The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with our condensed consolidated
financial statements and related notes appearing elsewhere in this Quarterly
Report on Form 10-Q and our Annual Report on Form 10-K. As discussed in the
section titled "Note About Forward-Looking Statements," the following discussion
and analysis contains forward-looking statements that involve risks and
uncertainties, as well as assumptions that, if they never materialize or prove
incorrect, could cause our results to differ materially from those expressed or
implied by such forward-looking statements. Factors that could cause or
contribute to these differences include, but are not limited to, those
identified below and those discussed in the section titled "Risk Factors" under
Part II, Item 1A in this Quarterly Report on Form 10-Q and in our Annual Report
on Form 10-K. Our fiscal year ends
Overview
Our modern economy runs on knowledge. Today, knowledge lives in the cloud as digital content, and Dropbox is where businesses and individuals can create, access, and share this content globally. We serve more than 700 million registered users across 180 countries.
Since our founding in 2007, our market opportunity has grown as we've expanded from keeping files in sync to keeping teams in sync. In a world where using technology at work can be fragmented and distracting, Dropbox makes it easy to focus on the work that matters.
By solving these universal problems, we've become invaluable to our users. The popularity of our platform drives viral growth, which has allowed us to scale rapidly and efficiently. We've built a thriving global business with 15.83 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
Our premium subscription plans, such as Professional and Advanced, provide more functionality than other subscription plans and have higher per user prices. Our Standard and Advanced subscription plans offer robust capabilities for businesses, and the vast majority of Dropbox Business teams purchase our Standard or Advanced subscription plans. While our Enterprise subscription plan offers more opportunities for customization, companies can subscribe to any of these team plans for their business needs.
In the first quarter of fiscal 2021, we acquired DocSend, a secure document sharing and analytics company. The combination of Dropbox, HelloSign, and DocSend will help customers across industries manage end-to-end document workflows-from content collaboration to sharing and e-signature-giving them more control over their business results.
DocSend offers paid subscription plans, including a personal plan designed for
individuals and Standard, Advanced, and Enterprise plans designed for business
users and teams. Similar to Dropbox plans, pricing is based on the number of
licenses purchased. Customers can choose between an annual or monthly plan, with
a small number of large organizations on multi-year plans. We typically bill
DocSend customers at the beginning of their respective terms and recognize
revenue ratably over the subscription period. DocSend primarily sells within
We also offer HelloSign, an e-signature solution. HelloSign has several product lines, and the pricing and revenue generated from each product line varies, with some product lines priced based on the number of licenses purchased (similar to Dropbox plans), while others are priced based on a customer's transaction volume. Depending on the product purchased, teams must have a minimum number of licenses, but can also have hundreds of users. Customers can choose between an annual or monthly plan, with a small number of large organizations on multi-year plans. We typically bill HelloSign customers at the
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beginning of their respective terms and recognizes revenue ratably over the
subscription period. We sell HelloSign products globally and sell primarily in
Our Customers Our customer base is highly diversified, and in the period presented, no customer accounted for more than 1% of our revenue. Our customers include individuals, families, teams, and organizations of all sizes, from freelancers and small businesses to Fortune 100 companies. They work across a wide range of industries, including professional services, technology, media, education, industrials, consumer and retail, and financial services. Within companies, our platform is used by all types of teams and functions, including sales, marketing, product, design, engineering, finance, legal, and human resources.
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Table of Contents Our Business Model Drive new signups
We acquire users efficiently and at relatively low cost through word-of-mouth referrals, direct in-product referrals, and sharing of content. Anyone can create a Dropbox account for free through our website or app and be up and running in minutes. These users often share and collaborate with other non-registered users, attracting new signups into our network.
Increase conversion of registered users to our paid subscription plans
We generate over 90% of our revenue from self-serve channels-users who purchase a subscription through our app or website. To grow our recurring revenue base, we actively encourage our registered users to convert to one of our paid plans based on the functionality that best suits their needs. We do this via in-product prompts and notifications, time-limited free trials of paid subscription plans, email campaigns, and lifecycle marketing. Together, these enable us to generate increased recurring revenues from our existing user base.
