, and
financial condition would be harmed.
Risks Related to Legal and Regulatory Compliance
We are subject to a variety of U.S. and international laws that could subject us to claims, increase the cost of operations, or otherwise harm our business
due to changes in the laws, changes in the interpretations of the laws, greater enforcement of the laws, or investigations into compliance with the laws.
We are subject to compliance with various laws, including those covering copyright, indecent content, child protection, consumer protection, and similar
matters. There have been instances where improper or illegal content has been stored on our
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platform without our knowledge. As a service provider, we do not regularly monitor our platform to evaluate the legality of content stored on it. While to date
we have not been subject to material legal or administrative actions as result of this content, the laws in this area are currently in a state of flux and vary widely
between jurisdictions. Accordingly, it may be possible that in the future we and our competitors may be subject to legal actions, along with the users who
uploaded such content. In addition, regardless of any legal liability we may face, our reputation could be harmed should there be an incident generating
extensive negative publicity about the content stored on our platform. Such publicity could harm our business and results of operations.
We are also subject to consumer protection laws that may impact our sales and marketing efforts, including laws related to subscriptions, billing, and auto-
renewal. These laws, as well as any changes in these laws, could adversely affect our self-serve model and make it more difficult for us to retain and upgrade
paying users and attract new ones. Additionally, we have in the past, are currently, and may from time to time in the future become the subject of inquiries and
other actions by regulatory authorities as a result of our business practices, including our policies and practices around subscriptions, billing, auto-renewal,
intermediary liability, privacy, and data protection. Consumer protection laws may be interpreted or applied by regulatory authorities in a manner that could
require us to make changes to our operations or incur fines, penalties or settlement expenses, which may result in harm to our business, results of operations,
and brand.
Our platform depends on the ability of our users to access the internet and our platform has been blocked or restricted in some countries for various
reasons. For example, our platform is blocked in the People’s Republic of China. If we fail to anticipate developments in the law, or fail for any reason to
comply with relevant law, our platform could be further blocked or restricted and we could be exposed to significant liability that could harm our business.
We are also subject to various U.S. and international anti-corruption laws, such as the U.S. Foreign Corrupt Practices Act, the U.K. Bribery Act, and Irish
Criminal Justice (Corruption Offences) Act 2018, as well as other similar anti-bribery and anti-kickback laws and regulations. These laws and regulations
generally prohibit companies and their employees and intermediaries from authorizing, offering, or providing improper payments or benefits to officials and
other recipients for improper purposes. Although we take precautions to prevent violations of these laws, our exposure for violating these laws increases as we
continue to expand our international presence and any failure to comply with such laws could harm our reputation and our business.
We are subject to export and import control laws and regulations that could impair our ability to compete in international markets or subject us to liability if
we violate such laws and regulations.
We are subject to U.S. export controls and sanctions regulations that prohibit the shipment or provision of certain products and services to certain
countries, governments, and persons targeted by U.S. sanctions. While we take precautions to prevent our products and services from being exported in
violation of these laws, including implementing IP address blocking, we may have experienced violations in the past and we cannot guarantee that the
precautions we take will prevent future violations of export control and sanctions laws. For example, in 2017, we discovered that our platform had been
accessed by certain users in apparent violation of United States sanctions regulations. We filed an Initial Voluntary Self Disclosure in October 2017 with the
Office of Foreign Assets Control, or OFAC, and a Final Voluntary Self Disclosure with OFAC in February 2018. In October 2018, OFAC notified us that it had
completed its review of these matters and closed its review with the issuance of a Cautionary Letter. No monetary penalties were assessed with respect to the
2018 filing. If in the future we are found to be in violation of U.S. sanctions or export control laws, it could result in substantial fines and penalties for us and for
the individuals working for us, particularly in light of warning letters we previously received from OFAC.
In addition, various countries regulate the import and export of certain encryption and other technology, including import and export permitting and
licensing requirements, and have enacted laws that could limit our ability to distribute our products or could limit our users’ ability to access our platform in
those countries. Changes in our platform or client-side software, or future changes in export and import regulations may prevent our users with international
operations from deploying our platform globally or, in some cases, prevent the export or import of our platform to certain countries, governments, or persons
altogether. Any change in export or import regulations, economic sanctions or related legislation, or change in the countries, governments, persons or
technologies targeted by such regulations, could result in decreased use of our platform by, or in our decreased ability to export or sell subscriptions to our
platform to, existing or potential users with international operations. Any decreased use of our platform or limitation on our ability to export or sell our products
would likely adversely affect our business, results of operations, and financial results.
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Our actual or perceived failure to comply with privacy, data protection, and information security laws, regulations, and obligations could harm our
business.
We receive, store, process, and use personal information and other user content. Numerous federal, state, local, and international laws and regulations
address privacy, data protection, information security, and the storing, sharing, use, processing, transfer, disclosure, and protection of personal information and
other content, the scope of which are changing, subject to differing interpretations, and may be inconsistent among jurisdictions, or conflict with other rules. We
also post privacy policies and are subject to contractual obligations to third parties related to privacy, data protection, and information security. We strive to
comply with applicable laws, regulations, policies, and other legal obligations relating to privacy, data protection, and information security to the extent
possible. However, the regulatory framework for privacy and data protection worldwide is, and is likely to remain, uncertain for the foreseeable future, and it is
possible that these or other actual or alleged obligations may be interpreted and applied in a manner that is inconsistent from one jurisdiction to another and may
conflict with other rules or our practices.
We also expect that there will continue to be new laws, regulations, and industry standards concerning privacy, data protection, and information security
proposed and enacted in various jurisdictions. For example, in May 2018, the General Data Protection Regulation, or GDPR, went into effect in the EU. The
GDPR imposed more stringent data protection requirements and provides greater penalties for noncompliance than previous data protection laws.
Additionally, although we have self-certified under the U.S.-EU and U.S.-Swiss Privacy Shield Frameworks with regard to our transfer of certain personal
data from the European Economic Area ("EEA") and Switzerland to the United States, on July 16, 2020, the Court of Justice of the European Union ("CJEU")
invalidated Decision 2016/1250 on the adequacy of the protection provided by the U.S.-EU Privacy Shield Framework, and on September 8, 2020, the Swiss
Federal Data Protection and Information Commissioner announced that it no longer considers the U.S.-Swiss Privacy Shield adequate for the purposes of
transfers of personal data from Switzerland to the U.S. While we rely on legal mechanisms to transfer data from the EEA, the United Kingdom, and Switzerland
to the United States, there is some regulatory uncertainty surrounding the future of data transfers from these locations to the United States, and we are closely
monitoring regulatory developments in this area. In its decision invalidating the U.S.-EU Privacy Shield Framework, the CJEU also imposed additional
obligations on companies relying on standard contractual clauses approved by the European Commission (“SCCs”) to transfer personal data. The CJEU
decision may result in data protection regulators applying differing standards for, and requiring additional measures in connection with, transfers of personal
data from the EEA and Switzerland to the United States. The European Commission issued revised SCCs in June 2021 that are required to be implemented. The
revised SCCs and other developments relating to cross-border data transfer may require us to implement additional contractual and technical safeguards for any
personal data transferred out of the EEA and Switzerland, which may increase our costs, lead to increased regulatory scrutiny or liability, necessitate additional
contractual negotiations, and adversely impact our business, results of operations, and financial results.
Additionally, several states in the U.S. have enacted new data privacy laws. For example, the California Consumer Privacy Act of 2018 ("CCPA"), which
affords consumers expanded privacy protections, went into effect on January 1, 2020. The California Privacy Rights Act ("CPRA"), effective as of January 1,
2023, significantly modified the CCPA, resulting in uncertainty and requiring us to incur additional costs and expenses. The enactment of the CCPA has
prompted similar legislative developments in other states, such as Virginia, which in March 2021 enacted a Consumer Data Protection Act that went into effect
January 1, 2023, Colorado, which in June 2021 enacted a Colorado Privacy Act that will go into effect July 1, 2023, Utah, which in March 2022 enacted a Utah
Consumer Privacy Act that will go into effect July 1, 2023, and Connecticut, which in May 2022 enacted a similar law, An Act Concerning Personal Data
Privacy and Online Monitoring, that will go into effect July 1, 2023. Similar laws are being considered by other state legislatures. These developments create
the potential for a patchwork of overlapping but different state laws. The effects of the CCPA and these other laws remain far-reaching, and depending on final
regulatory guidance and other related developments, may require us to modify our data processing practices and policies and to incur substantial costs and
expenses in an effort to comply. Similarly, a number of legislative initiatives in the EEA and the United States, at both the federal and state level, as well as
other jurisdictions have been proposed or enacted, and could impose new obligations in areas affecting our business. For example, on November 17, 2022, the
Digital Services Act (“DSA”) entered into force in the EU and includes new obligations to limit the spread of illegal content and illegal products online,
increase the protection of minors, and provide users with more choice and transparency and allows for fines of up to 6% of annual turnover. The impacts of the
DSA on the overall industry, business models and our operations are uncertain, and these regulations could result in changes to our subscriptions or introduce
new operational requirements and administrative costs, each of which could have an adverse effect on our business, results of operations, and financial
condition.
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In addition, some countries are considering or have passed legislation implementing data protection requirements or requiring local storage and processing
of data, or similar requirements, that could increase the cost and complexity of delivering our services.
With laws and regulations such as the GDPR in the EU and the CCPA in the U.S. imposing new and relatively burdensome obligations, and with
substantial uncertainty over the interpretation and application of these and other laws and regulations, we may face challenges in addressing their requirements
and making necessary changes to our policies and practices, and may incur significant costs and expenses in an effort to do so. Any failure or perceived failure
by us to comply with our privacy policies, our privacy-related obligations to users or other third parties, or any of our other legal obligations relating to privacy,
data protection, or information security may result in governmental investigations, enforcement actions or other proceedings, litigation, claims, or public
statements against us by consumer advocacy groups or others, and could result in significant liability or cause our users to lose trust in us, which could have an
adverse effect on our reputation and business.
Furthermore, the costs of compliance with, and other burdens imposed by, the laws, regulations, and policies that are applicable to the businesses of our
users may limit the adoption and use of, and reduce the overall demand for, our services. In addition to government regulation, self-regulatory standards and
industry-specific regulations, other industry standards or requirements may legally or contractually apply to us or be argued to apply to us, or we may elect to
comply with, or to facilitate our customers’ compliance with, such regulations, standards, requirements, or other actual or asserted obligations. If we are unable
or are perceived to be unable to comply with any of these regulations, standards, requirements, or other actual or asserted obligations, if we are unable to
maintain certifications or standards relevant to our customers, or if our customers are unable to obtain regulatory approval to use our services where required,
our business may be harmed. In addition, an inability to satisfy the standards of certain government agencies that our customers may expect may have an
adverse impact on our business and results.
Additionally, if third parties we work with, such as vendors or developers, violate applicable laws or regulations or our policies, such violations may also
put our users’ content at risk and could in turn have an adverse effect on our business. Any significant change to applicable laws, regulations, or industry
practices regarding the collection, use, retention, security, or disclosure of our users’ content, or regarding the manner in which the express or implied consent of
users for the collection, use, retention, or disclosure of such content is obtained, could increase our costs and require us to modify our services and features,
possibly in a material manner, which we may be unable to complete, and may limit our ability to store and process user data or develop new services and
features.
Our business could be adversely impacted by changes in internet access for our users or laws specifically governing the internet.
Our platform depends on the quality of our users’ access to the internet. Certain features of our platform require significant bandwidth and fidelity to work
effectively. Internet access is frequently provided by companies that have significant market power that could take actions that degrade, disrupt or increase the
cost of user access to our platform, which would negatively impact our business. We could incur greater operating expenses and our user acquisition and
retention could be negatively impacted if network operators:
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implement usage-based pricing;
discount pricing for competitive products;
otherwise materially change their pricing rates or schemes;
charge us to deliver our traffic at certain levels or at all;
throttle traffic based on its source or type;
implement bandwidth caps or other usage restrictions; or
otherwise try to monetize or control access to their networks
On June 11, 2018, the repeal of the Federal Communications Commission’s, or FCC, “net neutrality” rules took effect and returned to a “light-touch”
regulatory framework. The prior rules were designed to ensure that all online content is treated the same by internet service providers and other companies that
provide broadband services. Additionally, California and a number
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of other states are considering or have enacted legislation or executive actions that would regulate the conduct of broadband providers. We cannot predict
whether the FCC order or state initiatives will be modified, overturned, or vacated by legal action of the court, federal legislation, or the FCC. With the repeal of
net neutrality rules in effect, we could incur greater operating expenses, which could harm our results of operations. As the internet continues to experience
growth in the number of users, frequency of use, and amount of data transmitted, the internet infrastructure that we and our users rely on may be unable to
support the demands placed upon it. The failure of the internet infrastructure that we or our users rely on, even for a short period of time, could undermine our
operations and harm our results of operations.
In addition, there are various laws and regulations that could impede the growth of the internet or other online services, and new laws and regulations may
be adopted in the future. These laws and regulations could, in addition to limiting internet neutrality, involve taxation, tariffs, privacy, data protection, content,
copyrights, distribution, electronic contracts and other communications, consumer protection, and the characteristics and quality of services, any of which could
decrease the demand for, or the usage of, our platform. Legislators and regulators may make legal and regulatory changes, or interpret and apply existing laws,
in ways that require us to incur substantial costs, expose us to unanticipated civil or criminal liability, or cause us to change our business practices. These
changes or increased costs could materially harm our business, results of operations, and financial condition.
We are currently, and may be in the future, party to intellectual property rights claims and other litigation matters and, if resolved adversely, they could have
a significant impact on our business, results of operations, or financial condition.
We own a large number of patents, copyrights, trademarks, domain names, and trade secrets and, from time to time, are subject to litigation based on
allegations of infringement, misappropriation or other violations of intellectual property, or other rights. As we face increasing competition and gain an
increasingly high profile, the possibility of intellectual property rights claims, commercial claims, and other assertions against us grows. We have in the past
been, are currently, and may from time to time in the future become, a party to litigation and disputes related to our intellectual property, our business practices,
transactions involving our securities and our platform. For example, we were recently subject to a number of putative class action lawsuits in state and federal
court alleging federal securities law violations in connection with our IPO. Although the lawsuits in both the federal and state courts have since been dismissed,
we may not be successful in an appeal proceeding or in winning dismissal of an amended complaint. The costs of supporting litigation and dispute resolution
proceedings are considerable, and there can be no assurances that a favorable outcome will be obtained. Our business, results of operations, and financial
condition could be materially and adversely affected by such costs and any unfavorable outcomes in current or future litigation. We may need to settle litigation
and disputes on terms that are unfavorable to us, or we may be subject to an unfavorable judgment that may not be reversible upon appeal. The terms of any
settlement or judgment may require us to cease some or all of our operations or pay substantial amounts to the other party. With respect to any intellectual
property rights claim, we may have to seek a license to continue practices found to be in violation of third-party rights, which may not be available on
reasonable terms and may significantly increase our operating expenses. A license to continue such practices may not be available to us at all, and we may be
required to develop alternative non-infringing technology or practices or discontinue the practices. The development of alternative, non-infringing technology or
practices could require significant effort and expense.
Our failure to protect our intellectual property rights and proprietary information could diminish our brand and other intangible assets.
We rely and expect to continue to rely on a combination of patents, patent licenses, trade secrets, domain name protections, trademarks, and copyright laws,
as well as confidentiality and license agreements with our employees, consultants, and third parties, to protect our intellectual property and proprietary rights. In
the United States and abroad, we have over 1,550 issued patents and more than 300 pending patent applications. However, third parties may knowingly or
unknowingly infringe our proprietary rights, third parties may challenge our proprietary rights, pending and future patent, trademark, and copyright applications
may not be approved, and we may not be able to prevent infringement without incurring substantial expense. We have also devoted substantial resources to the
development of our proprietary technologies and related processes. In order to protect our proprietary technologies and processes, we rely in part on trade secret
laws and confidentiality agreements with our employees, consultants, and third parties. These agreements may not effectively prevent disclosure of confidential
information and may not provide an adequate remedy in the event of unauthorized disclosure of confidential information. In addition, others may independently
discover our trade secrets, in which case we would not be able to assert trade secret rights, or develop similar technologies and processes. Further, laws in
certain jurisdictions may afford little or no trade secret protection, and any changes in, or unexpected interpretations of, the intellectual property laws in any
country in which we operate may compromise our ability to enforce our intellectual property rights. Costly and time-consuming litigation could be necessary to
enforce and determine the scope of our proprietary rights. If the protection of our proprietary rights is inadequate to prevent use or
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appropriation by third parties, the value of our platform, brand, and other intangible assets may be diminished and competitors may be able to more effectively
replicate our platform and its features. Any of these events could materially and adversely affect our business, results of operations, and financial condition.
The trading price of our Class A common stock may be volatile, and you could lose all or part of your investment.
Risks Related to Ownership of Our Class A Common Stock
The trading price of our Class A common stock may be volatile and could be subject to fluctuations in response to various factors, some of which are
beyond our control. Factors that could cause fluctuations in the trading price of our Class A common stock include the following:
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price and volume fluctuations in the overall stock market from time to time;
volatility in the trading prices and trading volumes of technology stocks;
changes in operating performance and stock market valuations of other technology companies generally, or those in our industry in particular;
sales of shares of our Class A common stock by us or our stockholders;
failure of securities analysts to maintain coverage of us, changes in financial estimates by securities analysts who follow our company, or our
failure to meet these estimates or the expectations of investors;
the financial projections we may provide to the public, any changes in those projections, or our failure to meet those projections;
announcements by us or our competitors of new products, features, or services;
the public’s reaction to our press releases, other public announcements, and filings with the SEC;
rumors and market speculation involving us or other companies in our industry;
actual or anticipated changes in our results of operations or fluctuations in our results of operations;
actual or anticipated changes in our key metrics;
actual or anticipated developments in our business, our competitors’ businesses or the competitive landscape generally;
actual or perceived breaches of, or failures related to, privacy, data protection or data security;
litigation involving us, our industry, or both, or investigations by regulators into our operations or those of our competitors;
developments or disputes concerning our intellectual property or other proprietary rights;
announced or completed acquisitions of businesses, products, services, or technologies by us or our competitors;
new laws or regulations or new interpretations of existing laws or regulations applicable to our business;
changes in accounting standards, policies, guidelines, interpretations, or principles;
any significant change in our management; and
general economic conditions and slow or negative growth of our markets and catastrophic events, including earthquakes, fires, floods,
tsunamis, or other weather events, power loss, telecommunications failures,
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software or hardware malfunctions, cyber-attack, war, such as the conflict between Russia and Ukraine, or terrorist attacks, and pandemics.
In addition, in the past, following periods of volatility in the overall market and the market price of a particular company’s securities, securities class
action litigation has often been instituted against these companies. For example, we were recently subject to a number of putative class action lawsuits in state
and federal court alleging federal securities law violations in connection with our IPO. Although the lawsuits in both the federal and state courts have since been
dismissed, we may not be successful in an appeal proceeding or in winning dismissal of an amended complaint. This recent litigation, and any securities
litigation that may be instituted against us in the future, could result in substantial costs and a diversion of our management’s attention and resources.
The multi-class structure of our common stock has the effect of concentrating voting control with those stockholders who held our capital stock prior to the
completion of our IPO, and it may depress the trading price of our Class A common stock.
Our Class A common stock has one vote per share, our Class B common stock has ten votes per share, and our Class C common stock has no voting
rights, except as otherwise required by law. As of December 31, 2022, our directors, executive officers and holders of more than 5% of our common stock, and
their respective affiliates, held in the aggregate 79.3% of the voting power of our capital stock, with Mr. Houston holding approximately 74.4% of the voting
power of our capital stock. We are including the Co-Founder Grant (as defined in “Significant Impacts of Stock-Based Compensation” included in Part II, Item
7 of this report) in this calculation since the shares underlying such grant are legally issued and outstanding shares of our Class A common stock and Mr.
Houston is able to vote these shares prior to their vesting. Because of the ten-to-one voting ratio between our Class B and Class A common stock, the holders of
our Class B common stock collectively will continue to control a majority of the combined voting power of our common stock and therefore be able to control
all matters submitted to our stockholders for approval so long as the shares of Class B common stock represent at least 9.1% of all outstanding shares of our
Class A and Class B common stock. This concentrated control will limit or preclude other stockholders' ability to influence corporate matters for the foreseeable
future, including the election of directors, amendments of our organizational documents, and any merger, consolidation, sale of all or substantially all of our
assets, or other major corporate transaction requiring stockholder approval. In addition, this may prevent or discourage unsolicited acquisition proposals or
offers for our capital stock that other stockholders may feel are in their best interests as one of our stockholders.
Future transfers or sales by holders of Class B common stock will generally result in those shares converting to Class A common stock, except for certain
transfers described in our amended and restated certificate of incorporation, including transfers effected for estate planning purposes where sole dispositive
power and exclusive voting control with respect to the shares of Class B common stock is retained by the transferring holder and transfers between our co-
founders. In addition, each outstanding share of Class B common stock held by a stockholder who is a natural person, or held by the permitted entities or
permitted transferees of such stockholder (as described in our amended and restated certificate of incorporation), will convert automatically into one share of
Class A common stock upon the death of such natural person. In the event of Mr. Houston's death or permanent and total disability, shares of Class B common
stock held by Mr. Houston, his permitted entities or permitted transferees will convert to Class A common stock, provided that the conversion will be deferred
for nine months, or up to 18 months if approved by a majority of our independent directors, following his death or permanent and total disability. The
conversion of Class B common stock to Class A common stock will have the effect, over time, of increasing the relative voting power of those individual
holders of Class B common stock who retain their shares in the long term.
In addition, because our Class C common stock carries no voting rights (except as otherwise required by law), if we issue Class C common stock in the
future, the holders of Class B common stock may be able to elect all of our directors and to determine the outcome of most matters submitted to a vote of our
stockholders for a longer period of time than would be the case if we issued Class A common stock rather than Class C common stock in such transactions.
Substantial future sales could depress the market price of our Class A common stock.
The market price of our Class A common stock could decline as a result of a large number of sales of shares of such stock, and the perception that these
sales could occur may also depress the market price of our Class A common stock, particularly if those sales are by our officers and directors and their affiliates.
Sales of our shares may make it more difficult for us to sell equity securities in the future at a time and at a price that we deem appropriate. These sales
also could cause the trading price of our Class A common stock to fall and make it more difficult for you to sell shares of our Class A common stock.
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Transactions relating to our 2026 Notes and 2028 Notes may dilute the ownership interest of stockholders, or may otherwise depress the price of our
common stock.
If the 2026 Notes or the 2028 Notes are converted by holders of such series, we are required under the applicable indenture to pay cash up to the aggregate
principal amount converted and pay or deliver, as the case may be, cash, Class A common stock, or any combination of cash or Class A common stock, at our
election, in respect of the remainder, if any, of our conversion obligation in excess of the aggregated principal amount of such notes converted. If we elect to
deliver any Class A common stock upon conversion of the 2026 Notes or the 2028 Notes with respect to our conversion obligation in excess of the aggregated
principal amount of such notes converted, if any, it would dilute the ownership interests of existing stockholders. Any sales in the public market of the Class A
common stock issuable upon such conversion could adversely affect prevailing market prices of our Class A common stock. In addition, certain holders of the
2026 Notes or the 2028 Notes may engage in short selling to hedge their position in the convertible notes. Anticipated future issuances of shares of our Class A
common stock upon conversion of the 2026 Notes or 2028 Notes could depress the price of our Class A common stock.
Delaware law and provisions in our restated certificate of incorporation and restated bylaws could make a merger, tender offer, or proxy contest difficult,
thereby depressing the market price of our Class A common stock.
