David Paul Morris/Bloomberg
Box Inc. and Dropbox Inc. have been grouped together for nearly their entire existence for reasons that go beyond their names.
Both Silicon Valley companies were started with the idea of allowing anyone to store and access content they owned remotely, with young founders who found many willing venture investors. Box BOX, +0.13% was incorporated just two years before Dropbox DBX, +0.00% which priced its initial public offering Thursday, three years after Box entered the public market.
Box Chief Executive Aaron Levie says the similarities between his company and Dropbox CEO Drew Houston’s mostly end at the surface, though. Box has aimed its service at large companies seeking to allow secure sharing among employees, while Dropbox has chased consumer subscriptions and offered a “freemium” model to businesses with less emphasis on direct sales.
Previously: Aaron Levie on artificial intelligence and the future of Box
In a recent visit to the MarketWatch offices, Levie compared Box with Salesforce.com Inc. CRM, -3.01% and Workday Inc. WDAY, -1.66% while Dropbox received comparisons to Netflix Inc. NFLX, -3.09% and Spotify Inc. SPOT, +0.00% He described Dropbox as a marriage of Apple Inc.’s AAPL, -1.41% iCloud service and an enterprise-software company that thrives in smaller companies and groups of employees, like Zendesk Inc. ZEN, -1.57%
“It’s really a tale of two business that have one umbrella structure—it's a great business, [but] even with that, its just not like an enterprise software company in the terms of their economics,” he said of Dropbox.
Levie has led Box from an IPO valuation of about $1.7 billion to a market cap of more than $3.1 billion as of Wednesday’s close, with shares pushing higher by more than 41% in the past year as the S&P 500 index SPX, -2.52% has grown 15.7%. Dropbox priced its IPO at $21 late Thursday, up from the previously expected range of between $18 and $20 a share, according to Securities and Exchange Commission documents. The company had previously expected $16 to $18 a share. At $21 a share, investors will give it an initial market valuation of $8.24 billion, and the company will raise more than $750 million. Shares will start trading Friday on the Nasdaq, under the ticker symbol “DBX.”
Dropbox IPO: Five things to know about the cloud-storage company
Here is what Levie had to say about Dropbox earlier this month. The interview has been edited for brevity and clarity.
You just passed the third anniversary of your IPO - how does that process change a business like yours, and what becomes more difficult?
It has really advanced and evolved the operational rigor and discipline that goes into the company, and I think this is the case for any company that goes public, its just really different running a business where you have a few investors who have been with you a very long time around the table of your board and tens of thousands of investors who everyday get to make a decision about how you’re performing and where you’re going as a company. It changes how you think about running the organization, changes the operations, changes how you communicate, and all those things have been very good.
Obviously, there’s always this challenge that there’s a mismatch between what the market thinks about your company and what you’re seeing internally or what you believe, the path and the vision you have. You’re always trying to reduce that disconnect and have as little disparity as possible.
What did you take away from Dropbox’s IPO filing? Where did you see similarities and differences from Box?
It’s very efficient, generates really solid cash flow—those two things are correlated, so the more efficient you can be in serving your customers, the more cash you’re gonna generate, assuming you have a differentiated product that commands premium pricing. When we looked at the numbers, I thought it was a really attractive business—very strong economics, good retention rates for the market they serve, very healthy in terms of cash generation. All those things are positive.
Some points of distinction or difference between our business: Dropbox is fundamentally a consumer business that has a subset of revenue coming from small businesses or teams within companies. [The majority of Dropbox revenue] looks more like Spotify’s revenue or Netflix’s revenue because it is just you or I paying for an online service that has similar retention rates and gross margins to an online service that we would use. It’s really a tale of two businesses that have one umbrella structure—it's a great business, even with that, its just not like an enterprise software company in the terms of their economics. The amount that companies pay them is substantially less, the retention rates that they experience from companies is substantially less than you would see in a typical enterprise software business, but that’s because they’re being diluted down by a consumer revenue stream.
To truly compete and grow in enterprise sales, will Dropbox have to build up a sales force and potentially hurt the efficiency that makes it attractive?
I don’t really know, but I would say they’ve been trying to do that for five years. The past five or even eight years, they’ve always had the general positioning of, ”We’re moving upmarket,” but largely we still don’t see them upmarket. That’s just because when you don’t have 100% of your focus on the enterprise, its really, really hard to serve the types of businesses and organizations we serve. The Met Police in London, or General Electric GE, -3.82% or Eli Lilly LLY, -2.19% aren’t just going to choose a consumer tool because it’s a little bit easier to use than your traditional enterprise software. They’re going to go with the platform that has all the security, all the compliance, all the regulatory controls, that has the team that can help partner with them and has a great user experience.
Does seeing Dropbox’s numbers make you want to get into the consumer business at all?
God, no. 60% to 70% retention rates, the dynamics of their business—I haven’t done any of the math on this, but every year you have to go reacquire hundreds of millions of dollars in revenue to make up for the hundreds of millions of dollars in revenue that churned. You’re kind of on this hamster wheel from a customer standpoint. Also, it's a wildly competitive market—You’ve got iCloud, Google GOOGL, -3.73% GOOG, -3.83% Drive, OneDrive. You have adjacent competitors, like we all probably put our photos on Facebook FB, -2.66% or Instagram, so you have to be thinking about different adjacencies where the data that could have been in Dropbox is now in a photo-sharing tool or different platform. It’s not an attractive market. Dropbox has made it work, so I give them huge kudos for how they’ve made that business work, but I would not be able to stomach that.
Are you worried about losing investors to Dropbox?
I don’t think anyone is going to see us as zero-sum investments. There’s some argument that maybe we’ll finally start to look like a sector, because now there’s a couple of companies and it’s a frigging gigantic market. Dropbox and Box can grow for a very, very long time given the size of the addressable market where I don’t think there’s any sort of zero-sum investing behavior that would have to happen. But I also think we’re going to attract different investors, just as Netflix attracts different investors from Workday, I think they’re going to attract a certain kind of profile and we will attract a different profile (of investor).
Drew Houston shoots you full of sodium pentathol and says “Give me the one thing that I need to know before going public,” what is it?
(After confirming what sodium pentathol is) My truth serum advice would be, “Be as communicative as possible with Wall Street”—What’s your strategy, what’s your long-term plan, how you’re gonna get there, what the numbers look like. We’ve always benefited from more communication, not necessarily more types of communication, just more frequent, consistent communication about what we’re doing and where we’re going.
MarketWatch staff writers Max A. Cherney and Therese Poletti sat in on the interview and asked questions.