Upgrade and expand existing customers
We offer a range of paid subscription plans, from Plus, Professional, and Family for individuals to Standard, Advanced, and Enterprise for teams. We analyze usage patterns within our network and run hundreds of targeted marketing campaigns to encourage paying users to upgrade their plans. We prompt individual subscribers who collaborate with others on Dropbox to purchase our Standard or Advanced plans for a better team experience, and we also encourage existing Dropbox Business teams to purchase additional licenses or to upgrade to premium subscription plans. We also aim to offer additional products that expand our content collaboration capabilities, such as through our acquisitions of HelloSign and DocSend.
COVID-19 update
Although we did not experience material adverse impacts to our financial condition and results of operations in the first fiscal quarter of 2021 as a result of the COVID-19 pandemic, we have seen and may continue to see impacts to certain components of results of operations, as described below. However, the full extent of the impact of the COVID-19 pandemic on our operational and financial performance will continue to depend on certain developments, including the duration and spread of the outbreak, the pace of reopening, impact on our customers and our sales cycles, impact on our business operations, impact on our customer, employee or industry events, and effect on our vendors, all of which are uncertain and cannot be predicted. Accordingly, the full extent to which the COVID-19 pandemic may impact our business, financial condition or results of operations remains uncertain, but may include, without limitation, impacts to our paying user growth as well as disruptions to our business operations as a result of travel restrictions, shutdown of workplaces and potential impacts to our vendors.
Additionally, our results of operations and cash flows are subject to
fluctuations due to changes in foreign currency exchange rates relative to
Virtual First
Furthermore, the effects of the COVID-19 pandemic have led us to reimagine the
way we work, resulting in our announcement in
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in the year ended
While we seek to manage the implementation of this new work model carefully and we believe this model will help us reap the benefits of remote work, while maintaining a meaningful in-person experience, there is no guarantee that we will realize any anticipated benefits to our business, including any cost savings, operational efficiencies, increased employee satisfaction or increased productivity. In addition, given that we have a limited history of operating with a Virtual First workforce, the long-term impact on our financial results and business operations is uncertain. Please see Item 1A. "Risk Factors" in this Quarterly Report on Form 10-Q for a complete description of the material risks we currently face, including risks related to the COVID-19 pandemic and our shift to a Virtual First work model.
Reduction in Force
On
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Key Business Metrics
We review a number of operating and financial metrics, including the following key metrics to evaluate our business, measure our performance, identify trends affecting our business, formulate business plans, and make strategic decisions.
Total annual recurring revenue We primarily focus on total annual recurring revenue ("Total ARR") as the key indicator of the trajectory of our business performance. Total ARR represents the amount of revenue that we expect to recur annually, enables measurement of the progress of our business initiatives, and serves as an indicator of future growth. In addition, Total ARR is less subject to variations in short-term trends that may not appropriately reflect the health of our business. Total ARR is a performance metric and should be viewed independently of revenue and deferred revenue, and is not intended to be a substitute for, or combined with, any of these items.
Total ARR consists of contributions from all of our revenue streams, including subscriptions and add-ons. We calculate Total ARR as the number of users who have active paid licenses for access to our platform as of the end of the period, multiplied by their annualized subscription price to our platform. We include ARR related to acquired companies in our total ARR in the period of the acquisition. We adjust the exchange rates used to calculate Total ARR on an annual basis at the beginning of each fiscal year.
The below tables set forth our Total ARR using the exchange rates set at the beginning of each year, as well as on a constant currency basis relative to the exchange rates used in 2021.
As of March 31, 2021 December 31, 2020 March 31, 2020 (In millions) Total ARR$2,112 $2,022 $1,864 As of Constant Currency March 31, 2021 December 31, 2020 March 31, 2020 (In millions) Total ARR$2,112 $2,052 $1,889
Paying users We define paying users as the number of users who have active paid licenses for access to our platform as of the end of the period. One person would count as multiple paying users if the person had more than one active license. For example, a 50-person Dropbox Business team would count as 50 paying users, and an individual Dropbox Plus user would count as one paying user. If that individual Dropbox Plus user was also part of the 50-person Dropbox Business team, we would count the individual as two paying users.
We have experienced growth in the number of paying users across our products, with the majority of paying users for the periods presented coming from our self-serve channels.
We acquired DocSend in the first quarter of fiscal 2021. We define DocSend paying users as the number of users who have active paid licenses for access to our platform as of the end of the period.