Our status as a Delaware corporation and the anti-takeover provisions of the Delaware General Corporation Law may discourage, delay, or prevent a
change in control by prohibiting us from engaging in a business combination with an interested stockholder for a period of three years after the person becomes
an interested stockholder, even if a change of control would be beneficial to our existing stockholders. In addition, our restated certificate of incorporation and
restated bylaws contain provisions that may make the acquisition of our company more difficult, including the following:
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any transaction that would result in a change in control of our company requires the approval of a majority of our outstanding Class B
common stock voting as a separate class;
our multi-class common stock structure, which provides our holders of Class B common stock with the ability to significantly influence the
outcome of matters requiring stockholder approval, even if they own significantly less than a majority of the shares of our outstanding Class A
common stock, Class B common stock, and Class C common stock;
• when the outstanding shares of Class B common stock represent less than a majority of the total combined voting power of our Class A and
Class B common stock, or the Voting Threshold Date, our Board of Directors will be classified into three classes of directors with staggered
three-year terms, and directors will only be able to be removed from office for cause;
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until the Class B common stock, as a class, converts to Class A common stock, any amendments to our restated certificate of incorporation
will require the approval of two-thirds of the combined vote of our then-outstanding shares of Class A common stock and Class B common
stock; and following the conversion of our Class B common stock, as a class, to Class A common stock, certain amendments to our amended
and restated certificate of incorporation will require the approval of two-thirds of our then outstanding voting power;
our amended and restated bylaws will provide that approval of stockholders holding two-thirds of our outstanding voting power voting as a
single class is required for stockholders to amend or adopt any provision of our bylaws;
after the Voting Threshold Date our stockholders will only be able to take action at a meeting of stockholders, and will not be able to take
action by written consent for any matter;
until the Voting Threshold Date, our stockholders will be able to act by written consent only if the action is first recommended or approved by
the Board of Directors;
vacancies on our Board of Directors will be able to be filled only by our Board of Directors and not by stockholders;
only the chairman of our Board of Directors, our chief executive officer, a majority of our Board of Directors, or, until the Class B common
stock, as a class, converts to Class A common stock, a stockholder holding
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thirty percent of the combined voting power of our Class A and Class B common stock are authorized to call a special meeting of
stockholders;
certain litigation against us may be required to be brought in Delaware;
our restated certificate of incorporation authorizes undesignated preferred stock, the terms of which may be established and shares of which
may be issued, without the approval of the holders of Class A common stock; and
advance notice procedures apply for stockholders to nominate candidates for election as directors or to bring matters before an annual meeting
of stockholders.
These anti-takeover defenses could discourage, delay, or prevent a transaction involving a change in control of our company. These provisions could also
discourage proxy contests and make it more difficult for stockholders to elect directors of their choosing and to cause us to take other corporate actions they
desire, any of which, under certain circumstances, could limit the opportunity for our stockholders to receive a premium for their shares of our capital stock, and
could also affect the price that some investors are willing to pay for our Class A common stock.
Our amended and restated bylaws designate a state or federal court located within the State of Delaware as the exclusive forum for substantially all disputes
between us and our stockholders, and also provide that the federal district courts will be the exclusive forum for resolving any complaint asserting a cause
of action arising under the Securities Act, each of which could limit our stockholders’ ability to choose the judicial forum for disputes with us or our
directors, officers, or employees.
Our amended and restated bylaws provide that, unless we consent in writing to the selection of an alternative forum, the sole and exclusive forum for (1)
any derivative action or proceeding brought on our behalf, (2) any action asserting a claim of breach of a fiduciary duty owed by any of our directors, officers,
or other employees to us or our stockholders, (3) any action arising pursuant to any provision of the Delaware General Corporation Law, or the certificate of
incorporation or the amended and restated bylaws, or (4) any other action asserting a claim that is governed by the internal affairs doctrine shall be the Court of
Chancery of the State of Delaware (or, if the Court of Chancery does not have jurisdiction, the federal district court for the District of Delaware), in all cases
subject to the court having jurisdiction over indispensable parties named as defendants.
Our amended and restated bylaws also provide that the federal district courts of the United States of America will be the exclusive forum for resolving any
complaint asserting a cause of action arising under the Securities Act, or a Federal Forum Provision.
Any person or entity purchasing or otherwise acquiring any interest in any of our securities shall be deemed to have notice of and consented to this
provision. These exclusive-forum provisions may limit a stockholder’s ability to bring a claim in a judicial forum of its choosing for disputes with us or our
directors, officers, or other employees, which may discourage lawsuits against us and our directors, officers, and other employees.
If we face relevant litigation and are unable to enforce these provisions, we may incur additional costs associated with resolving the dispute in other
jurisdictions, which could harm our results of operations.
We cannot guarantee that our stock repurchase program will be fully implemented or that it will enhance long-term stockholder value
In February 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, in February 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 and in February 2022 our Board of Directors further authorized the repurchase of up to an additional $1.2 billion of the outstanding
shares of our Class A common stock. The repurchase program does not have an expiration date and we are not obligated to repurchase a specified number or
dollar value of shares. 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. Although we have previously announced an intention to allocate a significant portion of our free cash flow to share repurchases, any
share repurchases remain subject to the circumstances in place at that time, including prevailing market prices. As a result, there can be no guarantee around the
timing of our share repurchases, or that the volume of such repurchases will increase. In addition, as part of the IRA, the United States implemented a 1% excise
tax on the value of certain stock repurchase by publicly traded companies. This tax will generally increase the costs to us of any share repurchases. The stock
repurchase program could affect the price of our Class A common stock, increase
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volatility and diminish our cash reserves. Our repurchase program may be suspended or terminated at any time and, even if fully implemented, may not enhance
long-term stockholder value.
We do not intend to pay dividends for the foreseeable future.
We have never declared nor paid cash dividends on our capital stock. We currently intend to retain any future earnings to finance the operation and
expansion of our business and fund our stock repurchase program, and we do not expect to declare or pay any dividends in the foreseeable future. As a result,
stockholders must rely on sales of their Class A common stock after price appreciation as the only way to realize any future gains on their investment. In
addition, our revolving credit facility contains restrictions on our ability to pay dividends.
Our business could be disrupted by catastrophic events.
General Risk Factors
Occurrence of any catastrophic event, including earthquake, fire, flood, tsunami, or other weather event, power loss, telecommunications failure, software
or hardware malfunctions, cyber-attack, war, or terrorist attack, could result in lengthy interruptions in our service or result in unexpected increases in our costs.
Further, outbreaks of pandemic diseases, or the fear of such events, have resulted in responses, including government-imposed travel restrictions, grounding of
flights, and shutdown of workplaces. As a result, we are conducting business with substantial modifications, including modifications to employee travel and
employee work locations. These modifications may disrupt important business operations, such as our product development and sales and marketing activities,
and the productivity of our employees.
Additionally, our U.S. headquarters and some of the datacenters we utilize are located in the San Francisco Bay Area, a region known for seismic activity,
and our insurance coverage may not compensate us for losses that may occur in the event of an earthquake or other significant natural disaster. In addition, acts
of terrorism could cause disruptions to the internet or the economy as a whole. Even with our disaster recovery arrangements, our service could be interrupted.
If our systems were to fail or be negatively impacted as a result of a natural disaster or other event, our ability to deliver products to our users would be
impaired, we could lose critical data and we may be subject to increased costs. If we are unable to develop adequate plans to mitigate the impact of a disaster or
to ensure that our business functions continue to operate during and after a disaster, and successfully execute on those plans in the event of a disaster or
emergency, our business, results of operations, financial condition, and reputation would be harmed.
We may have exposure to greater than anticipated tax liabilities, which could adversely impact our results of operations.
We are subject to income taxes in the United States and various jurisdictions outside of the United States. Our effective tax rate could fluctuate due to
changes in the mix of earnings and losses in countries with differing statutory tax rates. Our tax expense could also be impacted by changes in non-deductible
expenses, changes in excess tax benefits of stock-based compensation, changes in the valuation of deferred tax assets and liabilities and our ability to utilize
them, the applicability of withholding taxes and effects from acquisitions. In addition to introducing a new minimum corporate income tax on certain large
corporations, and an excise tax of 1% on certain share repurchases by corporations, the recently enacted IRA increased funding for the Internal Revenue Service
(“IRS”). Although we do not anticipate the new corporate minimum income tax will currently apply, changes in the business and pending regulations on the
interpretation and application of the new corporate minimum tax may have adverse tax consequences for us. The excise tax on share repurchases may apply to
any repurchase of stock (including transactions deemed to be repurchases for U.S. income tax purposes) we undertake, which will generally increase the costs to
us of any share repurchases.
We are subject to review and audit by U.S. federal, state, local, and foreign tax authorities. Such tax authorities may disagree with tax positions we take
and if any such tax authority were to successfully challenge any such position, our financial results and operations could be materially and adversely affected.
We may also be subject to additional tax liabilities due to changes in non-income-based taxes resulting from changes in federal, state, or international tax laws,
changes in taxing jurisdictions’ administrative interpretations, decisions, policies, and positions, results of tax examinations, settlements or judicial decisions,
changes in accounting principles, or changes to our business operations, including acquisitions, as well as the evaluation of new information that results in a
change to a tax position taken in a prior period.
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If we fail to maintain an effective system of disclosure controls and internal control over financial reporting, our ability to produce timely and accurate
financial statements or comply with applicable regulations could be impaired.
We are subject to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, and the rules and
regulations of the applicable listing standards of the Nasdaq Global Select Market, or Nasdaq. We expect that the requirements of these rules and regulations
will continue to increase our legal, accounting, and financial compliance costs, make some activities more difficult, time-consuming and costly, and place
significant strain on our personnel, systems, and resources.
The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and internal control over financial
reporting. We are also required to provide an annual management report on the effectiveness of our disclosure controls and procedures over financial reporting.
We are continuing to develop and refine our disclosure controls and other procedures that are designed to ensure that information required to be disclosed by us
in the reports that we will file with the SEC is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms and that
information required to be disclosed in reports under the Exchange Act is accumulated and communicated to our principal executive and financial officers. We
are also continuing to improve our internal control over financial reporting. In order to maintain and improve the effectiveness of our disclosure controls and
procedures and internal control over financial reporting, we have expended, and anticipate that we will continue to expend, significant resources, including
accounting-related costs and significant management oversight. In addition, our independent registered public accounting firm is required to audit the
effectiveness of our internal control over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act annually. Testing, or the subsequent testing
by our independent registered public accounting firm, may reveal material weaknesses or significant deficiencies. If material weaknesses are identified or we
are not able to comply with the requirements of Section 404 in a timely manner, our reported financial results could be materially misstated, we could receive an
adverse opinion regarding our internal control over financial reporting from our independent registered public accounting firm, we could be subject to
investigations or sanctions by regulatory authorities and we could incur substantial expenses.
Our current controls and any new controls that we develop may become inadequate because of changes in conditions in our business. Additionally, to the
extent we acquire other businesses, the acquired company may not have a sufficiently robust system of internal controls and we may uncover new deficiencies.
Weaknesses in our disclosure controls and internal control over financial reporting may be discovered in the future. Any failure to develop or maintain effective
controls or any difficulties encountered in their implementation or improvement that could harm our results of operations or cause us to fail to meet our
reporting obligations and may result in a restatement of our financial statements for prior periods. Any failure to implement and maintain effective internal
control over financial reporting also could adversely affect the results of periodic management evaluations and annual independent registered public accounting
firm attestation reports regarding the effectiveness of our internal control over financial reporting that are required to be included in our periodic reports that will
be filed with the SEC. Ineffective disclosure controls and procedures and internal control over financial reporting could also cause investors to lose confidence
in our reported financial and other information, which would likely have a negative effect on the trading price of our Class A common stock. In addition, if we
are unable to continue to meet these requirements, we may not be able to remain listed on Nasdaq.
Our reported results of operations may be adversely affected by changes in accounting principles generally accepted in the United States.
Generally accepted accounting principles in the United States are subject to interpretation by the Financial Accounting Standards Board, or FASB, the
SEC, and various bodies formed to promulgate and interpret appropriate accounting principles. A change in these principles or interpretations could have a
significant effect on our reported results of operations, and may even affect the reporting of transactions completed before the announcement or effectiveness of
a change. It is difficult to predict the impact of future changes to accounting principles or our accounting policies, any of which could negatively affect our
results of operations.
We may need additional capital, and we cannot be certain that additional financing will be available on favorable terms, or at all.
Historically, we have funded our operations and capital expenditures primarily through equity issuances, cash generated from our operations, and debt
financing for capital purchases. Although we currently anticipate that our existing cash, cash equivalents and short-term investments, amounts available under
our existing credit facilities, and cash flow from operations will be sufficient to meet our cash needs for the foreseeable future, we may require additional
financing. We evaluate financing opportunities from time to time, and our ability to obtain financing will depend, among other things, on our development
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efforts, business plans, operating performance, and condition of the capital markets at the time we seek financing. We cannot assure you that additional
financing will be available to us on favorable terms when required, or at all and, in light of macroeconomic challenges, inflation and increased interest rates,
financing terms have become less favorable. If we raise additional funds through the issuance of equity or equity-linked or debt securities, those securities may
have rights, preferences or privileges senior to the rights of our Class A common stock, and our stockholders may experience dilution.
Our Class A common stock market price and trading volume could decline if securities or industry analysts do not publish research or publish inaccurate or
unfavorable research about our business.
The trading market for our Class A common stock will depend in part on the research and reports that securities or industry analysts publish about us or
our business. The analysts’ estimates are based upon their own opinions and are often different from our estimates or expectations. If one or more of the analysts
who cover us downgrade our Class A common stock or publish inaccurate or unfavorable research about our business, the price of our securities would likely
decline. If few securities analysts commence coverage of us, or if one or more of these analysts cease coverage of us or fail to publish reports on us regularly,
demand for our securities could decrease, which might cause the price and trading volume of our Class A common stock to decline.
ITEM 2. PROPERTIES
Our corporate headquarters are located in San Francisco, California, pursuant to operating leases that expire in 2033. We lease additional offices in San
Francisco and around the world, including in Austin, Texas; New York, New York; Mountain View, California; Seattle, Washington; Dublin, Ireland; and
Sydney, Australia. We have datacenter co-location facilities in California, Oregon, Texas, and Virginia. We believe that these facilities are generally suitable to
meet our needs.
ITEM 3. LEGAL PROCEEDINGS
Legal Proceedings
We are currently involved in, and may in the future be involved in, legal proceedings, claims, and government investigations in the ordinary course of
business, including legal proceedings with third parties asserting infringement of their intellectual property rights. See Note 10, “Commitments and
Contingencies” to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K for further information.
Future litigation may be necessary, among other things, to defend ourselves or our users by determining the scope, enforceability, and validity of third-
party proprietary rights or to establish our proprietary rights. The results of any current or future litigation cannot be predicted with certainty, and regardless of
the outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources, and other factors.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
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PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
Market Information for Class A Common Stock
Our Class A common stock has been listed on the Nasdaq Global Market under the symbol "DBX" since March 23, 2018.
Holders of Record
As of February 17, 2023, we had 752 holders of record of our Class A and Class B common stock, respectively, and no holders of our Class C common
stock. The actual number of stockholders is greater than this number of record holders and includes stockholders who are beneficial owners, but whose shares
are held in street name by brokers and other nominees.
Dividend Policy
We have never declared or paid any cash dividends on our capital stock. We currently intend to retain any future earnings and do not expect to pay any
dividends in the foreseeable future. Any future determination to declare cash dividends will be made at the discretion of our Board of Directors, subject to
applicable laws, and will depend on a number of factors, including our financial condition, results of operations, capital requirements, contractual restrictions,
general business conditions, and other factors that our Board of Directors may deem relevant. In addition, the terms of our revolving credit facility place certain
limitations on the amount of cash dividends we can pay, even if no amounts are currently outstanding.
Issuer Purchases of Equity Securities
The following table presents information with respect to our repurchases of Class A common stock during the quarter ended December 31, 2022.
Period
October 1 - 31
November 1 - 30
December 1 - 31
Total
Total Number of Shares
(1)
Purchased (in millions)
Average Price Paid per Share
(2)
2.95 $
(3)
2.68
$
2.40 $
8.03 $
21.16
22.06
22.73
21.93
Total Number of Shares
Purchased as Part of Publicly
Announced Programs
(in millions)
(1)
Approximate Dollar Value of
Shares that May Yet Be
Purchased Under Publicly
Announced Programs
(in millions)
(1)
2.95 $
2.60 $
2.40 $
7.95
859.66
802.28
747.70
(1)
On February 17, 2022, we announced that our Board of Directors authorized the repurchase of $1.2 billion of the outstanding shares of our Class A common
stock. Under this program, shares may be repurchased, subject to general business and market conditions and other investment opportunities, through open
market purchases or privately held negotiated transactions, including through Rule 10b5-1 plans, in each case as permitted by securities laws and other legal
requirements. The repurchase program does not have an expiration date. See Note 12 "Stockholders' (Deficit) Equity" of this Annual Report on Form 10-K for
additional information related to share repurchases.
(2)
Average price paid per share includes costs associated with the repurchases.
(3)
Includes 82,437 shares of restricted common stock delivered by certain employees upon vesting of restricted stock awards to satisfy tax withholding
requirements.
Stock Performance Graph
This performance graph shall not be deemed “soliciting material” or to be “filed” with the Securities and Exchange Commission, or the SEC, for
purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or the Exchange Act, or otherwise subject to the liabilities under that Section, and
shall not be deemed to be incorporated by reference into any of our filings under the Securities Act of 1933, as amended, or the Securities Act.
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The following graph compares (i) the cumulative total stockholder return on our Class A common stock from March 23, 2018 (the date our Class A
common stock commenced trading on the Nasdaq Global Select Market) through December 31, 2022 with (ii) the cumulative total return of the Standard &
Poor's 500 Index and the Nasdaq Computer Index over the same period, assuming the investment of $100 in our common stock and in both of the other indices
on March 23, 2018 and the reinvestment of dividends. The graph uses the closing market price on March 23, 2018 of $28.48 per share as the initial value of our
common stock. As discussed above, we have never declared or paid a cash dividend on our common stock and do not anticipate declaring or paying a cash
dividend in the foreseeable future.
*Returns are based on historical results and are not necessarily indicative of future performance. See the disclosure in Part I, Item 1A, “Risk Factors.”
Unregistered Sales of Equity Securities
None.
ITEM 6. Reserved
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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the consolidated financial
statements and related notes thereto included elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements that involve
risks and uncertainties. Our actual results could differ materially from those discussed below. Factors that could cause or contribute to such differences include,
but are not limited to, those identified below and those discussed in the section titled “Risk Factors” included elsewhere in this Annual Report on Form 10-K.
For a comparison of our results of operations for the fiscal years ended December 31, 2021 and 2020 see Item 7, Management’s Discussion and Analysis of
Financial Condition and Results of Operations, of our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, filed with the SEC on
February 18, 2022.
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 approximately 180 countries.
Since our founding in 2007, our market opportunity grew 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 allows us to scale efficiently. We’ve built a
thriving global business with 17.77 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 in U.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.
We offer FormSwift, our cloud-based service that gives individuals and businesses a simple solution to create, complete, edit, and save critical business
forms and agreements. Customers can choose between annual or monthly subscriptions based on their individual or business needs. We typically bill FormSwift
customers at the beginning of their respective terms and recognize revenue ratably over the subscription period. FormSwift primarily sells within the United
States, and the majority of its sales are in U.S. dollars.
We also offer DocSend as our secure document sharing and analytics solution. 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 of DocSend's
plans 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 within the United States, and the majority of its sales are in U.S. dollars.
We also offer Dropbox Sign, as our e-signature solution. Dropbox Sign 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
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(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 Dropbox Sign customers at the beginning of their respective terms and recognize revenue ratably over the
subscription period. We sell Dropbox Sign products globally and sell primarily in U.S. dollars.
Our Business Model
Drive new signups
We acquire users efficiently and at relatively low costs 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 (which we subsequently rebranded as Dropbox Sign), DocSend and
FormSwift.
Update on Current Economic Conditions
Our overall performance depends in part on worldwide economic and geopolitical conditions and their impact on customer behavior. Worsening economic
conditions, including changes in the corporate real estate market, rising inflation, the U.S. Federal Reserve raising interest rates, supply chain disruptions,
fluctuations in currency exchange rates, and the Russian invasion of Ukraine have impacted our results of operations for the year ended December 31, 2022.
We saw elevated headwinds from the macro environment across all lines of our business, particularly in the fourth quarter of 2022. We began to see an
increased level of price sensitivity and a reduction in licenses from our larger Teams customers. In addition to the impacts within our file, sync and share core
business, we also saw incremental macro headwinds in our DropboxSign and DocSend businesses. While we are not immune to macroeconomic conditions, we
remain optimistic about our strategy through these dynamic times as the combination of Dropbox, Dropbox Sign, DocSend, and FormSwift 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 most
important agreements.
As a result of Russia’s military action against Ukraine, various nations, including the United States, have instituted economic sanctions against the Russian
Federation. We did not experience material impacts to our financial condition and results of operations during the year ended December 31, 2022 as a result of
the war in Ukraine or the related sanctions.
Our results of operations and cash flows are also subject to fluctuations due to changes in foreign currency exchange rates relative to U.S. dollars, our
reporting currency, as well as changes in interest rates. Volatile market conditions, directly or indirectly related to the COVID-19 pandemic and other
macroeconomic events, have, at times, and may in the future negatively impact our results of operations and cash flows. Conversely, we have seen and may
continue to see cost savings from the shift to remote and distributed work for all of our employees in areas including events, travel, utilities, and other benefits.
Due to our subscription-based business model, the ongoing effects of the COVID-19 pandemic and the current macroeconomic environment may not be fully
reflected in our results of operations until future periods, if at all. For a further discussion of the
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potential impacts of the macroeconomic environment on our business, see “Risk Factors” included in Part I, Item 1A. of this report.
Virtual First
The effects of the COVID-19 pandemic led us to reimagine the way we work, resulting in our announcement in October 2020 of our shift to a Virtual First
work model pursuant to which remote work has become the primary experience for all of our employees. As a result, we expect that our workforce will
continue to become more distributed over time, although we are continuing 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 are known as "Dropbox Studios". Consistent with this
strategy, we have retained a portion of our office space while the remainder will be subleased. We recorded impairment charges related to real estate assets of
$175.2 million during the year ended December 31, 2022 as a result of adverse changes in the corporate real estate market in the San Francisco Bay area which
has impacted our subleasing strategy in conjunction with our shift to Virtual First. We recorded impairment charges of $31.3 million in the year ended
December 31, 2021, including impairment related to real estate assets acquired as part of our acquisition of DocSend. See Note 9, "Leases" for additional
information. We may incur additional charges depending on the continued recovery of the corporate real estate market or shifts in our virtual first strategy. In
addition to generating sublease income, we expect that as a result of our shift to Virtual First, we will continue to see savings in certain areas, including
reductions in facilities related costs and depreciation expense due to these impairment charges.
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, however the
changes in ARR throughout the year could be subject to seasonality. 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.
In the second quarter of 2022, we repackaged our existing Dropbox Standard and Dropbox Advanced plans to include additional features. As a result, we
increased the price for new and existing users on these plans, with new users starting in the second quarter of 2022 and existing users as their billing cycles
occur. For a majority of existing users, the increase in price is effective on their next renewal date. As a result of the price increase, combined with an increase
in paying users across our product portfolio and an increased mix of sales from our higher-priced subscription plans, we experienced an increase in Total ARR
during the year ended December 31, 2022, compared to the year ended December 31, 2021. In addition, we acquired FormSwift in the fourth quarter of 2022,
resulting in a benefit to Total ARR in the period of the acquisition.
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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 relative to the
exchange rates used in 2022.
Total ARR
Constant Currency
Total ARR
As of December 31,
2022
2021
(In millions)
2,514 $
2,261
As of December 31,
2022
2021
(In millions)
2,514 $
2,250
$
$
Revaluing our ending Total ARR for fiscal 2022 using exchange rates set at the beginning of fiscal 2023, Total ARR at the end of fiscal 2022 would be
$2,430 million.
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 first include paying users related to acquired companies among our paying users in the
period of the acquisition.
