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DigitalOcean Announces First Quarter 2022 Financial Results

May 5, 2022

NEW YORK--( BUSINESS WIRE )--DigitalOcean Holdings, Inc. (NYSE: DOCN), the cloud for developers, startups and SMBs, today announced results for its first quarter ended March 31, 2022.

"Despite an uncertain macro environment, we had a good start to the year with strong growth and free cash flow," said Yancey Spruill, CEO of DigitalOcean. "We are focused on broadening our product offerings, investing in our go-to-market capabilities, both to enable our customers’ success and drive consistent revenue growth combined with ramping free cash flow."

First Quarter 2022 Financial Highlights:

  • Revenue was $127.3 million, an increase of 36% year-over-year.
  • Annual Run-Rate Revenue (ARR) ended the quarter at $524 million, representing 35% year-over-year growth.
  • Gross profit of $80.6 million or 63% of revenue and adjusted gross profit of $103.3 million or 81% of revenue.
  • Loss from operations was $13.1 million and operating margin was (10)%.
  • Non-GAAP income from operations was $13.6 million and non-GAAP operating margin was 11%.
  • Net loss per share was $(0.17) and non-GAAP diluted net income per share was $0.07.
  • Cash, cash equivalents, and marketable securities was $1.6 billion as of March 31, 2022.

First Quarter 2022 Operational Highlights:

  • Net Dollar Retention Rate (NDR) was 117%, up from 107% in the first quarter 2021.
  • Average Revenue Per Customer (ARPU) in the quarter was $68.90, an increase of 28% over the first quarter 2021.
  • Total customers grew 6% to 623K and customers spending more than $50 per month grew 20% to 102K.
  • Revenue from customers spending more than $50 per month grew 43% year-over-year. These customers had an NDR of 118% and now represent 84% of total revenue.
  • Acquired CSS Tricks, a learning site with 6,500 articles, videos, guides and other content focused on front-end development which attracts more than 3 million monthly unique visitors.
  • Increased existing revolving credit facility to $250 million to provide incremental capital for flexibility to invest in profitable growth.
  • Repurchased 2.6 million shares for $150.0 million utilizing the share repurchase program.

Financial Outlook:

Based on information available as of May 4, 2022, for the second quarter of 2022 we expect:

  • Total revenue of $133 to $135 million.
  • Non-GAAP operating margin of 10% to 11%.
  • Non-GAAP diluted net income per share of $0.09 to $0.10.
  • Fully diluted weighted average shares outstanding of approximately 122 to 124 million shares.

For the full year 2022, we expect:

  • Total revenue of $564 to $568 million.
  • Non-GAAP operating margin of 13% to 15%.
  • Free cash flow in the range of 8% to 10% of revenue.
  • Non-GAAP diluted net income per share of $0.70 to $0.71.
  • Fully diluted weighted average shares outstanding of approximately 123 to 125 million shares.

A reconciliation of non-GAAP guidance measures to corresponding GAAP measures is not available on a forward-looking basis without unreasonable effort due to the uncertainty regarding, and the potential variability of, expenses that may be incurred in the future. For example, stock-based compensation expense-related charges are impacted by the timing of employee stock transactions, the future fair market value of our common stock, and our future hiring and retention needs, all of which are difficult to predict and subject to constant change. Accordingly, a reconciliation is not available without unreasonable effort and we are unable to assess the probable significance of the unavailable information, although it is important to note that these factors could be material to our results computed in accordance with GAAP.

Conference Call Information:

DigitalOcean will host a conference call today, May 4, 2022, at 4:30 p.m. ET to review its results. The conference call can be accessed by dialing (888) 330-3637 with conference ID 7741047. A live webcast and replay of the conference call can be accessed from the DigitalOcean investor relations website at http://investors.digitalocean.com.

Following the completion of the call, a telephonic replay will be available through May 11, 2022, by dialing (800) 770-2030 with conference ID 7741047.

About DigitalOcean

DigitalOcean simplifies cloud computing so builders can spend more time creating software that changes the world. With its mission-critical infrastructure and fully managed offerings, DigitalOcean helps developers, startups and small and medium-sized businesses (SMBs) rapidly build, deploy and scale applications to accelerate innovation and increase productivity and agility. DigitalOcean combines the power of simplicity, community, open source and customer support so customers can spend less time managing their infrastructure and more time building innovative applications that drive business growth.

Forward‑Looking Statements

This release contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, regarding our performance, including but not limited to statements in the section titled “Financial Outlook.” The forward-looking statements contained in this release and the accompanying earnings call referenced in this release are subject to known and unknown risks, uncertainties, assumptions, and other factors that may cause actual results or outcomes to be materially different from any future results or outcomes expressed or implied by the forward-looking statements. These risks, uncertainties, assumptions, and other factors include, but are not limited to: (1) our recent growth may not be indicative of our future growth; (2) our history of operating losses; (3) our limited operating history; (4) our ability to attract and retain customers and/or expand usage of our platform by such customers; (5) breaches in our security measures allowing unauthorized access to our platform, our data, or our customers’ data; (6) our ability to release updates and new features to our platform and adapt and respond effectively to rapidly changing technology or customer needs; (7) the competitive markets in which we participate; (8) the rapidly evolving laws and industry standards that relate to privacy, data security, liability for service providers regarding the activities of customers, and access to the internet; (9) risks associated with successfully managing our growth; and (10) general market, political, economic, and business conditions.