We acquired HelloSign in the first quarter of fiscal 2019. HelloSign has several product lines and the pricing and revenue generated from each product line varies, with some product lines priced based on the number of licenses purchased (similar to Dropbox plans), while others are priced based on a customer's transaction volume. For purposes of HelloSign results, we include as paying users either (i) the number of users who have active paid licenses for access to the HelloSign platform as of the period end for those products that are priced based on the number of licenses purchased (which is the same method we use to evaluate existing Dropbox plans) or (ii) the number of customers for those products that are priced based on transaction volumes.
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The below table sets forth the number of paying users as of
As of March 31, 2021 December 31, 2020 March 31, 2020 (In millions) Paying users 15.83 15.48 14.60
Average revenue per paying user We define average revenue per paying user, or ARPU, as our revenue for the period presented divided by the average paying users during the same period. For interim periods, we use annualized revenue, which is calculated by dividing the revenue for the particular period by the number of days in that period and multiplying this value by 365 days. Average paying users are calculated based on adding the number of paying users as of the beginning of the period to the number of paying users as of the end of the period, and then dividing by two.
We experienced an increase in our average revenue per paying user for the three
months ended
The below table sets forth our ARPU for the three months ended
Three Months Ended March 31, 2021 2020 ARPU$ 132.55 $ 126.30 45
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Table of Contents Non-GAAP Financial Measure
In addition to our results determined in accordance with
Free cash flow We define FCF as GAAP net cash provided by operating activities less capital expenditures. We believe that FCF is a liquidity measure and that it provides useful information regarding cash provided by operating activities and cash used for investments in property and equipment required to maintain and grow our business. FCF is presented for supplemental informational purposes only and should not be considered a substitute for financial information presented in accordance with GAAP. FCF has limitations as an analytical tool, and it should not be considered in isolation or as a substitute for analysis of other GAAP financial measures, such as net cash provided by operating activities. Some of the limitations of FCF are that FCF does not reflect our future contractual commitments, excludes investments made to acquire assets under finance leases, includes capital expenditures, and may be calculated differently by other companies in our industry, limiting its usefulness as a comparative measure.
Our FCF increased for the three months ended
We expect our FCF to generally increase in future periods as we increase subscription sales and reduce our capital expenditures as we shift to a Virtual First environment. Although we expect to continue to purchase infrastructure equipment to support our user base, we anticipate that our capital expenditures related to building out our office spaces will continue to decline in future periods. The timing of our operating expenses as described below, may result in FCF to vary from period to period as a percentage of revenue.
The following is a reconciliation of FCF to the most comparable GAAP measure, net cash provided by operating activities:
Three Months Ended March 31, 2021 2020 (In millions) Net cash provided by operating activities 115.7 53.3 Capital expenditures (6.9) (27.8) Free cash flow$ 108.8 $ 25.5 46
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Table of Contents 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.
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, also known as Basic 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. Additionally, research and development expenses include internal development-related third-party hosting fees. We have expensed almost all of our research and development costs as they were incurred.
We plan to continue hiring employees for our engineering, product, and design teams to support our research and development efforts. We expect that research and development costs will increase in absolute dollars in future periods and fluctuate from period to period as a percentage of revenue.
Sales and marketing. Our sales and marketing expenses relate to both self-serve and outbound sales activities, and consist primarily of employee-related costs, brand marketing costs, lead generation costs, sponsorships and allocated overhead. Sales commissions earned by our outbound sales team and the related payroll taxes, as well as commissions earned by third-party resellers that we consider to be incremental and recoverable costs of obtaining a contract with a customer, are deferred and are typically amortized over an estimated period of benefit of five years. Additionally, sales and marketing expenses include non-employee costs related to app store fees, fees payable to third-party sales representatives and amortization of acquired customer relationships.
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
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Table of Contents generally increase in absolute dollars in future periods and fluctuate from period to period as a percentage of revenue. The trend and timing of sales and marketing expenses will depend in part on the timing of marketing campaigns.
General and administrative. Our general and administrative expenses consist primarily of employee-related costs for our legal, finance, human resources, and other administrative teams, as well as certain executives. In addition, general and administrative expenses include allocated overhead, outside legal, accounting and other professional fees, and non-income based taxes.