For FormSwift and DocSend, 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. FormSwift and DocSend users have been included as paying users since the respective period of acquisition; FormSwift in the fourth quarter of 2022,
and DocSend in the first quarter of 2021.
Dropbox Sign 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 Dropbox Sign
results, we include as paying users either (i) the number of users who have active paid licenses for access to the Dropbox Sign 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.
In fiscal year 2022, we 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 as well as our acquisition of FormSwift in the fourth quarter of 2022. However, our overall paying user growth rate has
declined and may decline in the future. We expect growth in paying users to fluctuate from period to period in the future.
The below table sets forth the number of paying users as of December 31, 2022 and 2021:
Paying users
49
As of December 31,
2022
2021
(In millions)
17.77
16.79
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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.
As a result of the repackaging and repricing of our existing Dropbox Standard and Dropbox Advanced plans, combined with an increased mix of sales
towards our higher-priced subscription plans, and offset by the impact of unfavorable foreign exchange rates across multiple currencies, we experienced an
increase in our average revenue per paying user during the year ended December 31, 2022, compared to the year ended December 31, 2021.
The below table sets forth our ARPU for the years ended December 31, 2022 and 2021:
ARPU
Non-GAAP Financial Measure
Year ended December 31,
2022
2021
$
134.51 $
133.73
In addition to our results determined in accordance with U.S. generally accepted accounting principles, or GAAP, we believe that free cash flow, or FCF, a
non-GAAP financial measure, is useful in evaluating our liquidity.
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 year ended December 31, 2022, compared to the year ended December 31, 2021, 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 operating efficiencies,
such as hiring in lower cost locations and reduced brand and other marketing campaign spend.
We expect our FCF to generally increase in future periods as we increase subscription sales and drive operating efficiencies. We expect to continue to
purchase infrastructure equipment to support our user base and anticipate that our capital expenditures will remain approximately consistent in future periods as
we continue to invest in our internal infrastructure, network and security. 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:
Net cash provided by operating activities
Capital expenditures
Free cash flow
50
Year ended December 31,
2022
2021
$
$
(In millions)
797.3 $
(33.8)
763.5 $
729.8
(22.1)
707.7
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Components of Our Results of Operations
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.
Our revenue growth is impacted by our number of paying users, as well as our ability to increase the average revenue per paying user. Our overall paying
user growth rate has declined and we expect growth in paying users to fluctuate from period to period in the future. Accordingly, if we do not increase the
average revenue per paying user, for example through pricing and packaging changes or increased sales of our higher priced subscription plans, to offset slower
growth or decline in paying users, our revenue and revenue growth rate will decline.
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.
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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.
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 remain relatively constant in both the near term and the long term as a percentage of revenue.
Impairment related to real estate assets
Impairment related to real estate assets consists primarily of impairment charges related to certain right-of-use assets and other lease related assets. The
impairment changes are described in Note 9 "Leases". We expect that allocable expenses will decrease in absolute dollars in future periods, as a result of lower
operating lease expense related to our right-of-use assets and common area maintenance expense following the impairment charge recorded during the year
ended December 31, 2022.
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 as well as 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 gains or losses on sale of assets, foreign currency transaction
gains and losses, lease arrangements, which include sublease income, and realized gains and losses related to our short-term investments.
Benefit from (provision for) income taxes
Benefit from (provision for) income taxes consists primarily of U.S. federal, state and foreign jurisdiction income taxes. For 2022, the difference between
the U.S. statutory rate and our effective tax rate is primarily due to changes to the valuation allowance on deferred tax assets, research credits and the impact of
capitalization of research and experimental expenditures. For 2021, the difference between the U.S. statutory rate and our effective tax rate is primarily due to
changes 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 net deferred tax assets when 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 and as a percentage of our total revenue for those periods:
Revenue
Cost of revenue
(1)
Gross profit
Operating expenses:
(1)
Research and development
Sales and marketing
General and administrative
Impairment related to real estate assets
(2)
Total operating expenses
Income from operations
Interest income (expense), net
Other income, net
Income before income taxes
(3)
Benefit from income taxes
Net income
(1)
Includes stock-based compensation as follows:
Cost of revenue
Research and development
Sales and marketing
General and administrative
Total stock-based compensation
Year ended December 31,
2022
2021
(In millions)
2,324.9 $
444.2
1,880.7
891.9
409.4
222.9
175.2
1,699.4
181.3
3.3
8.1
192.7
360.5
553.2 $
Year ended December 31,
2022
2021
(In millions)
24.7 $
232.3
22.4
51.3
330.7 $
2,157.9
444.2
1,713.7
755.9
427.5
224.6
31.3
1,439.3
274.4
(5.2)
30.1
299.3
36.5
335.8
23.2
190.1
25.0
48.8
287.1
$
$
$
$
(2)
(3)
Includes impairment charges related to real estate assets as a result of adverse changes in the corporate real estate market which has impacted our subleasing strategy in
conjunction with our shift to Virtual First. See Note 9 "Leases" for further information.
Results of Operations for the year-ended 2022 include a one-time benefit from income taxes of $420.2 million due to the release of a valuation allowance on the U.S.
federal and certain state deferred tax assets. Results of Operations for the year-ended 2021 include a one-time benefit from income taxes of $38.1 million from the release
of a valuation allowance on the Irish deferred tax assets.
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The following table sets forth our results of operations for each of the periods presented as a percentage of revenue:
Revenue
Cost of revenue
Gross profit
Operating expenses:
Research and development
Sales and marketing
General and administrative
Impairment related to real estate assets
Total operating expenses
Income from operations
Interest income (expense), net
Other income, net
Income before income taxes
Benefit from income taxes
Net income
* Percentages may not foot due to rounding.
Year ended December 31,
2022
2021
As a percentage of revenue*
100 %
19
81
38
18
10
8
73
8
—
—
8
16
24 %
100 %
21
79
35
20
10
1
67
13
—
1
14
2
16 %
Comparison of the year ended December 31, 2022 and 2021
Revenue
Revenue
Year ended
December 31,
2022
2021
$ Change
% Change
$
(In millions)
2,324.9 $
2,157.9 $
167.0
8 %
Revenue increased $167.0 million or 8% during the year ended December 31, 2022, as compared to the year ended December 31, 2021, primarily due to
an increase of $201.9 million from additional paying users and the repricing and repackaging of the Dropbox Standard and Dropbox Advanced plans in the
second quarter of 2022. These increases were offset by a $34.9 million unfavorable impact from changes in foreign exchange rates across multiple currencies.
Cost of revenue, gross profit, and gross margin
Cost of revenue
Gross profit
Gross margin
Year ended
December 31,
2022
2021
$ Change
% Change
$
(In millions)
444.2
1,880.7
$
81 %
444.2
1,713.7
$
79 %
—
167.0
— %
10 %
Cost of revenue stayed flat during the year ended December 31, 2022, as compared to the year ended December 31, 2021, primarily due to decreases of
$5.1 million in infrastructure costs and $2.3 million in allocated overhead. These decreases were offset by increases of $3.6 million in credit card transaction
fees, $2.4 million in outside services, and $1.0 million in employee-related costs.
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Our gross margin increased from 79% during the year ended December 31, 2021 to 81% during the year ended December 31, 2022, primarily due to an
8% increase in revenue during the period and our cost of revenue staying flat, as described above.
Research and development
Research and development
Year ended
December 31,
2022
2021
$ Change
% Change
$
(In millions)
891.9 $
755.9 $
136.0
18 %
Research and development expenses increased $136.0 million or 18% during the year ended December 31, 2022, as compared to the year ended
December 31, 2021, primarily due to increases of $112.0 million in employee-related costs driven by an increase in headcount partially due to high levels of
attrition in 2021 and $13.5 million in allocated overhead.
Sales and marketing
Sales and marketing
Year ended
December 31,
2022
2021
$ Change
% Change
$
(In millions)
409.4 $
427.5 $
(18.1)
(4)%
Sales and marketing expenses decreased $18.1 million or 4% during the year ended December 31, 2022, as compared to the year ended December 31,
2021, primarily due to decreases of $7.6 million in employee-related costs due to severance expenses associated with the reduction in force in 2021, $6.4
million related to brand and other marketing campaigns, and $2.9 million in allocated overhead.
General and administrative
General and administrative
Year ended
December 31,
2022
2021
$ Change
% Change
$
(In millions)
222.9 $
224.6 $
(1.7)
(1)%
General and administrative expense decreased $1.7 million or 1% during the year ended December 31, 2022, as compared to the year ended December
31, 2021, primarily due to decreases of $5.0 million in non-income based taxes, $3.6 million in allocated overhead and $1.9 million in legal fees. These
decreases were offset by increases of $5.6 million in outside services and $4.2 million in employee-related costs.
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Impairment related to real estate assets
Year ended
December 31,
2022
2021
$ Change
% Change
(In millions)
Impairment related to real estate assets
$
175.2 $
31.3 $
143.9
460 %
Impairment related to real estate assets was $175.2 million and $31.3 million during the year ended December 31, 2022 and 2021, respectively, related to
real estate assets as a result of our Virtual First strategy and the impact of updated assumptions, including future rent rates, expected vacancy periods, and
increased common area fees for our San Francisco headquarters, as we continue to monitor the corporate real estate market where we have space available for
sublease.
Interest income (expense), net
Interest income (expense), net increased $8.5 million during the year ended December 31, 2022, as compared to the year ended December 31, 2021,
primarily due to higher interest income as a result of interest rate increases.
Other income, net
Other income, net decreased $22.0 million during the year ended December 31, 2022, as compared to the year ended December 31, 2021, primarily due to
$13.6 million related to the partial termination of our headquarters head lease in 2021, $6.2 million in losses related to the termination of a datacenter lease, and
$8.0 million reduction in sales of retired infrastructure assets. These decreases were offset by a $5.0 million gain related to the sale of equity investments and
increases of $2.1 million in foreign currency transaction gains.
Benefit from income taxes
Benefit from income taxes increased by $324.0 million during the year ended December 31, 2022 as compared to the year ended December 31, 2021,
primarily due to $420.2 million of tax benefits from the release of a valuation allowance on U.S. deferred tax assets, offset by the impact of capitalization of
research and experimental expenditures and tax expense for our Irish subsidiary, which no longer maintains a valuation allowance on deferred tax assets during
the year ended December 31, 2022.
The Tax Cuts and Jobs Act of 2017 ("TCJA") requires taxpayers to capitalize and amortize research and development costs pursuant to Internal Revenue
Code ("IRC") Section 174. Although Congress may consider legislation that would defer the capitalization and amortization requirement to later years, we have
no assurance that the requirement will be repealed or otherwise modified. The requirement was effective for the Company beginning January 1, 2022. For the
tax year ended December 31, 2022, the Company recorded an increase to income tax payable as well as deferred tax assets of approximately $123.9 million due
to Section 174 capitalization.
Liquidity and Capital Resources
As of December 31, 2022, we had cash and cash equivalents of $232.8 million and short-term investments of $1,110.6 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 of December 31, 2022, we had $155.8 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.
We have historically 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.
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In February 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 on
March 1, 2026 and the 2028 Notes mature on March 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 our failure to comply with certain of our 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, repurchases of our Class A common stock, purchases of short-term
investments, the satisfaction of tax withholding obligations in connection with the settlement of restricted stock units and awards, making principal payments on
our finance lease obligations, and capital expenditures. In February 2022, our Board of Directors authorized the repurchase of up to $1.2 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 year ended December 31, 2022, we repurchased and subsequently retired 35.6 million shares of our Class A common stock for an aggregate amount of
$795.4 million. The pace of our share repurchases may fluctuate due to various circumstances, including market conditions and our stock price.
In April 2017, we entered into a $600.0 million credit facility with a syndicate of financial institutions, which we subsequently amended in February 2018
and February 2021. 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. In February 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. In February 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. The
revolving credit facility terminates on February 23, 2026.
Interest on borrowings under the revolving credit facility accrues at a variable rate tied to LIBOR or an alternative base 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 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 of as of December 31, 2022.
As of December 31, 2022, we had no amounts outstanding under the revolving credit facility and an aggregate of $40.6 million in letters of credit issued
under the revolving credit facility. Our total available borrowing capacity under the revolving credit facility was $459.4 million as of December 31, 2022.
As of December 31, 2022, we utilized a significant portion of our U.S. federal, state and foreign net operating losses. Future utilization of remaining net
operating loss and research credit carryforwards are subject to statutory limits. Accordingly, we expect our cash tax obligations will increase in the foreseeable
future.
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. In addition to the convertible notes discussed above, as of December 31,
2022, we have cash commitments due to additional known contractual obligations.
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The following table presents cash commitments due to known contractual obligations as of December 31, 2022:
(1)
Operating lease commitments
(2)
Finance lease commitments
Other commitments
Total contractual obligations
(3)
Total
Less than
1 year
1 - 3 years
(In millions)
3 - 5 years
More than
5 years
$
$
810.8 $
280.0
66.8
1,157.6 $
94.7 $
121.9
43.6
260.2 $
174.4 $
136.8
5.2
316.4 $
130.0 $
21.3
0.4
151.7 $
411
—
17
429
(1)
(2)
(3)
Consists of future non-cancelable minimum rental payments under operating leases for our offices and datacenters, excluding rent payments from our subtenants and
variable operating expenses with terms of 14 years or less. As of December 31, 2022, we are entitled to non-cancelable rent payments from our subtenants of $95.2
million, which will be collected over the next 10 years.
Consists of future non-cancelable minimum rental payments under finance leases primarily for our infrastructure with terms of 4 years or less.
Consists of commitments to third-party vendors for services related to our infrastructure, infrastructure warranty contracts, and asset retirement obligations for office
modifications with terms of 14 years or less.
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:
Net cash provided by operating activities
Net cash used in investing activities
Net cash (used in) provided by financing activities
Effect of exchange rate changes on cash and cash equivalents
Net (decrease) increase in cash and cash equivalents
Operating activities
Year ended December 31,
2022
2021
$
$
(In millions)
797.3 $
(48.5)
(1,041.8)
(7.2)
(300.2) $
729.8
(524.8)
16.2
(3.1)
218.1
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 stock-based compensation, depreciation and amortization expenses, and impairment related to real
estate assets, as well as the effect of changes in operating assets and liabilities.
For the year ended December 31, 2022, net cash provided by operating activities was $797.3 million, which primarily consisted of our net income
of $553.2 million, adjusted for an income tax benefit from deferred taxes of $396.3 million, stock-based compensation expense of $330.7 million, impairment
related to real estate assets of $175.2 million, depreciation and amortization expenses of $157.1 million, and net cash outflow of $124.3 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 acquisitions, offset by an increase in deferred revenue from increased subscription sales, as a majority of our paying users are invoiced in
advance.
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Investing activities
Net cash used in investing activities is primarily impacted by net investment activity, which includes sales, maturities, and purchases of short-term
investments, cash paid for acquisitions, 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.
For the year ended December 31, 2022, net cash used in investing activities was $48.5 million, which primarily related to cash paid for acquisitions of
$75.4 million and cash paid for capital expenditures of $33.8 million related to our office build-outs, work required to prepare spaces for sublease, purchases of
computer equipment, and datacenter build-outs. The increase was partially offset by $31.6 million in net investment activity inflows, driven by the sales and
maturities of short-term investments, net of purchases.
Financing activities
Net cash (used in) provided by financing activities is primarily impacted by cash used for repurchases of common stock, tax withholding obligations for
the release of restricted stock units (“RSUs”) and restricted stock awards (“RSAs”), and principal payments on finance lease obligations for our infrastructure
equipment.
For the year ended December 31, 2022, net cash used in financing activities was $1,041.8 million, which primarily consisted of $795.4 million for the
repurchase of our common stock, $127.5 million in principal payments on finance lease obligations, and $119.4 million for the satisfaction of tax withholding
obligations for the release of restricted stock units and awards.
Significant Impacts of Stock-Based Compensation
Co-Founder Grant
In December 2017, the Board of Directors approved the grant to Drew Houston, the Company's Co-Founder and Chief Executive Officer, of 10.3 million
shares of Class A common stock in the form of RSAs (the "Co-Founder Grant"). This Co-Founder Grant has service-based, market-based, and performance-
based vesting conditions. The Co-Founder Grant is excluded from Class A common stock issued and outstanding until the satisfaction of these vesting
conditions. The Co-Founder Grant also provides the holder with certain stockholder rights, such as the right to vote the shares with the other holders of Class A
common stock and a right to cumulative declared dividends.
The Co-Founder Grant is eligible to vest over the ten-year period following the date the Company’s shares of Class A common stock commenced trading
on the Nasdaq Global Select Market in connection with the Company’s IPO. The Co-Founder Grant is comprised of nine tranches that are eligible to vest based
on the achievement of stock price goals, each of which are referred to as a Stock Price Target, measured over a consecutive thirty-day trading period during the
Performance Period. The Performance Period began on January 1, 2019.
Company Stock Price
Target
Shares Eligible to Vest for
Mr. Houston
$30.00
$37.50
$45.00
$52.50
$60.00
$67.50
$75.00
$82.50
$90.00
2,066,667
1,033,334
1,033,334
1,033,333
1,033,333
1,033,333
1,033,333
1,033,333
1,033,333
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During the first four years of the Performance Period, no more than 20% of the shares subject to the Co-Founder Grant would be eligible to vest in any
calendar year. After the first four years, all shares are eligible to vest based on the achievement of the Stock Price Targets.
The Performance Vesting Condition for the Co-Founder Grant was satisfied on the date the Company’s shares of Class A common stock commenced
trading on the Nasdaq Global Select Market in connection with the Company’s IPO, which was March 23, 2018.
The first tranche of the Co-Founder Grant, or 2.1 million shares of Class A common stock, vested in the fourth quarter of 2021. The stock-based
compensation expense for the Co-Founder Grant is recognized utilizing the accelerated attribution method over the requisite service period identified as the
derived service period over which the market conditions are expected to be achieved, and is not reversed if the market conditions are not satisfied. Therefore, no
incremental stock-based compensation was recognized upon vesting of these RSAs.
Critical Accounting Estimates
Our consolidated financial statements and the related notes thereto included elsewhere in this Annual Report on Form 10-K are prepared in accordance
with generally accepted accounting principles, or GAAP, in the United States. The preparation of consolidated financial statements also requires us to make
estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs and expenses, and related disclosures. We base our estimates on
historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results could differ significantly from
the estimates made by management. To the extent that there are differences between our estimates and actual results, our future financial statement presentation,
financial condition, results of operations, and cash flows will be affected.
While our significant accounting policies are more fully described in Note 1 “Description of the Business and Summary of Significant Accounting
Policies” to our Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K, we believe that the accounting policies described
below involve a greater degree of judgment and estimation uncertainty.
Impairment related to real estate assets
In accordance with ASC 360, Property, Plant, and Equipment (“ASC 360”), we evaluate our long-lived assets for impairment whenever events and
circumstances indicate that the assets might be impaired. When the projected undiscounted cash flows estimated to be generated by those assets are less than
their carrying amounts, the assets are adjusted to their estimated fair value and an impairment loss is recorded as a component of operating income.
In the fourth quarter of 2020, as a result of our Virtual First strategy, we reassessed our asset groupings and evaluated the recoverability of our right-of-
use and related lease assets, including leasehold improvements, furniture and fixtures, and computer equipment and determined that the carrying value of the
respective assets groups was not fully recoverable. During the years ended December 31, 2022 and 2021, we continued to evaluate the recoverability of our real
estate assets. In the fourth quarter of 2022, we determined that there were adverse changes in the corporate real estate markets where we plan to sublease office
space, particularly in the San Francisco Bay Area. Given the current corporate real estate market, we are assuming reduced demand for corporate office real
estate, which we expect will result in increased real estate vacancy periods of two to five years and reduced sublease rent rates. Accordingly, we assessed the
recoverability of our real estate assets in the markets that have been impacted and adjusted the carrying value of these assets to their estimated fair values. As a
result of our revised subleasing assumptions, we recorded impairment charges related to real estate assets of $175.2 million during the year ended December 31,
2022. Estimating the fair value of our real estate assets required the application of significant judgment. Refer to Note 9, "Leases", for more information.
Income Taxes
Deferred income tax balances reflect the effects of temporary differences between the financial reporting and tax bases of the Company’s assets and
liabilities using enacted tax rates expected to apply when taxes are actually paid or recovered. In addition, deferred tax assets are recorded for net operating loss
and credit carryforwards.
A valuation allowance is provided against deferred tax assets unless it is more likely than not that they will be realized based on all available positive and
negative evidence. Such evidence, which requires management's judgment, includes, but is not limited to, recent cumulative earnings or losses, expectations of
future taxable income by taxing jurisdiction, and the carry-forward periods available for the utilization of deferred tax assets. To the extent sufficient positive
evidence becomes available, we may release all or a portion of our valuation allowance in one or more future periods.
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During the years ended December 31, 2022 and 2021, we evaluated the realizability of our deferred tax assets, which resulted in releasing part of our
historical valuation allowance. Future releases of the remaining valuation allowance, if any, would result in the recognition of certain deferred tax assets which
may include a material income tax benefit for the period in which such release is recorded. Refer to Note 14, “Income Taxes” to the Consolidated Financial
Statements in Part II, Item 8 of this Annual Report on Form 10-K for more information.
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Recent Accounting Pronouncements
See Note 1, “Description of the Business and Summary of Significant Accounting Policies” to our consolidated financial statements included elsewhere in
this Annual Report on Form 10-K for recently adopted accounting pronouncements as of the date of this Annual Report on Form 10-K.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest rate risk
We had cash and cash equivalents of $232.8 million and short-term investments of $1,110.6 million as of December 31, 2022. We hold our cash and cash
equivalents and short-term investments 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. The primary objectives of our investment activities are the preservation of
capital, the fulfillment of liquidity needs, and the control of cash and investments. We do not enter into investments for trading or speculative purposes. Our
cash equivalents and our portfolio of debt securities are subject to market risk due to changes in interest rates.
Any borrowings under the revolving credit facility bear interest at a variable rate tied to LIBOR or an alternative base rate. As of December 31, 2022, we
had no amounts outstanding under the revolving credit facility. We do not have any other long-term debt or financial liabilities with floating interest rates that
would subject us to interest rate fluctuations.
As of December 31, 2022, a hypothetical increase in interest rates by 100 basis points would have resulted in a $15 million reduction in the market value
of our investment portfolio. This estimate is based on a sensitivity model that measures market value changes when changes in interest rates occur.
Foreign currency exchange risk
Our results of operations and cash flows are subject to fluctuations due to changes in foreign currency exchange rates relative to U.S. dollars, our reporting
currency.
Most of our revenue is generated in U.S. dollars, with the remainder generated in Euros, British pounds sterling, Australian dollars, Canadian dollars, and
Japanese yen.
Our expenses are generally denominated in the currencies in which our operations are located, which are primarily the United States and, to a lesser
extent, Europe and Asia. The functional currency of Dropbox International Unlimited, our international headquarters and largest international entity, is
denominated in U.S. dollars. Our results of operations and cash flows are, therefore, subject to fluctuations due to changes in foreign currency exchange rates in
ways that are unrelated to our operating performance.
As exchange rates may fluctuate significantly between periods, revenue and operating expenses, when converted into U.S. dollars, may also experience
significant fluctuations between periods. Volatile market conditions, including those arising from the COVID-19 pandemic and other macroeconomic events
have and may in the future result in significant changes in exchange rates, and in particular a weakening of foreign currencies relative to the U.S. dollar has and
may in the future negatively affect our revenue expressed in U.S. dollars. Historically, a majority of our revenue and operating expenses have been denominated
in U.S. dollars, Euros, and British pounds sterling. Although we are impacted by the exchange rate movements from a number of currencies relative to the
U.S. dollar, our results of operations are particularly impacted by fluctuations in the U.S. dollar-Euro and U.S. dollar-British pounds sterling exchange rates. In
the year ended December 31, 2022, 27% of our sales were denominated in currencies other than U.S. dollars. Our expenses, by contrast, are primarily
denominated in U.S. dollars. As a result, any increase in the value of the U.S. dollar against these foreign currencies could cause our revenue to decline relative
to our costs, thereby decreasing our margins.
We recorded $0.2 million gains and $1.8 million losses in net foreign currency transactions in the years ended December 31, 2022 and 2021, respectively.
A hypothetical 10% change in foreign currency rates would not have resulted in material gains or losses for the years ended December 31, 2022 and 2021.
To date, we have not engaged in any hedging activities. As our international operations grow, we will continue to reassess our approach to managing risks
relating to fluctuations in currency rates.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
DROPBOX, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm (PCAOB ID: 42)
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Comprehensive Income (Loss)
Consolidated Statements of Stockholders’ (Deficit) Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
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67
68
69
70
71
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of Dropbox, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Dropbox, Inc. (the Company) as of December 31, 2022 and 2021, the related
consolidated statements of operations, comprehensive income (loss), stockholders' (deficit) equity and cash flows for each of the three years in the period ended
December 31, 2022, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial
statements present fairly, in all material respects, the financial position of the Company at December 31, 2022 and 2021, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 2022, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's
internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control—Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 22, 2023 expressed an unqualified
opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial
statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in
accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing
procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to
those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also
included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial
statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or
required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved
our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the
consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the
critical audit matters or on the accounts or disclosures to which they relate.
Description of the
Matter
Revenue from Contracts with Customers
As described in Note 1 to the consolidated financial statements, the Company derives its revenue from subscription fees from customers
for access to its platform, which it recognizes ratably over the related contractual term. The Company’s revenue recognition process
involves several applications responsible for the initiation, processing, and recording of transactions from the Company’s various sales
channels, and the calculation of revenue in accordance with the Company’s accounting policy.
Auditing the Company's accounting for revenue from contracts with customers was challenging and complex due to the high volume of
individually-low-monetary-value transactions, and the dependency on the effective design and operation of multiple applications, some of
which are specifically designed for the Company’s business.
64
Table of Contents
How We Addressed
the Matter in Our
Audit
We obtained an understanding, evaluated the design, and tested the operating effectiveness of internal controls over the Company’s
accounting for revenue from contracts with customers. For example, with the assistance of IT professionals, we tested the controls over the
initiation and billing of new and recurring subscriptions, the recognition of revenue, and the Company’s cash to billings reconciliation
process. We also tested the controls related to the key application interfaces between the initiation, billing, and accounting systems, which
included controls related to access to the relevant applications and data and changes to the relevant systems and interfaces, as well as
controls over the configuration of the relevant applications.
To test the Company’s accounting for revenue from contracts with customers, we performed substantive audit procedures that included,
among others, testing on a sample basis the completeness and accuracy of the underlying data within the Company’s billing system,
performing data analytics by extracting data from the billing system to evaluate the completeness and accuracy of recorded revenue and
deferred revenue amounts, tracing a sample of sales transactions to source data, and testing a sample of cash to billings reconciliations.
Description of the
Matter
Impairment of operating lease right-of-use and related assets
As disclosed in Note 9 to the consolidated financial statements, the Company recorded additional expense of $175.2 million in the year
ended December 31, 2022 as a result of the Company's identification of indicators of impairment related to certain of its leased office space
assets. In accordance with ASC 360, the Company performed a recoverability test of these leased office space asset groups, comprised of
operating lease right-of-use and other related assets, and determined that the carrying value of certain asset groups was not fully
recoverable. As a result, the Company measured and recognized an impairment charge related to these assets representing the amount by
which the carrying value exceeded the estimated fair value of these asset groups.
Auditing the Company's impairment measurement involved a high degree of subjectivity due to the significant estimation required by
management to determine the fair value of the asset groups. The Company utilized an income approach to value the asset groups, which
required the development of a discounted cash flow model utilizing certain key assumptions, including future sublease market rent rates,
discount rates, expected vacancy periods, and lease incentives offered to future tenants. These assumptions have a significant effect on the
estimated fair values of the asset groups, and the resulting impairment charge, and could be impacted by future economic and market
conditions.
How We Addressed
the Matter in Our
Audit
We obtained an understanding, evaluated the design, and tested the operating effectiveness of internal controls over the Company’s
processes to determine the fair values of the asset groups and measure the impairment charge. For example, we tested the controls over the
determination of the fair value of the asset groups subject to impairment, including the determination and review of the underlying
assumptions used to develop the fair value estimates.
Our testing of the Company's impairment measurement included, among other procedures, evaluating the significant assumptions used to
estimate fair value. For example, we compared the sublease market rent rate, vacancy period, and tenant lease incentive assumptions used
to estimate future cash flows to current industry and economic trends, and assessed the reasonableness of the discount rates used as part of
the discounted cash flow model. We also involved our valuation specialists to assist in our evaluation of the significant assumptions used in
the fair value estimate.
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2013.
San Francisco, California
February 22, 2023
65
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of Dropbox, Inc.
Opinion on Internal Control Over Financial Reporting
We have audited Dropbox, Inc.’s internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control—
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our
opinion, Dropbox, Inc. (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2022, based on
the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the
consolidated balance sheets of the Company as of December 31, 2022 and 2021, the related consolidated statements of operations, comprehensive income
(loss), stockholders’ (deficit) equity and cash flows for each of the three years in the period ended December 31, 2022, and the related notes and our report
dated February 22, 2023 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness
of internal control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our
responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered
with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules
and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and
evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal
control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
San Francisco, California
February 22, 2023
66
DROPBOX, INC.
CONSOLIDATED BALANCE SHEETS
(In millions, except for par value)
As of December 31,
2022
2021
Table of Contents
Assets
Current assets:
Cash and cash equivalents
Short-term investments
Trade and other receivables, net
Prepaid expenses and other current assets
Total current assets
Property and equipment, net
Operating lease right-of-use asset
Intangible assets, net
Goodwill
Deferred tax assets
Other assets
Total assets
Liabilities and stockholders’ deficit
Current liabilities:
Accounts payable
Accrued and other current liabilities
Accrued compensation and benefits
Operating lease liability
Finance lease obligation
Deferred revenue
Total current liabilities
Operating lease liability, non-current
Finance lease liability, non-current
Convertible senior notes, net, non-current
Other non-current liabilities
Total liabilities
Commitments and contingencies (Note 10)
Stockholders’ deficit:
Convertible preferred stock, $0.00001 par value; no shares authorized, issued and outstanding as of
December 31, 2022; no shares authorized, issued and outstanding as of December 31, 2021
Preferred stock, $0.00001 par value; 240.0 shares authorized, and no shares issued and outstanding as of
December 31, 2022; 240.0 shares authorized and no shares issued and outstanding as of December 31,
2021
Common stock, $0.00001 par value; Class A common stock - 2,400.0 shares authorized and 267.2 shares
issued and outstanding as of December 31, 2022; 2,400.0 shares authorized and 292.7 shares issued and
outstanding as of December 31, 2021; Class B common stock - 475.0 shares authorized and 82.2 shares
issued and outstanding as of December 31, 2022; 475.0 shares authorized and 82.8 issued and outstanding
as of December 31, 2021; Class C common stock - 800.0 shares authorized and no shares issues and
outstanding as of December 31, 2022; 800.0 shares authorized and no shares issued and outstanding as of
December 31, 2021
Additional paid-in capital
Accumulated deficit
Accumulated other comprehensive loss
Total stockholders’ deficit
Total liabilities and stockholders’ deficit
See accompanying Notes to Consolidated Financial Statements.
67
$
$
$
$
232.8 $
1,110.6
53.8
92.6
1,489.8
308.4
260.6
88.3
403.3
498.7
61.0
3,110.1 $
38.6 $
139.9
131.7
68.9
114.8
702.6
1,196.5
585.2
151.7
1,374.0
112.1
3,419.5
—
—
533.0
1,185.1
49.6
82.1
1,849.8
322.0
413.9
53.6
356.6
41.2
54.2
3,091.3
25.7
140.8
139.1
78.3
120.4
671.5
1,175.8
632.0
167.7
1,370.3
39.4
3,385.2
—
—
—
2,511.6
(2,772.1)
(48.9)
(309.4)
3,110.1 $
—
2,448.1
(2,739.4)
(2.6)
(293.9)
3,091.3
Table of Contents
Revenue
Cost of revenue
(1)
Gross profit
(1)
Operating expenses :
Research and development
Sales and marketing
General and administrative
Impairment related to real estate assets
(2)
Total operating expenses
Income (loss) from operations
Interest income (expense), net
Other income, net
Income (loss) before income taxes
Benefit from (provision for) income taxes
Net income (loss)
Net income (loss) per share-basic and diluted:
Basic net income (loss) per share
Diluted net income (loss) per share
(3)
Weighted-average shares used in computing net income (loss) per share
attributable to common stockholders, basic
Weighted-average shares used in computing net income (loss) per share
attributable to common stockholders, diluted
(1)
Includes stock-based compensation as follows (in millions):
Cost of revenue
Research and development
Sales and marketing
General and administrative
(4)
DROPBOX, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except per share data)
2022
Year ended December 31,
2021
2020
$
$
$
$
$
2,324.9 $
444.2
1,880.7
891.9
409.4
222.9
175.2
1,699.4
181.3
3.3
8.1
192.7
360.5
553.2 $
1.53 $
1.52 $
361.2
363.3
2,157.9 $
444.2
1,713.7
755.9
427.5
224.6
31.3
1,439.3
274.4
(5.2)
30.1
299.3
36.5
335.8 $
0.87 $
0.85 $
388.0
395.8
2022
Year ended December 31,
2021
2020
24.7 $
232.3
22.4
51.3
23.2 $
190.1
25.0
48.8
1,913.9
414.6
1,499.3
727.5
422.8
227.8
398.2
1,776.3
(277.0)
1.7
25.1
(250.2)
(6.1)
(256.3)
(0.62)
(0.62)
414.3
414.3
17.1
174.1
33.7
36.6
(2)
Includes impairment charges related to real estate assets as a result of adverse changes in the corporate real estate market which has impacted the Company's subleasing strategy in conjunction
with its shift to Virtual First. See Note 9 "Leases" for further information.
(3) Results of Operations for the year-ended 2022 include a one-time benefit from income taxes of $420.2 million due to the release of a valuation allowance on the U.S. federal and certain state
deferred tax assets. Results of Operations for the year-ended 2021 include a one-time benefit from income taxes of $38.1 million from the release of a valuation allowance on the Irish deferred
tax assets.
(4)
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 accompanying Notes to Consolidated Financial Statements.
68
Table of Contents
DROPBOX, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In millions)
Net income (loss)
Other comprehensive (loss) income, net of tax:
Change in foreign currency translation adjustments
Change in net unrealized (losses) gains on short-term investments
Total other comprehensive (loss) income, net of tax
Comprehensive income (loss)
$
$
$
$
2022
Year ended December 31,
2021
2020
553.2 $
(7.1) $
(39.2)
(46.3) $
506.9 $
335.8 $
(0.6) $
(12.9)
(13.5) $
322.3 $
(256.3)
4.8
2.8
7.6
(248.7)
See accompanying Notes to Consolidated Financial Statements.
69
Class A and Class
B common stock
Shares Amount
Accumulated
deficit
Accumulated
other
comprehensive
income (loss)
Total
stockholders’
(deficit)equity
Table of Contents
DROPBOX, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ (DEFICIT) EQUITY
(In millions)
Balance at December 31, 2019
Release of restricted stock units and awards
Shares withheld related to net share
settlement
Repurchases of common stock
Exercise of stock options and awards
Stock-based compensation
Other comprehensive income
Net loss
Balance at December 31, 2020
Release of restricted stock units and awards
Shares withheld related to net share
settlement of restricted stock units and
awards
Repurchases of common stock
Exercise of stock options and awards
Assumed stock options in connection with
acquisition
Purchase of bond hedges in connection with
issuance of convertible senior notes
Sale of warrants in connection with issuance
of convertible senior notes
Tax benefit attributable to bond hedges
purchased in connection with issuance of
convertible senior notes
Stock-based compensation
Other comprehensive loss
Net income
Balance at December 31, 2021
Release of restricted stock units and awards
Shares withheld related to net share
settlement of restricted stock units and
awards
Repurchases of common stock
Exercise of stock options and awards
Tax benefit attributable to bond hedges
purchased in connection with issuance of
convertible senior notes
Stock-based compensation
Other comprehensive loss
Net income
Balance at December 31, 2022
Convertible
preferred stock
Shares Amount
—
—
— $
—
—
—
—
—
—
—
— $
—
—
—
—
—
—
—
—
—
—
—
— $
—
—
—
—
—
—
—
—
— $
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
417.0 $
13.1
(4.7)
(20.2)
0.5
—
—
—
405.7 $
14.8
(4.6)
(41.1)
0.7
—
—
—
—
—
—
—
375.5 $
14.4
(5.1)
(35.6)
0.2
Additional
paid-in
capital
— $ 2,531.3 $
—
—
(43.5)
(187.3)
2.3
261.5
—
—
—
—
—
—
—
—
— $ 2,564.3 $
—
—
—
—
—
—
—
—
(35.2)
(314.3)
6.9
1.2
(265.3)
202.9
(1,726.2) $
—
(48.7)
(210.2)
—
—
—
(256.3)
(2,241.4) $
—
(89.6)
(744.2)
—
—
—
—
3.3 $
—
—
—
—
—
7.6
—
10.9 $
—
—
—
—
—
—
—
—
—
—
—
— $ 2,448.1 $
0.5
287.1
—
—
—
—
—
335.8
(2,739.4) $
—
—
(13.5)
—
(2.6) $
(77.9)
(508.0)
—
(41.5)
(287.4)
0.5
61.2
330.7
349.4 $
— $ 2,511.6 $
553.2
(2,772.1) $
(46.3)
(48.9) $
See accompanying Notes to Consolidated Financial Statements.
70
808.4
(92.2)
(397.5)
2.3
261.5
7.6
(256.3)
333.8
—
(124.8)
(1,058.5)
6.9
1.2
(265.3)
202.9
0.5
287.1
(13.5)
335.8
(293.9)
—
(119.4)
(795.4)
0.5
61.2
330.7
(46.3)
553.2
(309.4)
Table of Contents
DROPBOX, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
Cash flows from operating activities
Net income (loss)
Adjustments to reconcile net loss to net cash provided by operating activities:
$
2022
Year ended December 31,
2021
2020
553.2 $
335.8 $
(256.3)
Depreciation and amortization
Stock-based compensation
Impairment related to real estate assets
Amortization of debt issuance costs
Net gains on equity investments
Amortization of deferred commissions
Net gains on lease termination
Non-cash operating lease expense
Deferred taxes
Other
Changes in operating assets and liabilities:
Trade and other receivables, net
Prepaid expenses and other current assets
Other assets
Accounts payable
Accrued and other current liabilities
Accrued compensation and benefits
Deferred revenue
Other non-current liabilities
Operating lease liabilities
Tenant improvement allowance reimbursement
Cash paid for lease termination
Net cash provided by operating activities
Cash flows from investing activities
Capital expenditures
Purchase of intangible assets
Business combinations, net of cash acquired
Purchases of short-term investments
Proceeds from sales of short-term investments
Proceeds from maturities of short-term investments
Proceeds from sales of equity investments
Other
Net cash used in investing activities
Cash flows from financing activities
Proceeds from issuance of convertible senior notes
Purchases of convertible note hedge in connection with issuance of
convertible senior notes
Proceeds from sale of warrants in connection with issuance of convertible
senior notes
Payments of debt issuance costs
71
157.1
330.7
175.2
4.2
(5.0)
39.5
—
63.8
(396.3)
(0.8)
(5.5)
(50.0)
(9.7)
13.0
4.7
(6.8)
25.6
(17.9)
(86.4)
8.7
—
797.3
(33.8)
(1.1)
(75.4)
(571.2)
213.7
389.1
10.6
19.6
(48.5)
—
—
—
—
151.4
287.1
31.3
3.8
—
32.3
(13.6)
76.3
(37.5)
(4.4)
(6.2)
(58.4)
11.7
7.6
(28.6)
23.5
59.8
(13.1)
(102.1)
5.1
(32.0)
729.8
(22.1)
(6.8)
(140.0)
(1,138.4)
293.6
448.7
—
40.2
(524.8)
1,389.1
(265.3)
202.9
(23.7)
159.3
261.5
398.2
0.6
(17.5)
24.4
—
81.1
(2.5)
(2.6)
(5.5)
(39.4)
(17.2)
(19.9)
(9.3)
11.7
55.1
4.0
(77.4)
22.5
—
570.8
(80.1)
(0.2)
—
(756.1)
172.4
386.7
26.4
17.3
(233.6)
—
—
—
—
Table of Contents
Payments for taxes related to net share settlement of restricted stock units
and awards
Proceeds from issuance of common stock, net of taxes withheld
Principal payments on finance lease obligations
Common stock repurchases
Other
Net cash (used in) provided by financing activities
Effect of exchange rate changes on cash and cash equivalents
Change in cash and cash equivalents
Cash and cash equivalents—beginning of period
Cash and cash equivalents—end of period
Supplemental cash flow data:
Cash paid during the period for:
Interest
Income taxes
Non-cash investing and financing activities:
Property and equipment received and accrued in accounts payable and
accrued liabilities
Property and equipment acquired under finance leases
$
$
$
$
$
(119.4)
0.5
(127.5)
(795.4)
—
(1,041.8)
(7.2)
(300.2)
533.0
232.8 $
8.2 $
27.6 $
2.6 $
105.8 $
(124.8)
6.9
(110.4)
(1,058.5)
—
16.2
(3.1)
218.1
314.9
533.0 $
8.5 $
4.2 $
5.6 $
127.3 $
(92.2)
2.3
(89.5)
(397.5)
(0.8)
(577.7)
4.1
(236.4)
551.3
314.9
9.6
5.0
7.8
145.8
See accompanying Notes to Consolidated Financial Statements.
72
Table of Contents
DROPBOX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in tables are in millions except per share data, or as otherwise noted)
Note 1. Description of the Business and Summary of Significant Accounting Policies
Business
Dropbox, Inc. (the “Company” or “Dropbox”) helps keep life organized and work moving. The Company was incorporated in May 2007 as Evenflow,
Inc., a Delaware corporation, and changed its name to Dropbox, Inc. in October 2009. The Company is headquartered in San Francisco, California.
Basis of presentation and consolidation
The accompanying consolidated financial statements have been prepared in accordance with the United States of America generally accepted accounting
principles (“GAAP”). The accompanying consolidated financial statements include the accounts of Dropbox and its wholly owned subsidiaries. All
intercompany balances and transactions have been eliminated in consolidation.
Use of estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts
reported and disclosed in the Company’s consolidated financial statements and accompanying notes. These estimates are based on information available as of
the date of the consolidated financial statements. Management evaluates these estimates and assumptions on a regular basis. Actual results may differ materially
from these estimates.
The Company’s most significant estimates and judgments involve the valuation of right-of-use and other lease related assets and income taxes.
Financial information about segments and geographic areas
The Company manages its operations and allocates resources as a single operating segment. Further, the Company manages, monitors, and reports its
financials as a single reporting segment. The Company’s chief operating decision-maker is its Chief Executive Officer, who reviews financial information
presented on a consolidated basis for purposes of making operating decisions, assessing financial performance, and allocating resources. See Note 15,
"Geographic Areas" for information regarding the Company’s long-lived assets and revenue by geography.
Foreign currency transactions
The assets and liabilities of the Company’s foreign subsidiaries are translated from their respective functional currencies into U.S. dollars at the exchange
rates in effect at the balance sheet date. Revenue and expense amounts are translated at the average exchange rate for the period. Foreign currency translation
gains and losses are recorded in other comprehensive (loss) income, net of tax.
Gains and losses realized from foreign currency transactions (those transactions denominated in currencies other than the foreign subsidiaries’ functional
currency) are included in other income, net. Monetary assets and liabilities are remeasured using foreign currency exchange rates at the end of the period, and
non-monetary assets are remeasured based on historical exchange rates. The Company recorded net foreign currency transaction gains of $0.2 million and losses
of $1.8 million in the years ended December 31, 2022 and 2021, respectively.
Revenue recognition
The Company derives its revenue from subscription fees from customers for access to its platform. The Company’s policy is to exclude sales and other
indirect taxes when measuring the transaction price of its subscription agreements. The Company accounts for revenue contracts with customers through the
following steps:
•
•
Identification of the contract, or contracts, with a customer
Identification of the performance obligations in the contract
73
Table of Contents
DROPBOX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in tables are in millions except per share data, or as otherwise noted)
• Determination of the transaction price
• Allocation of the transaction price to the performance obligations in the contract
•
Recognition of revenue when, or as, the Company satisfies a performance obligation
The Company’s subscription agreements generally have monthly or annual contractual terms and a small percentage have multi-year contractual terms.
Revenue is recognized ratably over the related contractual term beginning on the date that the platform is made available to a customer. Access to the platform
represents a series of distinct services as the Company continually provides access to, and fulfills its obligation to, the end customer over the subscription term.
The series of distinct services represents a single performance obligation that is satisfied over time. The Company recognizes revenue ratably because the
customer receives and consumes the benefits of the platform throughout the contract period. The Company’s contracts are generally non-cancelable.
The Company bills in advance for monthly contracts and typically bills annually in advance for contracts with terms of one year or longer. The Company
also recognizes an immaterial amount of contract assets, or unbilled receivables, primarily relating to consideration for services completed but not billed at the
reporting date. Unbilled receivables are classified as receivables when the Company has the right to invoice the customer.
The Company records contract liabilities when cash payments are received or due in advance of performance to deferred revenue. Deferred revenue
primarily relates to the advance consideration received from the customer.
The price of subscriptions is generally fixed at contract inception and therefore, the Company’s contracts do not contain a significant amount of variable
consideration. As a result, the amount of revenue recognized in the periods presented from performance obligations satisfied (or partially satisfied) in previous
periods was not material.
The Company recognized $671.5 million, $610.5 million, and $554.2 million of revenue during the years ended December 31, 2022, 2021, and 2020
respectively, that was included in the deferred revenue balances at the beginning of their respective periods.
As of December 31, 2022, future estimated revenue related to performance obligations that were unsatisfied or partially unsatisfied was $774.2 million.
The substantial majority of the unsatisfied performance obligations will be satisfied over the next twelve months.
Stock-based compensation
The Company has primarily granted restricted stock units (“RSUs”) to its employees and members of the Board of Directors under the 2008 Equity
Incentive Plan (“2008 Plan”), the 2017 Equity Incentive Plan (“2017 Plan”), and the 2018 Equity Incentive Plan (“2018 Plan” and together with the 2008 Plan
and 2017 Plan, the "Dropbox Equity Incentive Plans”). Since August 2015, the Company has granted RSUs, which have a service based vesting condition over
a four-year period vesting quarterly, as the only stock-based payment awards to its employees, with the exception of awards granted to its co-founder and certain
executives, and has not granted any stock options to employees under the Dropbox Equity Incentive Plans. The Company recognizes compensation expense
associated with RSUs on a straight-line basis over the requisite service period and accounts for forfeitures in the period in which they occur.
The Board of Directors determines the fair value of each share of underlying common stock based on the closing price of the Company's Class A common
stock as reported on the Nasdaq Global Select Market on the date of the grant.
In March 2021, in connection with the acquisition of DocSend, Inc. (“DocSend”), the Company assumed unvested stock options and an immaterial
number of unvested RSUs that had been granted under DocSend's 2013 Stock Plan and DocSend's 2015 Stock Option and Grant Plan. The fair value of the
DocSend options assumed were based upon the Black-Scholes option-pricing model. See Note 12 "Stockholders' (Deficit) Equity" for further information.