We expect to incur additional general and administrative expenses to support the
growth of the Company. General and administrative expenses include the
recognition of stock-based compensation expense related to the grant of
restricted stock made to our co-founder. We expect that general and
administrative expenses will fluctuate in absolute dollars in future periods and
will generally decrease as a percentage of revenue, as a result of lower
amortization of the right-of-use assets and depreciation of related property and
equipment assets following the impairment charges recorded during the year ended
Interest income (expense), net Interest income (expense), net consists primarily of interest income earned on our money market funds classified as cash and cash equivalents and short-term investments, partially offset by interest expense related to our finance lease obligations for infrastructure and amortization of debt issuance costs.
Other income, net Other income, net consists of other non-operating gains or losses, including those related to equity investments, lease arrangements, which include sublease income, foreign currency transaction gains and losses, and realized gains and losses related to our short-term investments.
Benefit from (provision for) income taxes
Provision for income taxes consists primarily of
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Table of Contents Results of Operations The following tables set forth our results of operations for the periods presented: Three Months Ended March 31, 2021 2020 (In millions) Revenue$ 511.6 $ 455.0 Cost of revenue(1) 109.3 103.1 Gross profit 402.3 351.9 Operating expenses(1): Research and development 181.2 181.8 Sales and marketing 102.7 104.3 General and administrative 58.6 39.0 Impairment related to real estate assets 17.3 - Total operating expenses 359.8 325.1 Income from operations 42.5 26.8 Interest income (expense), net (1.2) 2.4 Other income, net 5.1 10.6 Income before income taxes 46.4 39.8 Benefit from (provision for) income taxes 1.2 (0.5) Net income$ 47.6 $ 39.3
(1) Includes stock-based compensation as follows:
Three Months Ended March 31, 2021 2020 (In millions) Cost of revenue$ 5.4 $ 3.5 Research and development 43.5 37.2 Sales and marketing 6.9 6.7 General and administrative(2) 12.1 (7.6) Total stock-based compensation$ 67.9 $ 39.8
(2) On
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The following table sets forth our results of operations for each of the periods presented as a percentage of revenue:
Three Months Ended March 31, 2021 2020 (As a % of revenue) Revenue 100 % 100 % Cost of revenue(1) 21 23 Gross profit 79 77 Operating expenses(1): Research and development 35 40 Sales and marketing 20 23 General and administrative 11 9 Impairment related to real estate assets 3 - Total operating expenses 70 71 Income from operations 8 6 Interest income (expense), net - 1 Other income, net 1 2 Income before income taxes 9 9 Benefit from (provision for) income taxes - - Net income 9 % 9 %
(1) Includes stock-based compensation as a percentage of revenue as follows:
Three Months Ended March 31, 2021 2020 (As a % of revenue) Cost of revenue 1 % 1 % Research and development 9 8 Sales and marketing 1 1 General and administrative(2) 2 (2) Total stock-based compensation 13 % 9 %
(2) On
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Table of Contents Comparison of the three months endedMarch 31, 2021 and 2020 Revenue Three Months Ended March 31, 2021 2020 $ Change % Change (In millions) Revenue$ 511.6 $ 455.0 $ 56.6 12 %
Revenue increased
Cost of revenue, gross profit, and gross margin
Three Months Ended March 31, 2021 2020 $ Change % Change (In millions) Cost of revenue$ 109.3 $ 103.1 $ 6.2 6 % Gross profit 402.3 351.9 50.4 14 % Gross margin 79 % 77 %
Cost of revenue increased
Our gross margin increased during the three months ended
Research and development Three Months Ended March 31, 2021 2020 $ Change % Change (In millions) Research and development$ 181.2 $ 181.8 $ (0.6) - %
Research and development expenses decreased
Sales and marketing Three Months Ended March 31, 2021 2020 $ Change % Change (In millions) Sales and marketing$ 102.7 $ 104.3 $ (1.6) (2) % 51
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Sales and marketing expenses decreased
General and administrative Three Months Ended March 31, 2021 2020 $ Change % Change (In millions) General and administrative$ 58.6 $ 39.0 $ 19.6 50 %
General and administrative expenses increased
Impairment related to real estate assets
Impairment related to real estate assets was
Interest income (expense), net
Interest income (expense), net decreased
Other income, net
Other income, net decreased
Benefit from (provision for) income taxes
Provision for income taxes decreased