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DROPBOX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in tables are in millions except per share data, or as otherwise noted)
In December 2017, the Board of Directors approved the Company’s Co-Founder Grant, consisting of 10.3 million shares of Class A Common Stock in the
form of restricted stock awards ("RSAs") which were granted to Drew Houston, the Company’s co-founder and Chief Executive Officer. This Co-Founder
Grant has service-based, market-based, and performance-based vesting conditions. The Co-Founder Grant is excluded from Class A common stock issued and
outstanding until the satisfaction of these vesting conditions. The Company estimated the grant date fair value of the Co-Founder Grant using a model based on
multiple stock price paths developed through the use of a Monte Carlo simulation that incorporates into the valuation the possibility that the certain stock price
targets may not be satisfied. The first tranche of the Co-Founder Grant vested in the fourth quarter of 2021. The stock-based compensation expense for the Co-
Founder Grant is recognized utilizing the accelerated attribution method over the requisite service period identified as the derived service period over which the
market conditions are expected to be achieved, and is not reversed if the market conditions are not satisfied. Therefore, no incremental stock-based
compensation was recognized upon vesting of these RSAs. See Note 12, "Stockholders' (Deficit) Equity" for further information.
Cost of revenue
Cost of revenue consists primarily of expenses associated with the storage, delivery, and distribution of the Company’s platform for both paying users and
free users. These costs, which are referred to as infrastructure costs, include depreciation of servers located in co-location facilities that the Company leases and
operates, rent and facilities expense for those datacenters, network and bandwidth costs, support and maintenance costs for infrastructure equipment, and
payments to third-party datacenter service providers. Cost of revenue also includes costs, such as salaries, bonuses, benefits, travel-related expenses, and stock-
based compensation, which are referred to as employee-related costs, for employees whose primary responsibilities relate to supporting the Company’s
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.
Advertising and promotional expense
Advertising and promotional expenses are primarily included in sales and marketing expenses within the consolidated statements of operations and are
expensed when incurred. Advertising and promotional expenses were $94.8 million, $108.6 million, and $81.4 million during the years ended December 31,
2022, 2021, and 2020, respectively.
Cash and cash equivalents
Cash consists primarily of cash on deposit with banks and includes amounts in transit from payment processors for credit and debit card transactions,
which typically settle within five business days. Cash equivalents include highly liquid investments purchased with an original maturity date of 90 days or less
from the date of purchase.
The Company monitors its credit risk by considering factors such as historical experience, credit ratings, current economic conditions, and reasonable and
supportable forecasts.
Short-term investments
The Company’s short-term investments are primarily comprised of corporate notes and obligations, U.S. Treasury securities, certificates of deposit, asset-
backed securities, commercial paper, U.S. agency obligations, foreign government securities, supranational securities, and municipal securities. The Company
determines the appropriate classification of its short-term investments at the time of purchase and reevaluates such designation at each balance sheet date. The
Company has classified and accounted for its short-term investments as available-for-sale securities as the Company may sell these securities at any time for use
in its current operations or for other purposes, even prior to maturity. As a result, the Company classifies its short-term investments, including securities with
stated maturities beyond twelve months, within current assets in the consolidated balance sheets.
The Company's short-term investments are recorded at fair value each reporting period. Unrealized gains and losses on these short-term investments are
reported as a separate component of accumulated other comprehensive loss in the consolidated balance sheets until realized. Unrealized gains and losses for any
short-term investments that management intends to sell or it is more likely than not that management will be required to sell prior to their anticipated recovery
are recorded in other income, net. The Company segments its portfolio based on the underlying risk profiles of the securities and has a zero-loss expectation
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DROPBOX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in tables are in millions except per share data, or as otherwise noted)
for U.S. treasury and U.S. government agency securities. The Company regularly reviews the securities in an unrealized loss position and evaluates the current
expected credit loss by considering factors such as credit ratings, issuer-specific factors, current economic conditions, and reasonable and supportable forecasts.
The Company did not record any material credit losses during the year ended December 31, 2022.
Concentrations of credit risk
Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash, cash equivalents, accounts
receivable, and short-term investments. The Company places its cash and cash equivalents, and short-term investments with well-established financial
institutions.
Trade accounts receivable are typically unsecured and are derived from revenue earned from customers located around the world. Two distribution
partners accounted for 12% and 30% of total trade and other receivables, net as of December 31, 2022. Two distribution partners accounted for 14% and 29% of
total trade and other receivables, net as of December 31, 2021. No customer accounted for more than 10% of the Company’s revenue in the periods presented.
Trade and other receivables, net
Trade and other receivables, net consists primarily of trade receivables that are recorded at the invoice amount, net of an allowance for expected credit
losses.
The allowance for expected credit losses is based on the Company’s assessment of the collectability of accounts receivable. The Company assesses
collectability by reviewing accounts receivable on a collective basis where similar characteristics exist and on an individual basis when the Company identifies
specific customers with known disputes or collectability issues. The Company regularly reviews the adequacy of the allowance for expected credit losses by
considering the age of each outstanding invoice, the collection history of each customer, and other relevant factors, including contractual term and current and
future economic conditions. The Company's allowance for expected credit losses was $0.7 million and $1.0 million as of December 31, 2022 and 2021,
respectively.
Non-trade receivables
The Company records non-trade receivables to reflect amounts due for activities outside of its subscription agreements, such as indemnification assets and
receivables from tenants. Non-trade receivables totaled $6.5 million and $4.1 million, as of December 31, 2022 and 2021, respectively, and are classified within
prepaid expenses and other current assets in the accompanying consolidated balance sheets. See "—Lease obligations” for further discussion.
Deferred commissions, net
Deferred commissions, net is stated as gross deferred commissions less accumulated amortization. Sales commissions earned by the Company’s sales
force and third-party resellers, as well as related payroll taxes, are considered to be incremental and recoverable costs of obtaining a contract with a customer.
These amounts have been capitalized as deferred commissions within prepaid and other current assets and other assets on the consolidated balance sheets. The
Company deferred incremental costs of obtaining a contract of $33.5 million and $23.7 million during the years ended December 31, 2022 and 2021,
respectively.
Deferred commissions, net included in prepaid and other current assets were $33.6 million and $30.8 million as of December 31, 2022 and 2021,
respectively. Deferred commissions, net included in other assets were $25.7 million and $34.6 million as of December 31, 2022 and 2021, respectively.
Commissions related to new contracts are typically deferred and amortized over a period of benefit of five years. The period of benefit was estimated by
considering factors such as historical customer attrition rates, the useful life of the Company’s technology, and the impact of competition in its industry.
Commissions that are commensurate with renewal contracts are typically amortized over one year. Amortization of deferred commissions costs was $39.5
million, $32.3 million, and $24.4 million for the years ended December 31, 2022, 2021, and 2020, respectively. Amortization of deferred commissions costs are
included in sales and marketing expense in the accompanying consolidated statements of operations. There was no material impairment loss in relation to the
deferred costs for any period presented.
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DROPBOX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in tables are in millions except per share data, or as otherwise noted)
Property and equipment, net
Equipment is stated at cost less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful life of the
related asset, which is generally three to seven years. Leasehold improvements are amortized on a straight-line basis over the shorter of their estimated useful
lives or the term of the related lease.
The following table presents the estimated useful lives of property and equipment:
Property and equipment
Buildings
Datacenter and other computer equipment
Office equipment and other
Leasehold improvements
Lease obligations
Useful life
20 to 30 years
3 to 5 years
3 to 7 years
Lesser of estimated useful life or remaining lease term
The Company leases office space, datacenters, and equipment under non-cancelable finance and operating leases with various expiration dates through
2036. The Company determines if an arrangement contains a lease at inception.
Operating lease right-of-use assets and lease liabilities are recognized at the present value of the future lease payments at commencement date. The
interest rate implicit in the Company’s operating leases is not readily determinable, and therefore an incremental borrowing rate is estimated to determine the
present value of future payments. The estimated incremental borrowing rate factors in a hypothetical interest rate on a collateralized basis with similar terms,
payments, and economic environments. Operating lease right-of-use assets also include any prepaid lease payments and lease incentives.
Certain of the operating lease agreements contain rent concession, rent escalation, and option to renew provisions. Rent concession and rent escalation
provisions are considered in determining the single lease cost to be recorded over the lease term. Single lease cost is recognized on a straight-line basis over the
lease term commencing on the date the Company has the right to use the leased property. The lease terms may include options to extend or terminate the lease.
The Company generally uses the base, non-cancelable, lease term when recognizing the lease assets and liabilities, unless it is reasonably certain that the option
will be exercised.
In addition, certain operating lease agreements contain tenant improvement allowances from its landlords. These allowances are accounted for as lease
incentives and decrease the Company's right-of-use asset and reduce single lease cost over the lease term.
As part of the Company's Virtual First strategy, Dropbox has retained a portion of its office space for in-person collaboration while the remainder will be
subleased. During the year ended December 31, 2022, the Company recorded impairment charges of $175.2 million related to real estate assets as a result of
adverse changes in the corporate real estate market which has impacted its subleasing strategy in conjunction with its shift to Virtual First. During the year
ended December 31, 2021, the Company recorded an impairment charge of $31.3 million related to its operating leases and related real estate assets, and assets
acquired as part of the acquisition of DocSend in the first quarter of 2021. These impairment charges were recorded as a result of adverse changes in the
corporate real estate market which impacted its subleasing strategy in conjunction with its shift to Virtual First. See Note 9 "Leases" for further information.
The Company leases certain equipment from various third parties, through equipment finance leases. These leases either include a bargain purchase
option, a full transfer of ownership at the completion of the lease term, or the terms of the leases are at least 75 percent of the useful lives of the assets and are
therefore classified as finance leases. These leases are capitalized in property and equipment, net and the related amortization of assets under finance leases is
included in depreciation and amortization expense in the Company’s consolidated statements of operations. Initial asset values and finance lease obligations are
based on the present value of future minimum lease payments.
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DROPBOX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in tables are in millions except per share data, or as otherwise noted)
The Company’s finance lease agreements may contain lease and non-lease components. The non-lease components include payments for support on
infrastructure equipment obtained via finance leases, which when not significant in relation to the overall agreement, are combined with the lease components
and accounted for together as a single lease component.
Internal use software
The Company capitalizes certain costs related to developed or modified software solely for its internal use and cloud based applications used to deliver its
platform. The Company capitalizes costs during the application development stage once the preliminary project stage is complete, management authorizes and
commits to funding the project, and it is probable that the project will be completed and that the software will be used to perform the function intended. Costs
related to preliminary project activities and post implementation activities are expensed as incurred. Capitalized internal use software costs were not material to
the Company’s consolidated financial statements during the years ended December 31, 2022, 2021, and 2020.
Business combinations
The Company uses best estimates and assumptions, including but not limited to, future expected cash flows, expected asset lives, and discount rates, to
assign a fair value to the tangible and intangible assets acquired and liabilities assumed in business combinations as of the acquisition date. These estimates are
inherently uncertain and subject to refinement. During the measurement period, which may be up to one year from the acquisition date, adjustments to the fair
value of these tangible and intangible assets acquired and liabilities assumed may be recorded, with the corresponding offset to goodwill. Upon the conclusion
of the measurement period or final determination of the fair value of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments
are recorded to the Company’s consolidated statements of operations.
Long-lived assets, including goodwill and other acquired intangible assets, net
The Company evaluates the recoverability of its property and equipment and finite-lived intangible assets for possible impairment whenever events or
circumstances indicate that the carrying amount of such assets may not be recoverable. The evaluation is performed at the lowest level for which identifiable
cash flows are largely independent of the cash flows of other assets and liabilities. Recoverability of these assets is measured by a comparison of the carrying
amounts to the future undiscounted cash flows the assets are expected to generate. If such review determines that the carrying amount of specific property and
equipment or intangible assets is not recoverable, the carrying amount of such assets is reduced to its fair value.
The Company reviews goodwill for impairment at least annually in the fourth quarter, or more frequently if events or changes in circumstances would more
likely than not reduce the fair value of its single reporting unit below its carrying value. At December 31, 2022, the single reporting unit had a zero or negative
carrying value of net assets. Goodwill allocated to the single reporting unit is $403.3 million at December 31, 2022.
The Company has not recorded impairment charges on goodwill or intangible assets for the periods presented in these consolidated financial statements.
The Company recorded impairment charges of $175.2 million and $31.3 million related to real estate assets and other lease related obligations during the
years ended December 31, 2022 and 2021, respectively, in conjunction with its decision to move towards a Virtual First work model. See Note 9 "Leases" for
further information.
Acquired property and equipment and finite-lived intangible assets are amortized over their useful lives. The Company evaluates the estimated remaining
useful life of these assets when events or changes in circumstances warrant a revision to the remaining period of amortization. If the Company revises the
estimated useful life assumption for any asset, the remaining unamortized balance is amortized or depreciated over the revised estimated useful life on a
prospective basis.
Income taxes
Deferred income tax balances reflect the effects of temporary differences between the financial reporting and tax bases of the Company’s assets and
liabilities using enacted tax rates expected to apply when taxes are actually paid or recovered. In addition, deferred tax assets are recorded for net operating loss
and credit carryforwards.
A valuation allowance is provided against deferred tax assets unless it is more likely than not that they will be realized based on all available positive and
negative evidence. Such evidence includes, but is not limited to, recent cumulative earnings
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DROPBOX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in tables are in millions except per share data, or as otherwise noted)
or losses, expectations of future taxable income by taxing jurisdiction, and the carry-forward periods available for the utilization of deferred tax assets. As of
December 31, 2022, the Company determined that all of its deferred tax assets related to federal and certain states are more likely than not to be realized,
resulting in a benefit to income taxes of $420.2 million from the release of the valuation allowance. As of December 31, 2021, the Company released the
valuation allowance on its Irish deferred tax assets resulting in an income tax benefit of $38.1 million.
The Company uses a two-step approach to recognizing and measuring uncertain income tax positions. The first step is to evaluate the tax position for
recognition by determining if the weight of available evidence indicates it is more likely than not that the position will be sustained on audit. The second step is
to measure the tax benefit as the largest amount, which is more than 50% likely of being realized upon ultimate settlement. The Company recognizes interest
and penalties related to unrecognized tax benefits as income tax expense.
Although the Company believes that it has adequately reserved for its uncertain tax positions, it can provide no assurance that the final tax outcome of
these matters will not be materially different. The Company evaluates its uncertain tax positions on a regular basis and evaluations are based on a number of
factors, including changes in facts and circumstances, changes in tax law, correspondence with tax authorities during the course of an audit, and effective
settlement of audit issues.
To the extent that the final tax outcome of these matters is different than the amounts recorded, such differences will affect the provision for income taxes
in the period in which such determination is made and could have a material impact on the Company’s financial condition and results of operations.
The Tax Cuts and Jobs Act of 2017 ("TCJA") subjects a U.S. shareholder to current tax global intangible low-taxed income ("GILTI") earned by foreign
subsidiaries. We account for GILTI as a period cost as incurred.
Fair value measurement
The Company applies fair value accounting for all financial assets and liabilities and non-financial assets and liabilities that are recognized or disclosed at
fair value in the financial statements on a recurring basis. The Company defines fair value as the price that would be received from selling an asset or paid to
transfer a liability in an orderly transaction between market participants at the measurement date. When determining fair value measurements for assets and
liabilities, the Company considers the principal or most advantageous market in which it would transact and the market-based risk measurements or
assumptions that market participants would use in pricing the asset or liability, such as risks inherent in valuation techniques, transfer restrictions, and credit
risk. Fair value is estimated by applying the following hierarchy, which prioritizes the inputs used to measure fair value into three levels and bases the
categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement:
Level 1—Quoted prices in active markets for identical assets or liabilities.
Level 2—Observable inputs other than quoted prices in active markets for identical assets and liabilities, quoted prices for identical or similar assets or
liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or
liabilities.
Level 3—Inputs that are generally unobservable and typically reflect management’s estimate of assumptions that market participants would use in pricing
the asset or liability.
Recently issued accounting pronouncements not yet adopted
In March 2022, the FASB issued ASU 2022-02, Financial Instruments—Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage
Disclosures, which eliminates the accounting guidance on troubled debt restructurings for creditors in ASC 310-40 and amends the guidance on "vintage
disclosures" to require disclosure of current-period gross write-offs by year of origination. The ASU also updates the requirements related to accounting for
credit losses under ASC 326 and adds enhanced disclosures for creditors with respect to loan refinancings and restructurings for borrowers experiencing
financial difficulty. The amendments in ASU 2022-02 are effective for fiscal years beginning after December 15, 2022, and interim periods within those fiscal
years. The Company does not expect the adoption of ASU 2022-02 to have a significant impact on its consolidated financial statements.
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DROPBOX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in tables are in millions except per share data, or as otherwise noted)
Recently adopted accounting pronouncements
In May 2021, the FASB issued ASU 2021-04, Earnings Per Share (Topic 260), Debt - Modifications and Extinguishments (Subtopic 470-50),
Compensation - Stock Compensation (Topic 718), and Derivatives and Hedging - Contracts in Entity's Own Equity (Subtopic 815-40) to clarify and reduce
diversity in an issuer’s accounting for modifications or exchanges of freestanding equity-classified written call options (for example, warrants) that remain
equity classified after modification or exchange. The Company adopted ASU 2021-04 on January 1, 2022. The adoption of the standard did not have a material
impact on the Company's consolidated financial statements.
In July 2021, the FASB issued ASU 2021-05, Leases (Topic 842), which amends ASC 842 so that lessors are no longer required to recognize a selling loss
upon commencement of a lease with variable lease payments that, prior to the amendments, would have been classified as a sales-type or direct financing lease.
Furthermore, a lessor must classify as an operating lease any lease that would otherwise be classified as a sales-type or direct financing lease and that would
result in the recognition of a selling loss at lease commencement, provided that the lease includes variable lease payments that do not depend on an index or
rate. The Company adopted ASU 2021-05 on January 1, 2022. The adoption of the standard did not have a material impact on the Company's consolidated
financial statements.
In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from
Contracts with Customers, which requires entities to recognize and measure contract assets and contract liabilities acquired in a business combination in
accordance with Topic 606, Revenue from Contracts with Customers, instead of fair value at the acquisition date in accordance with Topic 805. The
amendments in ASU 2021-08 results in the acquirer recording acquired contract assets and liabilities on the same basis as they would have been recorded by the
acquiree before the acquisition under ASC Topic 606. The amendments in ASU 2021-08 are effective for fiscal years beginning after December 15, 2022, but
early adoption is permitted, including in an interim period. The Company adopted this guidance in the fourth quarter of 2022 on a prospective basis. The
adoption of this standard did not have a material impact on our consolidated financial statements.
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DROPBOX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in tables are in millions except per share data, or as otherwise noted)
Note 2. Cash, Cash Equivalents and Short-Term Investments
The amortized cost, unrealized gains and losses and estimated fair value of the Company's cash, cash equivalents and short-term investments as of December
31, 2022 consisted of the following:
Amortized cost
Unrealized gain
Unrealized loss
Estimated fair value
Cash
Cash equivalents
Money market funds
Commercial paper
Total cash & cash equivalents
Short-term investments
Corporate notes and obligations
U.S. Treasury securities
Asset backed securities
Municipal securities
Commercial paper
Certificates of deposit
U.S. agency obligations
Foreign government obligations
Supranational securities
Total short-term investments
Total
$
$
$
90.1 $
139.5
3.2
232.8 $
512.1
360.2
117.6
65.3
46.4
29.1
18.4
6.0
3.4
1,158.5
1,391.3 $
— $
—
—
— $
0.1
0.2
—
—
—
—
—
—
—
0.3
0.3 $
— $
—
—
— $
(22.7)
(14.0)
(6.0)
(4.1)
—
—
(0.8)
(0.4)
(0.2)
(48.2)
(48.2) $
90.1
139.5
3.2
232.8
489.5
346.4
111.6
61.2
46.4
29.1
17.6
5.6
3.2
1,110.6
1,343.4
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DROPBOX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in tables are in millions except per share data, or as otherwise noted)
The amortized cost, unrealized gains and losses and estimated fair value of the Company's cash, cash equivalents and short-term investments as
of December 31, 2021 consisted of the following:
Amortized cost
Unrealized gain
Unrealized loss
Estimated fair value
Cash
Cash equivalents
Money market funds
Total cash and cash equivalents
Short-term investments
Corporate notes and obligations
U.S. Treasury securities
Asset backed securities
Municipal securities
U.S. agency obligations
Commercial paper
Supranational Securities
Foreign government obligations
Certificates of deposit
Total short-term investments
Total
$
$
$
142.7 $
390.3
533.0 $
607.4
240.4
140.7
70.5
14.6
61.7
8.0
18.4
32.1
1,193.8
1,726.8 $
— $
—
— $
0.4
—
0.1
—
—
—
—
—
—
0.5
0.5 $
— $
—
— $
(4.0)
(2.9)
(1.2)
(0.7)
(0.2)
—
(0.1)
(0.1)
—
(9.2)
(9.2) $
142.7
390.3
533.0
603.8
237.5
139.6
69.8
14.4
61.7
7.9
18.3
32.1
1,185.1
1,718.1
Included in cash and cash equivalents is cash in transit from payment processors for credit and debit card transactions of $12.4 million and $8.3 million as
of December 31, 2022 and December 31, 2021, respectively.
All short-term investments were designated as available-for-sale securities as of December 31, 2022.
The following table presents the contractual maturities of the Company’s short-term investments as of December 31, 2022:
Due within one year
Due between one to three years
Due after three years
Total
Amortized cost
Estimated fair value
$
$
398.6 $
556.8
203.1
1,158.5 $
39
53
18
1,11
The Company had 710 short-term investments in unrealized loss positions as of December 31, 2022. There were no material gains or losses from short-
term investments that were reclassified out of accumulated other comprehensive loss for the year ended December 31, 2022.
As of December 31, 2022, the Company’s short-term investments portfolio consisted of nine security types, seven of which were in an unrealized loss
position. The Company’s short-term investments had unrealized losses of approximately $48.2 million as of December 31, 2022. The following tables present
the breakdown of the short-term investments that have been in a continuous unrealized loss position aggregated by investment category, as of December 31,
2022 and December 31, 2021:
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DROPBOX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in tables are in millions except per share data, or as otherwise noted)
Less than 12 months
Fair Value
Gross
Unrealized
Losses
As of December 31, 2022
More than 12 months
Fair Value
Gross
Unrealized
Losses
Total
Gross
Unrealized
Losses
Fair Value
176.5 $
110.9
13.7
9.3
3.9
—
—
314.3 $
(3.5) $
(1.8)
(0.4)
(0.3)
—
—
—
(6.0) $
292.3 $
176.9
90.4
51.6
13.8
5.5
3.2
633.7 $
(19.2) $
(12.2)
(5.6)
(3.8)
(0.8)
(0.4)
(0.2)
(42.2) $
468.8 $
287.8
104.1
60.9
17.7
5.5
3.2
948.0 $
(22.7)
(14.0)
(6.0)
(4.1)
(0.8)
(0.4)
(0.2)
(48.2)
Less than 12 months
Fair Value
Gross
Unrealized
Losses
As of December 31, 2021
More than 12 months
Fair Value
Gross
Unrealized
Losses
Total
Gross
Unrealized
Losses
Fair Value
498.6 $
218.0
120.7
66.0
14.4
15.4
7.9
941.0 $
(4.0) $
(2.9)
(1.2)
(0.7)
(0.2)
(0.1)
(0.1)
(9.2) $
— $
—
—
—
—
—
—
— $
— $
—
—
—
—
—
—
— $
498.6 $
218.0
120.7
66.0
14.4
15.4
7.9
941.0 $
(4.0)
(2.9)
(1.2)
(0.7)
(0.2)
(0.1)
(0.1)
(9.2)
Corporate notes and obligations
U.S. Treasury securities
Asset backed securities
Municipal securities
U.S. agency obligations
Foreign government obligations
Supranational securities
Total
Corporate notes and obligations
U.S. Treasury securities
Asset backed securities
Municipal securities
U.S. agency obligations
Foreign government obligations
Supranational securities
Total
$
$
$
$
Unrealized losses on short-term investments have not been recorded into income because management does not intend to sell nor will be required to sell
these securities prior to their anticipated recovery, and for which the decline in fair value is largely due to changes in interest rates. The credit ratings associated
with the corporate notes and obligations are mostly unchanged, are highly rated and the issuers continue to make timely principal and interest payments.
The Company recorded $15.7 million, $7.5 million, and $12.5 million in interest income from its cash, cash equivalents and short-term investments for the
years ended December 31, 2022, 2021 and 2020, respectively.
Note 3. Fair Value Measurements
The Company measures its financial instruments at fair value each reporting period using a fair value hierarchy that prioritizes the use of observable
inputs and minimizes the use of unobservable inputs when measuring fair value. A financial instrument’s classification within the fair value hierarchy is based
upon the lowest level of input that is significant to the fair value measurement.
83
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DROPBOX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in tables are in millions except per share data, or as otherwise noted)
The following table presents information about the Company’s financial instruments that are measured at fair value on a recurring basis using the input
categories discussed in Note 1:
Level 1
Level 2
Level 3
Total
As of December 31, 2022
Cash equivalents
Money market funds
Commercial paper
Total cash equivalents
Short-term investments
Corporate notes and obligations
U.S. Treasury securities
Asset backed securities
Municipal securities
Commercial paper
Certificates of deposit
Foreign government obligations
U.S. agency obligations
Supranational securities
Total short-term investments
Total
Cash equivalents
Money market funds
Total Cash Equivalents
Short-term investments
Corporate notes and obligations
U.S. Treasury securities
Asset backed securities
Municipal securities
U.S. agency obligations
Commercial paper
Supranational securities
Foreign government obligations
Certificates of deposit
Total short-term investments
Total
$
$
$
$
$
139.5 $
—
139.5
—
—
—
—
—
—
—
—
—
—
139.5 $
— $
3.2
3.2
489.5
346.4
111.6
61.2
46.4
29.1
5.6
17.6
3.2
1,110.6
1,113.8 $
— $
— $
—
—
—
—
—
—
—
—
—
—
—
— $
Level 1
Level 2
Level 3
Total
As of December 31, 2021
390.3 $
390.3 $
—
—
—
—
—
—
—
—
—
—
390.3 $
— $
— $
603.8
237.5
139.6
69.8
14.4
61.7
7.9
18.3
32.1
1,185.1
1,185.1 $
— $
— $
—
—
—
—
—
—
—
—
—
—
— $
139.5
3.2
142.7
489.5
346.4
111.6
61.2
46.4
29.1
5.6
17.6
3.2
1,110.6
1,253.3
390.3
390.3
603.8
237.5
139.6
69.8
14.4
61.7
7.9
18.3
32.1
1,185.1
1,575.4
As of December 31, 2021, the Company had an investment in a non-marketable equity security in a privately held Company without a readily
determinable market value. The investment had a carrying value of $5.6 million and was categorized as Level 3 as of December 31, 2021. The investment was
sold during the twelve months ended December 31, 2022 resulting in a gain of $5.0 million.
84
Table of Contents
DROPBOX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in tables are in millions except per share data, or as otherwise noted)
The Company had no transfers between levels of the fair value hierarchy.
The carrying amounts of certain financial instruments, including cash held in banks, accounts receivable and accounts payable approximate fair value due
to their short-term maturities and are excluded from the fair value table above.
The Company had $695.8 million in aggregate principal amount of 0% convertible senior notes due in 2026 (the "2026 Notes"), and $693.3 million in
aggregate principal amount of 0% convertible senior notes due in 2028 (the "2028 Notes" and together with the 2026 Notes, the "Notes"), outstanding as of
December 31, 2022. Refer to Note 8 "Debt" for further details on the 2026 Notes and 2028 Notes.
The estimated fair value of the 2026 Notes and the 2028 Notes, based on a market approach as of December 31, 2022 was approximately $631.5 million
and $632.2 million, respectively. The Notes were categorized as Level 2 instruments as the estimated fair value was determined based on the estimated or actual
bids and offers of the Notes in an over-the-counter market on the last business day of the period.
Note 4. Property and Equipment, Net
Property and equipment, net consisted of the following:
Datacenter and other computer equipment
Furniture and fixtures
Leasehold improvements
Construction in progress
Total property and equipment
Accumulated depreciation and amortization
Property and equipment, net
As of December 31,
2022
2021
$
$
671.3 $
19.8
118.0
2.8
811.9
(503.5)
308.4 $
634.5
21.7
106.7
11.7
774.6
(452.6)
322.0
The Company leases certain infrastructure, computer equipment, and furniture from various third parties, through equipment finance leases. Infrastructure
assets as of December 31, 2022 and 2021, respectively, included a total of $456.4 million and $469.4 million acquired under finance lease agreements. These
leases are capitalized in property and equipment, and the related amortization of assets under finance leases is included in depreciation and amortization
expense. The accumulated depreciation of the equipment under finance leases totaled $240.9 million and $237.6 million as of December 31, 2022 and 2021,
respectively.
Depreciation expense related to property and equipment was $140.9 million and $135.7 million for the years ended December 31, 2022 and 2021
respectively.
85
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DROPBOX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in tables are in millions except per share data, or as otherwise noted)
Note 5. Business Combinations
2022 Business Combination
On December 15, 2022, the Company acquired 100% ownership of FormSwift, a cloud-based service that gives individuals and businesses a simple
solution to create, complete, edit, and save critical business forms and agreements. The Company believes the combination of Dropbox, Dropbox Sign,
DocSend, and FormSwift 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 most important agreements. The results of FormSwift's operations have been included in the Company’s consolidated
results of operations since the date of acquisition and were immaterial for the periods presented.
The purchase consideration transferred consisted of the following:
Cash paid to stockholders
Cash paid for extinguishing shadow stock units
Transaction costs paid by Dropbox on behalf of FormSwift
Cash purchase consideration
(1)
Indemnification holdback
Total purchase consideration
Purchase consideration
50.0
3.2
2.0
55.2
14.3
69.5
$
$
$
(1)
Approximately $14.3 million of the total purchase consideration was withheld as an indemnification holdback to be used for the purpose of satisfying any indemnification claims made by the
Company for a period of 18 months following the transaction close date. Any remaining indemnity will be released to the seller's representative following the 18 month period.
In addition to the total purchase consideration above, the Company has compensation agreements with key FormSwift personnel consisting of $25.7
million in cash payments subject to ongoing employee service. The related expenses are recognized within research and development expenses over the
required service period of three years. The cash payment was transferred to a paying agent escrow account immediately upon the acquisition close date. The
related payments will be paid out by the escrow agent as they vest.
The purchase consideration was allocated to the tangible and intangible assets and liabilities acquired as of the acquisition date, with the excess recorded
to goodwill as shown below. The fair value of assets and liabilities acquired may change as additional information is received during the measurement period.
The measurement period will end no later than one-year from the acquisition date.
Assets acquired:
Cash and cash equivalents
Acquisition-related intangible assets
Accounts receivable, prepaid and other assets
Total assets acquired
Liabilities assumed:
Accounts payable, accrued and other liabilities
Deferred revenue
Total liabilities assumed
Net assets acquired, excluding goodwill
Total purchase consideration
Goodwill
(2)
86
$
$
$
$
0.4
41.2
3.4
45.0
4.6
6.6
11.2
33.8
69.5
35.7
Table of Contents
DROPBOX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in tables are in millions except per share data, or as otherwise noted)
(2)
The goodwill recognized was primarily attributable to the opportunity to expand the user base of the Company's platform. A portion of the goodwill is deductible for U.S. federal income tax
purposes.
The fair value of the separately identifiable finite-lived intangible assets acquired and estimated weighted average useful lives are as follows:
Developed technology
Customer relationships
Trade name
Total acquisition-related intangible assets
Estimated fair values
24.2
16.4
0.6
41.2
$
$
Estimated weighted average
useful lives
(In years)
5.0
2.0
1.0
The fair values of the acquisition-related intangible assets were determined using the following methodologies: the multi-period excess earnings method
for developed technology, the with and without method for customer relationships, and the relief from royalty method for the trade name, respectively. The
valuation model inputs required the application of significant judgment by management. The acquired intangible assets have a total weighted average
amortization period of 3.7 years.
One-time acquisition-related diligence costs of $1.3 million were expensed within general and administrative expenses as incurred during the year ended
December 31, 2022.
2021 Business Combination
On March 22, 2021, the Company acquired all outstanding stock of DocSend, a secure document sharing and analytics company. The Company believes
the combination of Dropbox, Dropbox Sign, 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. The results of DocSend's operations have been included in the
Company’s consolidated results of operations since the date of acquisition.
The purchase consideration transferred consisted of the following:
Cash paid to common and preferred stockholders and vested option holders
Transaction costs paid by Dropbox on behalf of DocSend
Fair value of assumed DocSend options attributable to pre-combination services
Purchase price adjustments
Total purchase consideration
(1)
(1)
The fair value of options assumed was based upon the Black-Scholes option-pricing model.
Purchase consideration
125.5
5.0
1.2
0.1
131.8
$
$
In addition to the total purchase consideration above, the Company has compensation agreements with key DocSend personnel consisting of $30.7 million
in cash payments subject to ongoing employee service. The related expenses are recognized within sales and marketing and research and development expenses
over the required service period of approximately three years. The payments began in the first quarter of 2022, with $10.2 million paid during the year ended
December 31, 2022. The remaining balance of $20.5 million will be paid out over the next year in accordance with the acquisition agreement.
The purchase consideration was allocated to the tangible and intangible assets and liabilities acquired as of the acquisition date, with the excess recorded
to goodwill as shown below.
87
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DROPBOX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in tables are in millions except per share data, or as otherwise noted)
Assets acquired:
Cash and cash equivalents
Acquisition-related intangible assets
Accounts receivable, prepaid and other assets
Total assets acquired
Liabilities assumed:
Accounts payable, accrued and other liabilities
Deferred revenue
Deferred tax liability
Total liabilities assumed
Net assets acquired, excluding goodwill
Total purchase consideration
Goodwill
(2)
$
$
$
$
5.1
20.6
6.1
31.8
6.4
1.9
1.9
10.2
21.6
131.8
110.2
(2)
The goodwill recognized was primarily attributable to the opportunity to expand the user base of the Company's platform. The goodwill is not deductible for U.S. federal income tax
purposes.
The fair value of the separately identifiable finite-lived intangible assets acquired and estimated weighted average useful lives are as follows:
Developed technology
Customer relationships
Trade name
Total acquisition-related intangible assets
Estimated fair values
11.5
8.1
1.0
20.6
$
$
Estimated weighted average
useful lives
(In years)
5.0
5.0
5.0
The fair values of the acquisition-related intangible assets were determined using the following methodologies: the multi-period excess earnings method
for customer relationships, and the relief from royalty method for developed technology, and the trade name, respectively. The valuation model inputs required
the application of significant judgment by management. The acquired intangible assets have a total weighted average amortization period of 5.0 years.
One-time acquisition-related diligence costs of $1.2 million were expensed within general and administrative expenses as incurred during the year ended
December 31, 2021.
88
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DROPBOX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in tables are in millions except per share data, or as otherwise noted)
Note 6. Intangible Assets
Intangible assets consisted of the following:
Developed technology
Customer relationships
Patents
Software
Trademarks and trade names
Licenses
Assembled workforce in asset acquisitions
Other
Total intangibles
Accumulated amortization
Intangible assets, net
As of December 31,
2022
2021
74.3 $
43.2
19.4
8.9
5.8
4.6
3.4
1.1
160.7
(72.4)
88.3 $
45.9
28.6
19.5
9.0
5.6
4.6
3.0
0.8
117.0
(63.4)
53.6
$
$
Amortization expense was $16.3 million, $15.6 million, and $14.1 million for the years ended December 31, 2022, 2021, and 2020, respectively.
Expected future amortization expense for intangible assets as of December 31, 2022, is as follows:
2023
2024
2025
2026
2027
Thereafter
Total
Note 7. Goodwill
$
$
Goodwill represents the excess of the purchase price in a business combination over the fair value of net tangible and intangible assets acquired. The
changes in the carrying amounts of goodwill were as follows:
Balance at December 31, 2021
FormSwift acquisition
Other acquisition
Effect of foreign currency translation
Balance at December 31, 2022
$
$
356.6
35.7
14.4
(3.4)
403.3
89
Weighted-
average
remaining
useful life
(In years)
4.2
2.2
4.3
0.7
1.6
0.0
3.3
2.8
30.4
25.1
14.8
10.4
7.0
0.6
88.3
Table of Contents
DROPBOX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in tables are in millions except per share data, or as otherwise noted)
Goodwill amounts are not amortized but tested for impairment on an annual basis. There was no impairment of goodwill as of December 31, 2022, 2021,
and 2020.
Note 8. Debt
Revolving credit facility
In February 2018, the Company entered into an amendment to the revolving credit facility to, among other things, permit the Company to make certain
investments, enter into an unsecured standby letter of credit facility and increase its standby letter of credit sublimit to $187.5 million. The Company increased
its borrowing capacity under the revolving credit facility from $600.0 million to $725.0 million. In February 2021, the Company amended the revolving credit
facility to decrease its borrowing capacity under the revolving credit facility from $725.0 million to $500.0 million and extended the term of the agreement
through February 2026. The Company may from time to time request increases in its 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. In conjunction with the February 2021
amendment, the Company paid upfront issuance fees of $1.7 million, which are being amortized over the remaining term of the agreement, and wrote-off
$0.2 million in unamortized deferred debt issuance costs.
Pursuant to the terms of the revolving credit facility, the Company may issue letters of credit under the revolving credit facility, which reduce the total
amount available for borrowing. Pursuant to the terms of the revolving credit facility, the Company is 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, the Company is required to pay
a fee in connection with letters of credit issued under the revolving credit facility, which 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. Borrowings under the revolving credit facility bear interest, at the Company’s option, at an annual rate based on LIBOR plus a spread of
1.375% or at an alternative base rate plus a spread of 0.375%.
The revolving credit facility contains customary conditions to borrowing, events of default and covenants, including covenants that restrict the Company’s
ability to incur indebtedness, grant liens, make distributions to holders of the Company or its subsidiaries’ equity interests, make investments, or engage in
transactions with its affiliates. In addition, the revolving credit facility contains financial covenants, including a consolidated leverage ratio incurrence covenant
and a minimum liquidity balance of $100.0 million, which includes any available borrowing capacity. The Company was in compliance with the covenants of
the revolving credit facility as of December 31, 2022 and 2021, respectively.
The Company had an aggregate of $40.6 million of letters of credit outstanding under the revolving credit facility as of December 31, 2022, and the
Company’s total available borrowing capacity under the revolving credit facility was $459.4 million as of December 31, 2022. The Company’s letters of credit
have final expiration dates through 2036.
Convertible senior notes
During the first quarter of 2021, the Company issued $695.8 million aggregate principal amount of the 2026 Notes. Additionally, during the first quarter
of 2021, the Company issued $693.3 million aggregate principal amount of the 2028 Notes. The Notes were issued in a private placement to qualified
institutional buyers pursuant to Rule 144A under the Securities Act of 1933. The net proceeds from the sale of the Notes were approximately $1.4 billion after
deducting offering and issuance costs related to the Notes.
The Notes of each series do not bear regular interest. 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. The Company has complied with these reporting obligations from the issuance date through December 31,
2022. The 2026 Notes will mature on March 1, 2026, and the 2028 Notes will mature on March 1, 2028, in each case, unless earlier converted, redeemed or
repurchased.
The initial conversion rate for the 2026 Notes is 26.1458 shares of the Company’s Class A common stock per $1,000 principal amount of such Note,
which is equivalent to an initial conversion price of approximately $38.25 per share. The initial conversion rate for the 2028 Notes is 28.2889 shares of Class A
common stock per $1,000 principal amount of such Notes,
90
Table of Contents
DROPBOX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in tables are in millions except per share data, or as otherwise noted)
which is equivalent to an initial conversion price of approximately $35.35 per share. The conversion rate for each series of Notes will be subject to adjustment
upon the occurrence of certain specified events but will not be adjusted for accrued and unpaid special interest. In addition, upon the occurrence of a make-
whole fundamental change (as defined in the relevant indentures governing the Notes) or a notice of redemption, the Company will, in certain circumstances,
increase the conversion rate of the relevant series of Notes by a number of additional shares for a holder that elects to convert all or a portion of its Notes of
such series in connection with such make-whole fundamental change or who elects to convert such Notes that are subject to such notice of redemption. The
conversion rate for the 2026 Notes and the 2028 Notes shall not exceed 43.1406 shares per $1,000 principal amount of such Notes, subject to certain customary
anti-dilution adjustments (as defined in the relevant indentures governing the Notes). There have been no changes to the initial conversion price of the Notes
since issuance as of December 31, 2022.
Upon conversion, the principal portion of the Notes of the applicable series being converted will be settled in cash, and any amount in excess of the
principal portion of such Notes will be settled in cash or shares of the Company’s Class A common stock or any combination thereof at the Company’s option.
The if-converted value of the 2026 Notes and the 2028 Notes was below the principal value of the respective Notes as of December 31, 2022. In addition,
during the year ended December 31, 2022, the conditions allowing holders of the Notes to convert were not met. As a result, the Notes are not convertible
during the year ended December 31, 2022.
Prior to the close of business on the business day immediately preceding December 1, 2025, in the case of the 2026 Notes, and prior to the close of
business on the business day immediately preceding December 1, 2027, in the case of the 2028 Notes, the Notes of the applicable series will be convertible only
under the following circumstances: (1) during any calendar quarter commencing after June 30, 2021 (and only during such calendar quarter), if the last reported
sale price of the Class A common stock for at least 20 trading days (whether or not consecutive) during the 30 consecutive trading day period ending on the last
trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price for the relevant series of Notes on each
applicable trading day; (2) during the five business day period after any five consecutive trading day period in which, for each trading day of that period, the
trading price per $1,000 principal amount of 2026 Notes or 2028 Notes, as applicable, for such trading day was less than 98% of the product of the last reported
sale price of the Class A common stock and the conversion rate for such series of Notes on each such trading day; (3) if the Company calls any or all of the
Notes for redemption, such Notes of the applicable series called for redemption may be converted at any time prior to the close of business on the second
scheduled trading day immediately preceding the redemption date; or (4) upon the occurrence of specified corporate transactions.
On or after December 1, 2025, in the case of the 2026 Notes, and on or after December 1, 2027, in the case of the 2028 Notes, until the close of business
on the second scheduled trading day immediately preceding the relevant maturity date, holders of the relevant series of Notes may convert all or a portion of
their Notes of such series regardless of the foregoing conditions.
The Company may redeem for cash all or any part of the Notes, at its option, on or after March 6, 2024, in the case of the 2026 Notes, and on or after
March 6, 2025, in the case of the 2028 Notes, if the last reported sale price of its Class A common stock has been at least 130% of the conversion price for the
relevant series of Notes then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period (including the last
trading day of such period) ending on, and including, the trading day immediately preceding the date on which the Company provides notice of redemption at a
redemption price equal to 100% of the principal amount of the series of Notes to be redeemed, plus any accrued and unpaid special interest to, but excluding,
the redemption date. No sinking fund is provided for the Notes.
Upon the occurrence of a fundamental change (as defined in the relevant indentures governing the Notes) prior to the relevant maturity date, holders of
the relevant series of Notes may require the Company to repurchase all or a portion of the Notes of such series for cash at a price equal to 100% of the principal
amount of the series of Notes to be repurchased, plus any accrued and unpaid special interest to, but excluding, the fundamental change repurchase date.
Additionally, and upon events of default (as defined in the relevant indentures governing the Notes), the maturity of the Notes may be accelerated.
The Notes are the Company’s general unsecured obligations and will rank senior in right of payment to any existing and future indebtedness that is
contractually subordinated to the Notes; rank equal in right of payment with the Company’s existing and future senior unsecured indebtedness that is not so
subordinated; effectively rank junior in right of payment to any of the Company’s existing and future secured indebtedness to the extent of the value of the
assets securing such indebtedness; and be structurally subordinated to all indebtedness and other liabilities (including trade payables) of subsidiaries of the
Company.
91
Table of Contents
DROPBOX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in tables are in millions except per share data, or as otherwise noted)
In accounting for the Notes, issuance costs of $11.0 million and $11.0 million for the 2026 Notes and the 2028 Notes were deducted from the carrying
value of the Notes in the consolidated balance sheet. Issuance costs will be recognized as interest expense over the five-year term and seven-year term for the
2026 Notes and the 2028 Notes, respectively.
The following is a summary of the Company’s convertible senior notes as of December 31, 2022 and December 31, 2021.
December 31, 2022
Principal balance
Unamortized issuance costs
Carrying value, net
December 31, 2021
Principal balance
Unamortized issuance costs
Carrying value, net
2026 Notes
2028 Notes
Total
$
$
$
$
695.8 $
(7.0)
688.8 $
695.8 $
(9.1)
686.7 $
693.3 $
(8.1)
685.2 $
693.3 $
(9.7)
683.6 $
1,389.1
(15.1)
1,374.0
1,389.1
(18.8)
1,370.3
During the years ended December 31, 2022 and 2021, the Company recognized $2.1 million and $1.9 million in interest expense for the 2026 Notes and
$1.6 million and $1.3 million in interest expense for the 2028 Notes, respectively, with such interest expense solely consisting of amortization of issuance costs.
The effective interest rate for the 2026 Notes and the 2028 Notes was 0.32% and 0.22%, respectively, as of December 31, 2022.
Maturities on the Company's long-term convertible debt are as follows:
2023
2024
2025
2026
2027
Thereafter
Total
$
Convertible Debt
—
—
—
695.8
—
693.3
1,389.1
Convertible Note Hedges and Warrants
Concurrent with the offering of the Notes, the Company entered into convertible note hedge transactions with certain counterparties whereby the
Company had the option to purchase a total of approximately 18.2 million shares for note hedges expiring in March 2026 (the “2026 Note Hedges”) and
19.6 million shares for note hedges expiring in March 2028 (the “2028 Note Hedges”, together with the 2026 Note Hedges, the “Note Hedges”), respectively, of
its common stock at a price of approximately $38.25 and $35.35 per share, respectively. The aggregate cost of the convertible note hedge transactions was
$265.3 million.
The Note Hedges, or a portion thereof, are exercisable upon conversion of the Notes and the satisfaction of certain conditions set forth in the Note
Hedges. Additionally, the Note Hedges may be terminated and early settled upon the occurrence of certain events, including certain merger events, events of
default, and upon a fundamental change (as defined in the relevant indentures for the Notes). The Note Hedges are settleable in cash, shares or a combination of
cash and shares, at the option of the Company, and the settlement alternative will be the same as the settlement alternative of the conversion spread for the
respective Notes.
The convertible note hedge transactions are expected generally to reduce the potential dilution to the Class A common stock upon conversion of the
relevant series of Notes and/or offset any cash payments the Company is required to make in
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DROPBOX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in tables are in millions except per share data, or as otherwise noted)
excess of the principal amount of such converted Notes, as the case may be, in the event that the market price per share of the Class A common stock, as
measured under the terms of the convertible note hedge transactions, is greater than the applicable strike price of those convertible note hedge transactions. As
of December 31, 2022, the Company’s stock price was below the exercise price of the respective Note Hedges.
In addition, the Company sold warrants to certain counterparties whereby the holders of the warrants had the option to purchase a total of approximately
18.1 million shares underlying warrants expiring in 2026 (the “2026 Warrants”) and 20.1 million shares underlying warrants expiring in 2028 (the “2028
Warrants”, together with the 2026 Warrants, the “Warrants”), respectively, of the Company’s Class A common stock at an initial strike price of $46.36 and
$46.36 per share, respectively. The Company received aggregate cash proceeds of $202.9 million from the sale of these Warrants.
If the market price per share of the Company’s Class A common stock, as measured under the terms of the Warrants, exceeds the strike price of the
Warrants, the Warrants could have a dilutive effect, unless the Company elects, subject to certain conditions, to settle the Warrants in cash. The Warrants are
only exercisable on the applicable expiration dates in accordance with the terms of the Warrants. Subject to the other terms of the Warrants, the first expiration
date applicable to the 2026 Warrants and to the 2028 Warrants is June 1, 2026, and June 1, 2028, respectively, and the final expiration date applicable to the
2026 Warrants and 2028 Warrants is August 10, 2026 and August 10, 2028, respectively. As of December 31, 2022, the Company’s Class A common stock
price was below the exercise price of the Warrants.