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Table of Contents Liquidity and Capital Resources As ofMarch 31, 2021 , we had cash and cash equivalents of$845.5 million and short-term investments of$1,070.9 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 ofMarch 31, 2021 , we had$155.1 million of our cash and cash equivalents held by our foreign subsidiaries. We do not expect to incur material taxes in the event we repatriate any of these amounts. Since our inception, we have financed our operations primarily through the issuance of the Notes, equity issuances, cash generated from our operations, and finance leases to finance infrastructure-related assets in co-location facilities that we directly lease and operate. We enter into finance leases in part to better match the timing of payments for infrastructure-related assets with that of cash received from our paying users. In our business model, some of our registered users convert to paying users over time, and consequently there is a lag between initial investment in infrastructure assets and cash received from some of our users. InFebruary 2021 , we issued approximately$1.4 billion in aggregate principal amount of convertible senior notes, comprised of$695.8 million in aggregate principal amount of 2026 Notes and$693.3 million in aggregate principal amount of 2028 Notes. The net proceeds from the issuance of the 2026 Notes and 2028 Notes were$684.8 million , net of debt issuance costs, and$682.3 million , net of debt issuance costs, respectively. The 2026 Notes mature onMarch 1, 2026 and the 2028 Notes mature onMarch 1, 2028 . The Notes of each series will not bear regular interest and the principal will not accrete. The Notes of each series may bear special interest as the remedy relating to the Company's failure to comply with certain of its reporting obligations. These notes can be converted or repurchased prior to maturity if certain conditions are met. Our principal uses of cash in recent periods have been funding our operations, purchases of short-term investments, the satisfaction of tax withholdings in connection with the settlement of restricted stock units and awards, making principal payments on our finance lease obligations, repurchases of our Class A common stock, and capital expenditures. InFebruary 2020 , our Board of Directors approved a stock repurchase program for the repurchase of up to$600 million of the outstanding shares of our Class A common stock. InFebruary 2021 , our Board of Directors authorized the repurchase of up to an additional$1 billion of the outstanding shares of our Class A common stock. Share repurchases will be made from time to time in private transactions or open market purchases as permitted by securities laws and other legal requirements and will be subject to a review of the circumstances in place at that time, including prevailing market prices. The program does not obligate us to repurchase any specific number of shares and has no specified time limit; it may be discontinued at any time. During the three months endedMarch 31, 2021 , we repurchased and subsequently retired 18.6 million shares of our Class A common stock for an aggregate amount of$431.9 million . 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. We have previously announced, and executed on, our intention to increase the pace of our share repurchases under the current program, any share repurchases remain subject to the circumstances in place at that time, including prevailing market prices. InApril 2017 , we entered into a$600.0 million credit facility with a syndicate of financial institutions. Pursuant to the terms of the revolving credit facility, we may issue letters of credit under the revolving credit facility, which reduce the total amount available for borrowing under such facility. The revolving credit facility terminates onApril 4, 2022 . InFebruary 2018 , we amended our revolving credit facility to, among other things, permit us to make certain investments, enter into an unsecured standby letter of credit facility, and increase our standby letter of credit sublimit to$187.5 million . We also increased our borrowing capacity under the revolving credit facility from$600.0 million to$725.0 million . InFebruary 2021 , we amended our revolving credit facility to decrease our borrowing capacity from$725.0 million to$500.0 million . We may from time to time request increases in the borrowing capacity under the revolving credit facility of up to$250.0 million , provided no event of default has occurred or is continuing or would result from such increase. Interest on borrowings under the revolving credit facility accrues at a variable rate tied to the prime rate or the LIBOR rate, at our election. Interest is payable quarterly in arrears. Pursuant to the terms of the revolving credit facility, we are required to pay an annual commitment fee that accrues at a rate of 0.20% per annum on the unused portion of the borrowing commitments under the revolving credit facility. In addition, we are required to pay a fee in connection with letters of credit issued under the revolving credit facility that accrues at a rate of 1.375% per annum on the amount of such letters of credit outstanding. There is an additional fronting fee of 0.125% per annum multiplied by the average aggregate daily maximum amount available under all letters of credit. The revolving credit facility contains customary conditions to borrowing, events of default, and covenants, including covenants that restrict our ability to incur indebtedness, grant liens, make distributions to our holders or our subsidiaries' equity interests, make investments, or engage in transactions with our affiliates. In addition, the revolving credit facility contains 53
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financial covenants, including a consolidated leverage ratio incurrence covenant
and a minimum liquidity balance. We were in compliance with all covenants under
the revolving credit facility as of
Three Months Ended March 31, 2021 2020 (In millions) Net cash provided by operating activities$ 115.7 $ 53.3 Net cash used in investing activities (398.8) (11.7) Net cash provided by (used in) financing activities 814.6 (104.3) Effect of exchange rate changes on cash and cash equivalents (0.9) (2.2)
Net (decrease) increase in cash and cash equivalents
Operating activities Our largest source of operating cash is cash collections from our paying users for subscriptions to our platform. Our primary uses of cash from operating activities are for employee-related expenditures, infrastructure-related costs, and marketing expenses. Net cash provided by operating activities is impacted by our net income adjusted for certain non-cash items, including depreciation and amortization expenses, stock-based compensation, and impairment related to real estate assets, as well as the effect of changes in operating assets and liabilities. For the three months endedMarch 31, 2021 , net cash provided by operating activities was$115.7 million , which primarily consisted of our net income of$47.6 million , adjusted for stock-based compensation expense of$67.9 million , depreciation and amortization expenses of$34.7 million , impairment related to real estate assets of$17.3 million , and net cash outflow of$59.3 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 the acquisition of HelloSign, offset by an increase in deferred revenue from increased subscription sales, as a majority of our paying users are invoiced in advance. The increase in net cash provided by operating activities during the three months endedMarch 31, 2021 , compared to the three months endedMarch 31, 2020 , was primarily due to an increase in net income, as adjusted for stock-based compensation, depreciation and amortization expenses, and impairment related to real estate assets. Investing activities Net cash used in investing activities is primarily impacted by purchases of short-term investments, purchases of property and equipment to make improvements or modifications to existing and new office spaces, and for purchasing infrastructure equipment in co-location facilities that we directly lease and operate. 54
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Table of Contents For the three months endedMarch 31, 2021 , net cash used in investing activities was$398.8 million , which primarily related to$269.8 million in net investment activity outflows, driven by the purchases of short-term investments, net of sales and maturities and$125.4 million related to cash paid for our acquisition of DocSend. The increase in cash used in investing activities during the three months endedMarch 31, 2021 , compared to the three months endedMarch 31, 2020 , was primarily due to higher outflows related to net investment activity during the three months endedMarch 31, 2021 , and the acquisition of DocSend. Financing activities Net cash used in financing activities is primarily impacted by cash used for tax withholding obligations for the release of RSUs and RSAs, principal payments on finance lease obligations for our infrastructure equipment, and repurchases of common stock. Additionally, in connection with the issuance of convertible senior notes, proceeds from the issuance of convertible notes, proceeds from the issuance of warrants, purchases of convertible senior note hedges, and debt issuance costs impacted net cash used in financing activities. For the three months endedMarch 31, 2021 , net cash provided by financing activities was$814.6 million , which primarily consisted of$1,303.8 million in net proceeds from the 2026 Notes and 2028 Notes, offset by offering costs, and the concurrent Note Hedges and Warrants transaction, offset by$431.9 million for the repurchase of our common stock,$35.8 million for the satisfaction of tax withholding obligations for the release of restricted stock units and awards, and$24.6 million in principal payments on finance lease obligations. The increase in cash provided by financing activities during the three months endedMarch 31, 2021 , compared to the three months endedMarch 31, 2020 , was primarily due to the net proceeds from the 2026 Notes and 2028 Notes, offset by offering costs, and the concurrent Note Hedges and Warrants transaction during the three months endedMarch 31, 2021 , offset by the increase in repurchases of our common stock during the three months endedMarch 31, 2021 . 55
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Table of Contents Contractual Obligations
Our principal commitments consist of obligations under the Notes, operating leases for office space and datacenter operations, and finance leases for datacenter equipment. For additional information on the Notes, operating leases for office space and datacenter operations, and finance leases for datacenter equipment, see Note 8 "Debt" and Note 9 "Leases" to our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for further information. Except for the Notes, there have been no material changes in our contractual obligations and commitments, as disclosed in our Annual Report.
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Table of Contents Off-Balance Sheet Arrangements
As of
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Table of Contents Critical Accounting Policies and Judgments
See Part II, Item 7, "Critical Accounting Policies and Judgments " in our Annual
Report on Form 10-K for the year ended
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Table of Contents Recent Accounting Pronouncements
See Note 1 "Description of the Business and Summary of Significant Accounting Policies" to our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for recently adopted accounting pronouncements as of the date of this Quarterly Report on Form 10-Q.
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