Taken together, the purchase of the Note Hedges and the sale of the Warrants are intended to reduce potential dilution from the conversion of the 2026
Notes and the 2028 Notes, and to effectively increase the overall conversion price from $38.25 per share to $46.36 per share and from $35.35 per share to
$46.36 for the 2026 Notes and the 2028 Notes, respectively.
The Note Hedges and the Warrants are equity-classified instruments as a result of being indexed to the Company’s Class A common stock and meeting
certain equity classification criteria, and the instruments will not be remeasured in subsequent periods as long as the instruments continue to meet these
accounting criteria. The premium paid for the Note Hedges has been included as a net reduction to additional paid-in capital within stockholders’ (deficit)
equity, and the premium received for the Warrants has been included as a net increase to additional paid-in capital within stockholders' (deficit) equity.
Note 9. Leases
Leases
The Company has operating leases for corporate offices and datacenters, and finance leases for infrastructure and office equipment. The Company’s leases
have remaining lease terms of 1 year to 14 years, some of which include options to extend the leases for up to 5 years.
The Company also has subleases for several floors of its former corporate offices. The Company classifies its subleases as operating leases. The subleases
have remaining lease terms of 1 year to 10 years, some of which include options to extend the sublease for up to approximately 4 years. Sublease income, which
is recorded as a reduction of rental expense, was $20.1 million for the year ended December 31, 2022 and $17.6 million for the year ended December 31, 2021.
The components of lease cost were as follows:
(1)
Operating lease cost
Finance lease cost:
Amortization of assets under finance lease
Interest
Total finance lease cost
(1)
Is presented gross of sublease income and includes short-term leases, which are immaterial.
93
Year ended December 31,
2021
2022
$
$
91.7 $
111.4
7.5
118.9 $
107.8
107.1
8.8
115.9
Table of Contents
DROPBOX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in tables are in millions except per share data, or as otherwise noted)
Other information related to leases was as follows:
Supplemental Cash Flow Information:
Cash paid for amounts included in the measurement of lease liabilities:
Payments for operating leases included in cash from operating activities
Payments for finance leases included in cash from operating activities
Payments for finance leases included in cash from financing activities
Assets obtained in exchange for lease obligations:
Operating leases
Finance leases
Year ended December 31,
2022
Year ended December
2021
$
$
104.7 $
7.5
127.5
33.0
105.8 $
13
1
6
12
As of December 31, 2022
As of December 31, 2021
Weighted Average Remaining Lease Term (in years)
Operating leases
Finance leases
Weighted Average Discount Rate
Operating leases
Finance leases
9.9
2.6
4.1 %
3.4 %
Future minimum lease payments under non-cancellable leases as of December 31, 2022 were as follows:
Year ending December 31,
2023
2024
2025
2026
2027
Thereafter
Total future minimum lease payments
Less imputed interest
Less tenant improvement receivables
Total liability
Operating leases
(1)
Finance leases
$
$
94.7 $
89.9
84.5
64.9
65.1
411.7
810.8
(155.5)
(1.2)
654.1 $
(1)
Consists of future non-cancelable minimum rental payments under operating leases for the Company’s corporate offices and datacenters where the Company has
possession, excluding rent payments for short-term lease obligations, payments from the Company’s subtenants and variable operating expenses.
10.2
2.7
4.0 %
2.9 %
121.9
87.4
49.4
21.1
0.2
—
280.0
(13.5)
—
266.5
94
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DROPBOX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in tables are in millions except per share data, or as otherwise noted)
Future non-cancelable rent payments from the Company's subtenants as of December 31, 2022 were as follows:
Year ending December 31,
2023
2024
2025
2026
2027
Thereafter
Total future sublease rent payments
Less subtenant incentive
Total future sublease rent payments, net
Operating leases
17
16
15.
11.
8.
26.
96.
(1.
95.
$
In 2017, the Company signed a 15 year lease agreement for office space in San Francisco, California, to serve as its corporate headquarters which
commenced in 2018. The Company’s obligations under the lease are supported by a $26.1 million letter of credit, which reduced the borrowing capacity under
the revolving credit facility. As of December 31, 2022, the Company's remaining minimum obligation for its headquarters was $553.2 million.
In the fourth quarter of 2020, the Company announced a Virtual First work model pursuant to which remote work has become the primary experience for
all of its employees. As part of the Virtual First strategy, Dropbox retained a portion of its office space to be used for the Company’s team collaboration use and
a portion will be marketed for sublease. The Company evaluated certain of its right-of-use assets and other lease related assets including leasehold
improvements, furniture and fixtures, and computer equipment for impairment under ASC 360.
During the years ended December 31, 2022 and 2021, the Company continued to evaluate the recoverability of its real estate assets and made adjustments
to market participant assumptions. In the fourth quarter of 2022, the Company determined that there were adverse changes in the corporate real estate markets
where it plans to sublease office space. These changes have reduced demand for corporate office real estate, which the Company expects will result in increased
real estate vacancy periods and reduced sublease rent rates. Accordingly, the Company assessed the recoverability of its real estate assets in the markets that
have been impacted.
As a result of this analysis, the Company reassessed its real estate asset groups and estimated the fair value of the office space to be subleased using current
market conditions. Where the carrying value of the individual asset groups exceeded their fair value, an impairment charge was recognized for the difference.
The Company recorded impairment charges related to real estate assets of $175.2 million and $31.3 million during the year ended December 31, 2022 and
2021, respectively. The impairment charges included accruals for expected losses related to common area maintenance costs that the Company expects to incur
during vacancy periods. Accruals for expected losses are recorded within accrued and other current liabilities and other liabilities.
As of December 31, 2022, the Company has a $1.0 million commitment related to a sublease that has not commenced, with a lease term of 2 years.
95
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DROPBOX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in tables are in millions except per share data, or as otherwise noted)
Note 10. Commitments and Contingencies
Other commitments
Other commitments include payments to third-party vendors for services related to the Company's infrastructure, infrastructure warranty contracts, and
asset retirement obligations for office modifications.
Future minimum payments under the Company's non-cancelable leases, finance lease obligations, and other commitments as of December 31, 2022, are
as follows, and exclude non-cancelable rent payments from the Company's subtenants:
Year ended December 31:
2023
2024
2025
2026
2027
Thereafter
Future minimum payments
Less interest and taxes
Less current portion of the present value of minimum lease payments
Financing lease obligations, net of current portion
Finance
lease
commitments
Operating lease
(1)
commitments
Other
commitments
(2)
94.7
89.9
84.5
64.9
65.1
411.7
810.8
4
4
1
6
121.9
87.4
49.4
21.1
0.2
—
280.0
(13.5)
(114.8)
151.7
(1)
(2)
This balance includes short-term lease obligations.
This balance excludes indemnification and founder holdbacks related to our acquisitions. See Note 5, "Business Combinations" for further details.
Legal matters
From time to time, the Company is a party to a variety of claims, lawsuits, and proceedings which arise in the ordinary course of business, including
claims of alleged infringement of intellectual property rights. The Company records a liability when it believes that it is probable that a loss will be incurred and
the amount of loss or range of loss can be reasonably estimated. In its opinion, resolution of pending matters is not likely to have a material adverse impact on
its consolidated results of operations, cash flows, or its financial position. Given the unpredictable nature of legal proceedings, the Company bases its estimate
on the information available at the time of the assessment. As additional information becomes available, the Company reassesses the potential liability and may
revise the estimate.
In 2019, multiple lawsuits were filed against the Company in California state court and federal court asserting violations of federal securities laws, for
allegedly making materially false and misleading statements in, or omitting material information from, the Company's initial public offering ("IPO") registration
statement. All cases have now been resolved. The federal court litigation was resolved in a settlement approved in December 2021. In the state court, the
Company’s motion to dismiss the consolidated case based on the exclusive federal forum provisions contained in the Company's amended and restated bylaws
was granted on December 4, 2020, and affirmed by the California Court of Appeal on May 13, 2022. The California Supreme Court denied the plaintiff’s
petition for review on August 10, 2022. The plaintiff elected not to petition for certiorari to the U.S. Supreme Court. Accordingly, the state securities litigation is
also now resolved.
Indemnification
The Company’s arrangements generally include certain provisions for indemnifying customers against liabilities if its products or services infringe a third
party’s intellectual property rights. It is not possible to determine the maximum potential amount under these indemnification obligations due to the limited
history of prior indemnification claims.
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DROPBOX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in tables are in millions except per share data, or as otherwise noted)
Note 11.Accrued and Other Current Liabilities
Accrued and other current liabilities consisted of the following:
Non-income taxes payable
Accrued legal and other external fees
Other accrued and current liabilities
Total accrued and other current liabilities
Note 12. Stockholders’ (Deficit) Equity
Common stock
As of December 31,
2022
2021
$
$
76.4 $
25.5
38.0
139.9 $
77.4
24.0
39.4
140.8
The Company’s amended and restated certificate of incorporation authorizes the issuance of Class A common stock, Class B common stock, and Class C
common stock. Holders of Class A common stock, Class B common stock, and Class C common stock are entitled to dividends on a pro rata basis, when, as,
and if declared by the Company’s Board of Directors, subject to the rights of the holders of the Company’s preferred stock. Holders of Class A common stock
are entitled to one vote per share, holders of Class B common stock are entitled to 10 votes per share, and holders of Class C common stock are entitled
to zero votes per share.
As of December 31, 2022, the Company had authorized 2,400.0 million shares of Class A common stock, 475.0 million shares of Class B common stock,
and 800.0 million shares of Class C common stock, each at par value of $0.00001. Holders of Class B common stock voluntarily converted 0.6 million and 0.7
million shares into an equivalent number of shares of Class A common stock during the years ended December 31, 2022 and 2021 respectively. As
of December 31, 2022, 267.2 million shares of Class A common stock, 82.2 million shares of Class B common stock, and no shares of Class C common stock
were issued and outstanding. As of December 31, 2021, 292.7 million shares of Class A common stock, 82.8 million shares of Class B common stock,
and no shares of Class C common stock were issued and outstanding. Class A shares issued and outstanding as of December 31, 2022 and 2021 exclude
unvested restricted stock awards granted to certain executives. Class A shares issued and outstanding as of December 31, 2022 and 2021 exclude 8.3 million
unvested restricted stock awards granted to one of the Company's co-founders. See "Co-Founder Grant" section below for further details.
Preferred stock
The Company's Board of Directors will have the authority, without further action by the Company's stockholders, to issue up to 240.0 million shares of
undesignated preferred stock with rights and preferences, including voting rights, designated from time to time by the Board of Directors.
Stock repurchase program
In February 2022, the Board of Directors authorized the Company to repurchase up to $1.2 billion of the Company's outstanding shares of 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
the Company to repurchase any specific number of shares and may be discontinued at any time.
During the year ended December 31, 2022, the Company repurchased and subsequently retired 35.6 million shares of its Class A common stock for an
aggregate amount of $795.4 million. During the year ended December 31, 2021, the Company repurchased and subsequently retired 41.1 million of its Class A
common stock for an aggregate amount of $1.1 billion. This includes $200.0 million in repurchases of 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.
97
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DROPBOX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in tables are in millions except per share data, or as otherwise noted)
Equity incentive plans
Under the 2018 Plan, the Company may grant stock-based awards to purchase or directly issue shares of common stock to employees, directors, and
consultants. Options are granted at a price per share equal to the fair market value of the Company's common stock at the date of grant. Options granted are
exercisable over a maximum term of 10 years from the date of grant and generally vest over a period of four years. RSUs and RSAs are also granted under the
2018 Plan. The 2018 Plan will terminate 10 years after the later of (i) its adoption or (ii) the most recent stockholder-approved increase in the number of shares
reserved under the 2018 Plan, unless terminated earlier by the Company's Board of Directors. The 2018 Plan was adopted on March 22, 2018.
In connection with the acquisition of DocSend, the Company assumed unvested stock options and an immaterial number of unvested RSUs that had been
granted under DocSend's 2013 Stock Plan and DocSend's 2015 Stock Option and Grant Plan.
As of December 31, 2022, there were 34.8 million stock-based awards issued and outstanding and 98.2 million shares available for issuance under the
Dropbox Equity Incentive Plans, Dropbox Sign's 2011 Equity Incentive Plan, DocSend's 2013 Stock Plan and DocSend's 2015 Stock Option and Grant Plan
(collectively, the "Plans").
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DROPBOX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in tables are in millions except per share data, or as otherwise noted)
Stock option and restricted stock activity for the Plans was as follows for the years ended December 31, 2022 and 2021:
Options outstanding
Number of
shares
available for
issuance
under the
Plans
Number of
shares
outstanding
under the
Plans
Weighted-
average
exercise
price
per share
Weighted-
average
remaining
contractual
term
(In years)
Restricted stock
outstanding
Aggregate
Intrinsic
Value
Number of
Plan
shares
outstanding
Weighted-
average
grant date
fair value
per share
Balance as of December 31, 2020
(1)
Additional shares authorized
Stock options assumed
Options exercised and restricted stock
units and awards released
Options and restricted stock units and
awards canceled
Shares withheld related to net share
settlement of restricted stock units and
awards
Options and restricted stock units and
awards granted
Balance as of December 31, 2021
Additional shares authorized
Options exercised and restricted stock
units and awards released
Options and restricted stock units and
awards canceled
Shares withheld related to net share
settlement of restricted stock units and
awards
Options and restricted stock units and
awards granted
Balance as of December 31, 2022
Vested at December 31, 2022
Unvested at December 31, 2022
78.5
20.3
0.4
11.0
4.6
(19.6)
95.2
18.8
6.9
5.1
(27.8)
98.2
1.3 $
13.73
5.7 $
11.4
31.9 $
19.79
0.4 $
(0.7)
(0.1)
2.17
9.77
11.84
0.9 $
12.09
5.4 $
10.0
(0.1)
(0.4)
3.00
18.53
0.4 $
0.3 $
0.1 $
11.30
13.83
2.01
4.5 $
4.1 $
$
4.5
2.8
1.7
(12.7)
(11.0)
19.6
27.8 $
(14.3)
(6.5)
27.8
34.8 $
— $
34.8 $
20.77
21.12
20.71
26.34
24.17
23.37
23.72
23.40
22.68
23.40
—
23.40
(1)
This amount includes an immaterial amount of unvested RSUs that were assumed as part of the acquisition of DocSend. The RSUs had a weighted-average
grant date fair value of $26.86 per share and a total fair value of $0.4 million, all of which will be recognized as post-combination stock-based compensation
expense.
The following table summarizes information about the pre-tax intrinsic value of options exercised during the years ended December 31, 2022 and 2021:
Intrinsic value of options exercised
Year ended
December 31,
2022
2021
$
2.9 $
12.3
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DROPBOX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in tables are in millions except per share data, or as otherwise noted)
As of December 31, 2022, unamortized stock-based compensation related to unvested stock options, restricted stock awards (excluding the Co-Founder
Grant), and RSUs was $772.2 million. The weighted-average period over which such compensation expense will be recognized if the requisite service is
provided is approximately 2.8 years as of December 31, 2022.
Assumed stock options
In connection with the acquisition of DocSend the Company assumed 0.9 million unvested stock options which were valued using the Black-Scholes
option-pricing model. The fair value of stock options assumed were estimated using the following assumptions:
Expected volatility
Expected term (in years)
Risk-free interest rate
Dividend yield
47 %
2.0 - 6.8
0.15% - 1.29%
— %
Expected volatility. The expected volatility is based on the Company's historical volatility. Management believes this is the best estimate of the expected
volatility over the expected life of its stock options.
Expected term. The Company determines the expected term based on the average period the stock options are expected to remain outstanding, generally
calculated as the midpoint of the stock options’ remaining vesting term and contractual expiration period, as the Company does not have sufficient historical
information to develop reasonable expectations about future exercise patterns and post-vesting employment termination behavior.
Risk-free interest rate. The risk-free interest rate is based on the U.S. Treasury security in effect at the time the options were assumed for maturities
corresponding with the expected term of the option.
Expected dividend yield. The Company has not paid and does not expect to pay dividends. Consequently, the Company uses an expected dividend yield of
zero.
In connection with the acquisition of DocSend, the estimated weighted-average grant date fair value for stock options assumed was $25.28 per share and a
total fair value of $9.3 million, of which, $8.1 million will be recognized as post-combination stock-based compensation expense.
Co-Founder Grant
In December 2017, the Board of Directors approved the Company's Co-Founder Grant, consisting of 10.3 million shares of Class A common stock in the
form of RSAs which were granted to Drew Houston, the Company’s co-founder and Chief Executive Officer. This Co-Founder Grant has service-based, market-
based, and performance-based vesting conditions. The Co-Founder Grant is excluded from Class A common stock issued and outstanding until the satisfaction
of these vesting conditions. The Co-Founder Grant also provides the holder with certain stockholder rights, such as the right to vote the shares with the other
holders of Class A common stock and a right to cumulative declared dividends.
The Co-Founder Grant is eligible to vest over the ten-year period following the date the Company’s shares of Class A common stock commenced trading
on the Nasdaq Global Select Market in connection with the Company’s IPO. The Co-Founder Grant is comprised of nine tranches that are eligible to vest based
on the achievement of stock price goals, each of which are referred to as a Stock Price Target, measured over a consecutive thirty-day trading period during the
Performance Period. The Performance Period began on January 1, 2019.
During the first four years of the Performance Period, no more than 20% of the shares subject to the Co-Founder Grant would be eligible to vest in any
calendar year. After the first four years, all shares are eligible to vest based on the achievement of the Stock Price Targets.
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DROPBOX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in tables are in millions except per share data, or as otherwise noted)
The first tranche of the Co-Founder Grant, or 2.1 million shares of Class A common stock, vested in the fourth quarter of 2021. The stock-based
compensation expense for the Co-Founder Grant is recognized utilizing the accelerated attribution method over the requisite service period identified as the
derived service period over which the market conditions are expected to be achieved, and is not reversed if the market conditions are not satisfied. Therefore no
incremental stock-based compensation was recognized upon vesting of these RSAs.
The Company recognized stock-based compensation expense related to the Co-Founder Grant of $11.7 million and $14.6 million during the years ended
December 31, 2022 and 2021, respectively. Unamortized stock-based compensation expense related to the Co-Founder Grant was $9.4 million as of the year
ended December 31, 2022.
Note 13. Net Income (Loss) Per Share
The Company computes net income (loss) per share using the two-class method required for multiple classes of common stock and participating
securities. The rights, including the liquidation and dividend rights, of the Class A common stock and Class B common stock are substantially identical, other
than voting rights. Accordingly, the Class A common stock and Class B common stock share equally in the Company’s net income and losses.
Basic net income per share is computed by dividing net income attributable to common stockholders by the weighted-average number of shares of the
Class A and Class B common stock outstanding.
Diluted net income per share is computed by dividing net income attributable to common stockholders by the weighted-average number of diluted
common shares outstanding. The computation of the diluted net income per share of Class A common stock assumes the conversion of our Class B common
stock to Class A common stock, while the diluted net income per share of Class B common stock does not assume the conversion of those shares to Class A
common stock. The dilutive effect of potentially dilutive common shares is reflected in diluted earnings per share by application of the if-converted method for
the 2026 Notes and the 2028 Notes, and by application of the treasury stock method for the Company's other potentially dilutive securities.
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DROPBOX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in tables are in millions except per share data, or as otherwise noted)
The numerators and denominators of the basic and diluted EPS computations for our common stock are calculated as follows (in millions, except for per
share amounts):
Basic net income per share:
Numerator
Net income attributable to common stockholders
Denominator
Weighted-average number of common shares outstanding used in
computing basic net income per share
Net income per common share, basic
Diluted net income per share:
Numerator
Net income attributable to common stockholders
Reallocation of net income as a result of conversion of Class B to Class A
common stock
Reallocation of net income to Class B common stock
Net income attributable to common stockholders for diluted EPS
Denominator
Weighted-average number of common shares outstanding used in
computing basic net income per share
Weighted-average effect of dilutive restricted stock units and awards and
employee stock options
Conversion of Class B to Class A common stock
Weighted-average number of common shares outstanding used in
computing diluted net income per share
Net income per common share, diluted
$
$
$
$
$
$
$
Year ended December 31,
2022
2021
Class A
Class B
Class A
Class B
426.8 $
126.4 $
263.9 $
71.9
278.6
1.53 $
82.6
1.53 $
304.9
0.87 $
426.8 $
126.4 $
263.9 $
126.4 $
— $
553.2 $
278.6
2.1
82.6
363.3
1.52 $
— $
(0.7) $
125.7 $
82.6
—
—
82.6
1.52 $
71.9 $
— $
335.8 $
304.9
7.8
83.1
395.8
0.85 $
83.1
0.87
71.9
—
(1.3)
70.6
83.1
0.1
—
83.2
0.85
The following table sets forth the calculation of basic and diluted net loss per share attributable to common stockholders during the periods presented. The
voluntary conversions of Class B common stock into Class A common stock are included in the table below weighted for the respective periods outstanding.
Year ended December 31,
2020
Class A
Class B
Numerator:
Net loss attributable to common stockholders
Denominator:
Weighted-average number of common shares outstanding used in computing basic and diluted net loss per common
share
Net loss per common share, basic and diluted
$
$
(182.5) $
(73.8)
295.0
(0.62) $
119.3
(0.62)
Since the Company was in a loss position for the year ended December 31, 2020, basic net loss per share attributable to common stockholders is the same
as diluted net loss per share as the inclusion of all potential common shares outstanding would have been anti-dilutive.
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DROPBOX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in tables are in millions except per share data, or as otherwise noted)
The weighted-average impact of potentially dilutive securities that were not included in the diluted per share calculations because they would be anti-
dilutive was as follows:
Restricted stock units and awards
Options to purchase shares of common stock
Co-Founder Grants
Convertible Senior Notes
Warrants
Total
Note 14. Income Taxes
2022
Year ended December 31,
2021
2020
20.4
0.3
8.3
37.8
37.8
104.6
2.4
0.1
9.3
31.9
31.9
75.6
10.5
0.9
11.3
—
—
22.7
For the years ended December 31, 2022, 2021, and 2020, the Company’s income (loss) from continuing operations before provision for income taxes was
as follows:
Domestic
Foreign
Income (loss) before income taxes
2022
Year ended December 31,
2021
2020
$
$
37.8 $
154.9
192.7 $
185.3 $
114.0
299.3 $
(57.7)
(192.5)
(250.2)
The components of the benefit from (provision for) income taxes in the years ended December 31, 2022, 2021, and 2020, were as follows:
Current:
Federal
State
Foreign
Deferred:
Federal
State
Foreign
Benefit from (provision for) income taxes
2022
Year ended December 31,
2021
2020
(13.2) $
(15.3)
(7.5)
386.7
30.0
(20.2)
360.5 $
(0.4) $
(0.7)
(2.5)
2.2
0.4
37.5
36.5 $
—
(2.7)
(6.0)
—
—
2.6
(6.1)
$
$
103
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DROPBOX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in tables are in millions except per share data, or as otherwise noted)
A reconciliation of income taxes at the statutory federal income tax rate to the benefit from (provision for) income taxes included in the accompanying
consolidated statements of operations is as follows:
Tax (provision) benefit at federal statutory rate
State taxes, net of federal benefit
Foreign rate differential
Research and other credits
Non-deductible compensation
Permanent differences
Change in valuation allowance
Stock-based compensation
Other non-deductible items
Benefit from (provision for) income taxes
2022
Year ended December 31,
2021
2020
$
$
(40.5) $
(4.9)
(34.0)
45.3
(3.4)
(1.8)
409.9
(4.3)
(5.8)
360.5 $
(62.8) $
(5.5)
0.9
38.1
(6.2)
(0.8)
51.4
23.5
(2.1)
36.5 $
The significant components of the Company’s deferred tax assets and liabilities as of December 31, 2022 and 2021 were as follows:
Deferred tax assets:
Net operating loss carryforwards
Research credit carryforwards
Stock-based compensation
Accruals and reserves
Lease liability
Convertible senior notes
Capitalized research expenditures
Other
Gross deferred tax assets
Valuation allowance
Total deferred tax assets, net of valuation allowance
Deferred tax liabilities:
Fixed assets and intangible assets
Right-of-use assets
Other
Total deferred tax liability
Net deferred tax assets
As of December 31,
2022
2021
$
$
40.8 $
268.9
24.1
36.8
141.8
47.5
123.9
0.6
684.4
(111.6)
572.8
14.4
59.5
0.2
74.1
498.7 $
52.5
1.2
(12.2)
34.9
(4.1)
(1.8)
(69.6)
(3.2)
(3.8)
(6.1)
202.6
263.9
25.2
41.6
168.4
57.3
—
—
759.0
(586.7)
172.3
20.6
110.2
0.3
131.1
41.2
As of December 31, 2022, the Company determined that U.S. federal and certain states deferred tax assets were more likely than not to be realized,
resulting in a benefit from income taxes of $420.2 million as well as an adjustment recorded to additional paid in capital of $61.2 million. Accordingly, the
valuation allowance recorded against deferred tax assets decreased by $475.1 million in the year ended December 31, 2022, compared to an increase of
$3.0 million in the year ended December 31, 2021. Management applied judgment in assessing the positive and negative evidence available in the determination
of the amount of deferred tax assets that were more-likely-than-not to be realized in the future. As of December 31, 2022, the Company maintained a valuation
allowance against its California deferred tax assets.
104
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DROPBOX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in tables are in millions except per share data, or as otherwise noted)
As of December 31, 2022, the Company had $13.3 million of federal, $118.5 million of state, and $150.3 million of foreign net operating loss
carryforwards available to reduce future taxable income. Of the federal net operating loss carryforwards, $7.8 million will begin to expire in 2032 and $5.5
million will carryforward indefinitely, while state net operating losses begin to expire in 2035. The foreign net operating loss carryforwards will carryforward
indefinitely.
As of December 31, 2022, the Company had research credit carryforwards of $249.4 million and $150.3 million for federal and state income tax purposes,
respectively, of which $72.5 million and $38.7 million is the unrecognized tax benefit portion related to the research credit carryforwards for federal and state,
respectively. The federal credit carryforward will begin to expire in 2037. The state research credits have no expiration date.
As of December 31, 2022, the Company had $0.5 million of foreign tax credit carryforwards, which will carryforward indefinitely. The Company also
had $3.6 million of state enterprise zone credit carryforwards, which will begin to expire in 2023.
Under Section 382 and 383 of the Internal Revenue Code of 1986, as amended, or the Code, if a corporation undergoes an “ownership change,” the
corporation’s ability to use its pre-change net operating loss carryforwards and other pre-change attributes, such as research tax credits, to offset its post-change
income may be limited. In general, an “ownership change” will occur if there is a cumulative change in our ownership by “5-percent shareholders” that exceeds
50 percentage points over a rolling three-year period. Similar rules may apply under state tax laws. The Company has determined that it has experienced
multiple ownership changes and, as a result, the annual utilization of its net operating loss carryforwards and other pre-change attributes will be subject to
limitation. However, the Company does not expect that the annual limitations will significantly impact its ability to utilize its net operating loss or tax credit
carryforwards prior to expiration.
As of December 31, 2022, the balance of unrecognized tax benefits was $127.2 million of which $88.5 million, if recognized, would affect the effective
tax rate and $38.7 million would result in adjustment to deferred tax assets with corresponding adjustments to the valuation allowance.
A reconciliation of the beginning and ending amount of unrecognized tax benefit is as follows:
Balance of gross unrecognized tax benefits at the beginning of the fiscal year
Gross increases related to prior period tax positions
Gross decreases related to prior period tax positions
Gross increases related to current period tax positions
Reductions due to lapse in statute of limitations
Reductions due to settlements with taxing authorities
Balance of gross unrecognized tax benefits at the end of the fiscal year
$
$
107.3 $
—
—
20.3
(0.4)
—
127.2 $
91.4 $
—
(0.3)
18.5
(1.5)
(0.8)
107.3 $
74.5
1.3
—
15.8
(0.2)
—
91.4
2022
Year ended December 31,
2021
2020
The Company recognizes interest and/or penalties related to income tax matters as a component of income tax expense. As of December 31, 2022, the
amount of accrued interest and penalties related to uncertain tax positions was $5.3 million. Interest and penalties recognized for the year ended December 31,
2022, 2021, and 2020 was $1.7 million, $0.4 million, and $0.7 million, respectively.
It is reasonably possible that there could be changes to the amount of uncertain tax positions due to activities of the taxing authorities, settlement of audit
issues, reassessment of existing uncertain tax positions, or the expiration of applicable statutes of limitations; however, the Company is not able to estimate the
impact of these items at this time.
The Company files income tax returns in the U.S. federal, multiple states, and foreign jurisdictions. All of the Company’s tax years from 2007 remain
open for examination by the federal and state authorities, and from 2015 by foreign authorities.
105
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DROPBOX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in tables are in millions except per share data, or as otherwise noted)
The Company generally does not provide deferred income taxes for the undistributed earnings of its foreign subsidiaries as the Company intends to
reinvest such earnings indefinitely. Should circumstances change and it becomes apparent that some or all of the undistributed earnings will no longer be
indefinitely reinvested, the Company will accrue for income taxes not previously recognized. As of December 31, 2022, there were no cumulative undistributed
earnings in its Irish subsidiary and, as a result, there were no unrecorded deferred tax liabilities. The amount of undistributed earnings in the Company’s other
foreign subsidiaries, if any, are immaterial.
Note 15. Geographic Areas
Long-lived assets
The following table sets forth long-lived assets by geographic area:
United States
International
Total property and equipment, net
(1)
As of December 31,
2022
2021
$
$
300.2 $
8.2
308.4 $
316.6
5.4
322.0
(1)
No single country other than the United States had a property and equipment balance greater than 10% of total property and equipment, net, as of
December 31, 2022 and 2021.
Revenue
Revenue by geography is generally based on the address of the customer as defined in the Company’s subscription agreement. The following table sets
forth revenue by geographic area for the years ended December 31, 2022, 2021, and 2020:
United States
International
Total revenue
(1)
2022
Year ended December 31,
2021
2020
$
$
1,264.2 $
1,060.7
2,324.9 $
1,130.0 $
1,027.9
2,157.9 $
999.3
914.6
1,913.9
(1)
No single country outside of the United States accounted for more than 10 percent of total revenue during the years ended December 31, 2022, 2021,
and 2020
106
Table of Contents
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our Management, with the participation of our principal executive officer and principal financial officer, has evaluated the effectiveness of our disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), as of the
end of the period covered by this Annual Report on Form 10-K. Based on such evaluation, our principal executive officer and principal financial officer have
concluded that as of such date, our disclosure controls and procedures were effective at a reasonable assurance level.
Management's Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-
15(f) under the Exchange Act) to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of consolidated financial
statements for external purposes in accordance with generally accepted accounting principles.
Our management, under the supervision of our Chief Financial Officer, conducted an evaluation of the effectiveness of our internal control over financial
reporting based on the framework in Internal Control—Integrated Framework (2013), issued by the Committee of Sponsoring Organizations of the Treadway
Commission. Based on this evaluation, management concluded that our internal control over financial reporting was effective as of December 31, 2022.
The effectiveness of our internal control over financial reporting as of December 31, 2022 has been audited by Ernst & Young LLP, an independent
registered public accounting firm, as stated in their report, which is included in Item 8 of this Annual Report on Form 10-K.
Changes in Internal Control Over Financial Reporting
There was no change in our internal control over financial reporting (as defined in Rules 13a-15(d) and 15d-15(d) under the Exchange Act) that occurred
during the quarter ended December 31, 2022 that has materially affected, or is reasonably likely to materially affect, our internal control over financial
reporting.
Inherent Limitations on Effectiveness of Disclosure Controls and Procedures
Our management, including our principal executive officer and principal financial officer, do not expect that our disclosure controls and procedures or our
internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well designed and operated, can provide only
reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are
resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include
the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be
circumvented by the individual acts of some persons, by collusion of two or more people or by management override of the controls. The design of any system
of controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in
achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of
compliance with policies or procedures may deteriorate. Due to inherent limitations in a cost-effective control system, misstatements due to error or fraud may
occur and not be detected.
ITEM 9B. OTHER INFORMATION
Not applicable.
107
Table of Contents
ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
Not applicable.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this item is incorporated by reference to our Proxy Statement relating to our 2023 Meeting of Stockholders. The Proxy
Statement will be filed with the Securities and Exchange Commission within 120 days of the end of the fiscal year ended December 31, 2022.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to our Proxy Statement relating to our 2023 Meeting of Stockholders. The Proxy
Statement will be filed with the Securities and Exchange Commission within 120 days of the end of the fiscal year ended December 31, 2022.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
The information required by this item is incorporated by reference to our Proxy Statement relating to our 2023 Meeting of Stockholders. The Proxy
Statement will be filed with the Securities and Exchange Commission within 120 days of the end of the fiscal year ended December 31, 2022.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this item is incorporated by reference to our Proxy Statement relating to our 2023 Meeting of Stockholders. The Proxy
Statement will be filed with the Securities and Exchange Commission within 120 days of the end of the fiscal year ended December 31, 2022.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by this item is incorporated by reference to our Proxy Statement relating to our 2023 Meeting of Stockholders. The Proxy
Statement will be filed with the Securities and Exchange Commission within 120 days of the end of the fiscal year ended December 31, 2022.
108
Table of Contents
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
The following documents are filed as a part of this Annual Report on Form 10-K
(a) Financial statements
Our Consolidated Financial Statements are listed in the “Index to Consolidated Financial Statements” under Part II, Item 8 of this Annual Report on Form
10-K.
(b) Financial statement schedules.
All financial statement schedules not listed above have been omitted because the information called for is not required or is shown either in the
consolidated financial statements or in the notes thereto.
(c) Exhibits
The documents listed in the Exhibit Index of this Annual Report on Form 10-K are incorporated by reference or are filed with this Annual Report on
Form 10-K, in each case as indicated therein (numbered in accordance with Item 601 of Regulation S-K).
109
Table of Contents
Exhibit
Number
Description
EXHIBIT INDEX
Form
File Number
Exhibit
Filed with SEC
3.1
Amended and Restated Certificate of Incorporation of the Registrant.
10-Q
001-38434
3.2
Amended and Restated Bylaws of the Registrant.
10-Q
001-38434
4.1
Form of Class A common stock certificate of the Registrant.
S-1/A
333-223182
4.2
4.3
4.4
4.5
4.6
4.7
4.8
Amended and Restated Investors’ Rights Agreement among the Registrant
and certain holders of its capital stock, dated as of January 30, 2014, as
amended.
S-1
333-223182
Amendment No. 2 to the Amended and Restated Investors’ Rights Agreement
among the Registrant and certain holders of its capital stock, dated as of
March 27, 2018.
10-Q
001-38434
Indenture, dated February 26, 2021, between the Registrant and U.S. Bank
National Association (2026 Notes).
8-K
001-38434
Indenture, dated February 26, 2021, between the Registrant and U.S. Bank
National Association (2028 Notes).
Form of 0% Convertible Senior Note due 2026 (included in Exhibit 4.4).
Form of 0% Convertible Senior Note due 2028 (included in Exhibit 4.5).
8-K
8-K
8-K
001-38434
001-38434
001-38434
Description of Capital Stock
10-Q
001-38434
3.2
3.3
4.1
4.2
4.3
4.1
4.2
4.3
4.4
4.1
May 11, 2018
May 11, 2018
March 12, 2018
February 23, 2018
May 11, 2018
February 26, 2021
February 26, 2021
February 26, 2021
February 26, 2021
August 7, 2020
10.1+
Form of Indemnification Agreement between the Registrant and each of its
directors and executive officers.
S-1
333-223182
10.1
February 23, 2018
10.2+
Dropbox, Inc. 2018 Equity Incentive Plan and related form agreements.
10-K
001-38434
10.2
February 19, 2021
10.3+
10.4+
10.5+
Dropbox, Inc. 2018 Employee Stock Purchase Plan and related form
agreements.
S-1/A
333-223182
10.3
March 21, 2018
Dropbox, Inc. 2018 Class C Stock Incentive Plan and related form
agreements.
S-1/A
333-223182
10.4
March 21, 2018
Dropbox, Inc. 2018 Class C Employee Stock Purchase Plan and related form
agreements.
S-1/A
333-223182
10.5
March 21, 2018
10.6+
Dropbox, Inc. 2017 Equity Incentive Plan and related form agreements.
S-1/A
333-223182
10.6
March 21, 2018
110
Table of Contents
10.7+
Dropbox, Inc. 2008 Equity Incentive Plan, as amended, and related form
agreements.
Form
S-1/A
File Number
Exhibit
Filed with SEC
333-223182
10.7
March 21, 2018
10.8+
Dropbox, Inc. Amended and Restated Cash Bonus Plan.
10-K
001-38434
10.9+
Restricted Stock Agreement between the Registrant and Andrew W. Houston.
S-1
333-223182
10.8
10.9
February 19, 2021
February 23, 2018
10.10+
Form of Change in Control and Severance Agreement between the Registrant
and certain executive officers.
10-K
001-38434
10.11
February 21, 2020
10.11+
Employment Letter between the Registrant and Andrew W. Houston.
S-1/A
333-223182
10.12
March 12, 2018
10.12+
Form of Restricted Stock Agreement between the Registrant and certain
executive officers.
10-K
001-38434
10.14
February 21, 2020
10.13+
Employment Letter between the Registrant and Timothy Young.
10-K
001-38434
10.17
February 21, 2020
10.14+
Offer Letter between the Registrant and Timothy Regan
10-Q
001-38434
10.15+
Offer Letter between the Registrant and Timothy Young
10-Q
001-38434
10.1
10.1
August 7, 2020
November 6, 2020
10.16+
Restricted Stock Agreement between the Registrant and Timothy Young
10-K
001-38434
10.17
February 19, 2021
Office Lease between the Registrant and KR Mission Bay, LLC, dated as of
October 6, 2017.
S-1
333-223182
10.19
February 23, 2018
Second Amendment to Office Lease between Dropbox, Inc. and KR Mission
Bay, LLC, dated as of May 25, 2018.
10-Q
001-38434
10.2
August 10, 2018
10.17
10.18
10.19
10.20
Third Amendment and Restatement Agreement to the Revolving Credit and
Guaranty Agreement, by and among the Registrant, the lenders party thereto
and JPMorgan Chase Bank, N.A., as Administrative Agent, dated as of
February 23, 2021.
Purchase Agreement, dated February 23, 2021, by and among the Registrant
and J.P. Morgan Securities LLC and Goldman Sachs & Co. LLC, as
representatives of the several initial purchasers listed in Schedule I thereto.
10.21
Form of Convertible Note Hedge Confirmation (2026 Notes).
10.22
Form of Convertible Note Hedge Confirmation (2028 Notes).
10.23
Form of 2026 Warrant Confirmation.
10.24
Form of 2028 Warrant Confirmation.
111
8-K
001-38434
10.6
February 26, 2021
8-K
001-38434
10.1
February 26, 2021
8-K
8-K
8-K
8-K
001-38434
001-38434
001-38434
001-38434
10.2
10.3
10.4
10.5
February 26, 2021
February 26, 2021
February 26, 2021
February 26, 2021
Table of Contents
10.25+
10.26
Dropbox, Inc. Outside Director Compensation Policy and related form
agreements.
10-K
001-38434
10.22
February 21, 2020
Eighth Amendment to Office Lease, dated November 1, 2021 and executed
on December 16, 2021, by and between the Registrant and KRE Exchange
Owner LLC
10-K
001-38434
10.26
February 18, 2022
Form
File Number
Exhibit
Filed with SEC
21.1*
List of subsidiaries of the Registrant.
23.1*
Consent of Independent Registered Public Accounting Firm.
24.1*
Power of Attorney (included in signature pages hereto).
31.1*
31.2*
32.1†
101
Certification of Principal Executive Officer pursuant to Exchange Act Rules
13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-
Oxley Act of 2002.
Certification of Principal Financial Officer pursuant to Exchange Act Rules
13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-
Oxley Act of 2002.
Certifications of Chief Executive Officer and Chief Financial Officer pursuant
to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
The following financial statements from the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 2022, formatted in Inline
XBRL: (i) Consolidated Balance Sheets, (ii) Consolidated Statement of
Operations, (iii) Consolidated Statements of Comprehensive Income (Loss),
(iv) Consolidated Statement of Cash Flows, (v) Consolidated Statements of
Stockholders' (Deficit) Equity, and (vi) Notes to Consolidated Financial
Statements.
104
Cover Page Interactive Data File (formatted as inline XBRL and contained in
Exhibit 101)
*
+
†
Filed herewith.
Indicates management contract or compensatory plan.
The certifications attached as Exhibit 32.1 that accompany this Annual Report on Form 10-K are deemed furnished and not filed with the Securities and Exchange
Commission and are not to be incorporated by reference into any filing of Dropbox, Inc. under the Securities Act of 1933, as amended, or the Securities Exchange Act of
1934, as amended, whether made before or after the date of this Annual Report on Form 10-K, irrespective of any general incorporation language contained in such filing.
112
Table of Contents
ITEM 16. FORM 10-K SUMMARY
None.
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this Annual
Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized, in San Francisco, California, on February 22, 2023.
SIGNATURES
DROPBOX, INC.
By:
/s/ Andrew W. Houston
Andrew W. Houston
Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Andrew W. Houston and
Timothy J. Regan, and each of them, as his or her true and lawful attorney-in-fact and agent with full power of substitution and resubstitution, for such
individual in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto and other
documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power
and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully for all intents and purposes as
he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or the individual’s substitute,
may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed by the following persons on behalf of the
Company and in the capacities and on the dates indicated.
113
Table of Contents
Signature
Title
Date
/s/ Andrew W. Houston
Andrew W. Houston
Chief Executive Officer and Chairman
(Principal Executive Officer)
/s/ Timothy J. Regan
Timothy J. Regan
Chief Financial Officer
(Principal Accounting and Financial Officer)
/s/ Donald W. Blair
Donald W. Blair
/s/ Lisa Campbell
Lisa Campbell
/s/ Paul E. Jacobs
Paul E. Jacobs
/s/ Sara Mathew
Sara Mathew
/s/ Abhay Parasnis
Abhay Parasnis
/s/ Karen A. Peacock
Karen A. Peacock
/s/ Michael Seibel
Michael Seibel
Director
Director
Director
Director
Director
Director
Director
114
February 22, 2023
February 22, 2023
February 22, 2023
February 22, 2023
February 22, 2023
February 22, 2023
February 22, 2023
February 22, 2023
February 22, 2023
Subsidiaries of Registrant
Exhibit 21.1
Name of Subsidiary
Dropbox Canada Limited
Dropbox Holding, LLC
Hypertools, Inc.
Orcinus Holdings, LLC
CloudOn, Inc.
DocSend, Inc.
Dropbox Australia Pty Ltd.
Dropbox France S.A.S
Dropbox France S.A.S, Paris, Zweigniederlassung Zurich
Dropbox Germany GmbH
Dropbox International Unlimited Company
Dropbox Israel Online Ltd.
Dropbox Japan KK
Dropbox Mexico S. de R.L. de C.V
Dropbox Netherlands B.V.
Dropbox Poland sp. z.o.o.
Dropbox Singapore Pte. Ltd.
Dropbox Sweden AB
Dropbox Taiwan Co. Ltd.
Dropbox UK Online Ltd.
King Street Labs, LLC
Valt Inc.
Jurisdiction of Incorporation
British Columbia
Delaware
Delaware
Delaware
Delaware
Delaware
Australia
France
Switzerland
Germany
Ireland
Israel
Japan
Mexico
Netherlands
Poland
Singapore
Sweden
Taiwan
United Kingdom
Oregon
Delaware
Exhibit 23.1
Consent of Independent Registered Public Accounting Firm
We consent to the incorporation by reference in the following Registration Statements:
(1) Registration Statement (Form S-8 No. 333-262866) of Dropbox, Inc., pertaining to the 2018 Equity Incentive Plan of Dropbox, Inc.,
(2) Registration Statement (Form S-8 No. 333-255665) of Dropbox, Inc., pertaining to the 2013 Stock Plan and 2015 Stock Option and Grant Plan of DocSend,
Inc.,
(3) Registration Statement (Form S-8 No. 333-253304) of Dropbox, Inc., pertaining to the 2018 Equity Incentive Plan of Dropbox, Inc.,
(4) Registration Statement (Form S-8 No. 333-236570) of Dropbox, Inc., pertaining to the 2018 Equity Incentive Plan of Dropbox, Inc.,
(5) Registration Statement (Form S-8 No. 333-229924) of Dropbox, Inc., pertaining to the 2011 Equity Incentive Plan of JN Projects, Inc.,
(6) Registration Statement (Form S-8 No. 333-229842) of Dropbox, Inc., pertaining to the 2018 Equity Incentive Plan of Dropbox, Inc., and
(7) Registration Statement (Form S-8 No. 333-223863) of Dropbox, Inc., pertaining to the 2008 Equity Incentive Plan of Dropbox, Inc., 2017 Equity Incentive
Plan of Dropbox, Inc., 2018 Equity Incentive Plan of Dropbox, Inc., and 2018 Employee Stock Purchase Plan of Dropbox, Inc.;
of our reports dated February 22, 2023, with respect to the consolidated financial statements of Dropbox, Inc. and the effectiveness of internal control over
financial reporting of Dropbox, Inc. included in this Annual Report (Form 10-K) of Dropbox, Inc. for the year ended December 31, 2022.
/s/ Ernst & Young LLP
San Francisco, California
February 22, 2023
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
PURSUANT TO
EXCHANGE ACT RULES 13a-14(a) AND 15d-14(a),
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 31.1
I, Andrew W. Houston, certify that:
1.
I have reviewed this Annual Report on Form 10-K of Dropbox, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange
Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure
that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of
the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal
quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely
to adversely affect the registrant's ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over
financial reporting.
Date: February 22, 2023
DROPBOX, INC.
By:
Name:
Title:
/s/ Andrew W. Houston
Andrew W. Houston
Chief Executive Officer
(Principal Executive Officer)
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
PURSUANT TO
EXCHANGE ACT RULES 13a-14(a) AND 15d-14(a),
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 31.2
I, Timothy J. Regan, certify that:
1.
I have reviewed this Annual Report on Form 10-K of Dropbox, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange
Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure
that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of
the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal
quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely
to adversely affect the registrant's ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over
financial reporting.
Date: February 22, 2023
DROPBOX, INC.
/s/ Timothy J. Regan
By:
Name: Timothy J. Regan
Title: Chief Financial Officer
(Principal Accounting
Financial Officer)
and
Exhibit 32.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER
PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Pursuant to the requirement set forth in Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended, (the “Exchange Act”) and Section 1350 of Chapter
63 of Title 18 of the United States Code (18 U.S.C. §1350), Andrew W. Houston, Chief Executive Officer of Dropbox, Inc.. (the “Company”), and Timothy
J. Regan, Chief Financial Officer of the Company, each hereby certifies that, to the best of his knowledge:
1. The Company’s Annual Report on Form 10-K for the year ended December 31, 2022, to which this Certification is attached as Exhibit 32.1 (the
“Periodic Report”), fully complies with the requirements of Section 13(a) or Section 15(d) of the Exchange Act; and
2. The information contained in the Periodic Report fairly presents, in all material respects, the financial condition and results of operations of the
Company.
Date: February 22, 2023
/s/ Andrew W. Houston
Andrew W. Houston
Chief Executive Officer
(Principal Executive Officer)
/s/ Timothy J. Regan
Timothy J. Regan
Chief Financial Officer
(Principal Accounting and Financial Officer)