Further information on these and additional risks, uncertainties, assumptions and other factors that could cause actual results or outcomes to differ materially from those included in or contemplated by the forward-looking statements contained in this release are included under the caption “Risk Factors” and elsewhere in our Annual Report on Form 10-K for the year ended December 31, 2021, filed with the SEC on February 25, 2022. Additional information will be made available in our Quarterly Report on Form 10-Q that will be filed for the quarter ended March 31, 2022 and other filings and reports we make with the SEC from time to time.

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 release. The results, events and circumstances reflected in the forward-looking statements may not be achieved or occur. The forward-looking statements made in this release relate only to events as of the date on which the statements are made. We assume no obligation to, and do not currently intend to, update any such forward-looking statements after the date of this release.

About Non-GAAP Financial Measures

To supplement our consolidated financial statements, which are prepared and presented in accordance with generally accepted accounting principles in the United States, or GAAP, we provide investors with non-GAAP financial measures including: (i) adjusted gross profit and adjusted gross margin; (ii) non-GAAP income from operations and non-GAAP operating margin; (iii) non-GAAP net income and non-GAAP diluted net income per share; and (iv) free cash flow and free cash flow margin. These measures are presented for supplemental informational purposes only, have limitations as analytical tools and should not be considered in isolation or as a substitute for financial information presented in accordance with GAAP. In particular, free cash flow is not a substitute for cash used in operating activities. Additionally, the utility of free cash flow as a measure of our financial performance and liquidity is further limited as it does not represent the total increase or decrease in our cash balance for a given period. Our calculations of each of these measures may differ from the calculations of measures with the same or similar titles by other companies and therefore comparability may be limited. Because of these limitations, when evaluating our performance, you should consider each of these non-GAAP financial measures alongside other financial performance measures, including the most directly comparable financial measure calculated in accordance with GAAP and our other GAAP results. A reconciliation of each of our non-GAAP financial measures to the most directly comparable financial measure calculated in accordance with GAAP is set forth in the tables in the section “Reconciliation of GAAP to Non-GAAP Data.”

Adjusted Gross Profit and Adjusted Gross Margin

We believe adjusted gross profit and adjusted gross margin, when taken together with our GAAP financial results, provides a meaningful assessment of our performance, and is useful for the preparation of our annual operating budget and quarterly forecasts.

We define adjusted gross profit as gross profit exclusive of stock-based compensation, amortization of capitalized internal-use software development costs and depreciation of our data center equipment included within Cost of revenue. We exclude stock-based compensation, which is a non-cash item, because we do not consider it indicative of our core operating performance. We exclude depreciation and amortization, which primarily relates to our investments in our data center servers that are long lived assets with an economic life of five years, because it may not reflect our current or future cash spending levels to support our business. While we intend to spend a significant amount on capital expenditures on an absolute basis in the coming years, our capital expenditures as a percentage of revenue has declined significantly and will continue to decline. We define adjusted gross margin as a percentage of adjusted gross profit to revenue.

Non-GAAP Income from Operations and Non-GAAP Operating Margin

We define non-GAAP income from operations as (Loss) income from operations, excluding stock-based compensation and loss on sublease. Beginning in the second quarter of 2022, we will define non-GAAP income from operations as (Loss) income from operations, excluding stock-based compensation, amortization of acquired intangibles, acquisition related costs, loss on sublease, asset impairment, restructuring and severance, and other unusual or non-recurring transactions as they occur. We believe these modifications will assist investors in performing meaningful comparisons of past, present and future operating results and better highlight the results of our ongoing operations. We define non-GAAP operating margin as non-GAAP income from operations as a percentage of revenue. We use non-GAAP income from operations to understand and evaluate our core operating performance and trends and to develop short-term and long-term operating plans. We believe that non-GAAP income from operations facilitates comparison of our operating performance on a consistent basis between periods, and when viewed in combination with our results prepared in accordance with GAAP, helps provide a broader picture of factors and trends affecting our results of operations.

Accordingly, our outlook for non-GAAP operating margin for the second quarter and full year 2022 is based off the revised definition as outlined above.

Non-GAAP Net Income and Non-GAAP Diluted Net Income Per Share

We define non-GAAP net income as Net loss attributable to common stockholders, excluding stock-based compensation, amortization of acquired intangibles, acquisition related costs, release of VAT reserve, and loss on sublease. Beginning in the second quarter of 2022, we will define non-GAAP net income (loss) as Net loss attributable to common stockholders, excluding stock-based compensation, amortization of acquired intangibles, acquisition related costs, release of VAT reserve, loss on sublease, loss on extinguishment of debt, asset impairment, restructuring and severance expense, revaluation of warrants, and other unusual or non-recurring transactions as they occur. We believe these modifications will assist investors in performing meaningful comparisons of past, present and future operating results and better highlight the results of our ongoing operations. We define non-GAAP diluted net income per share as non-GAAP net income divided by the weighted-average shares including the dilutive effects of our convertible preferred stock, warrants, stock options, RSUs, PRSUs and Convertible Notes.

We believe non-GAAP net income per share provides our management and investors consistency and comparability with our past financial performance and facilitates period-to-period comparisons of operations, as this metric generally eliminates the effects of unusual or non-recurring items from period to period for reasons unrelated to overall operating performance.

Accordingly, our outlook for non-GAAP diluted net income per share for the second quarter and full year 2022 is based off the revised definition as outlined above.

Free Cash Flow and Free Cash Flow Margin

Free cash flow is a non-GAAP financial measure that we define as Net cash provided by operating activities less purchases of property and equipment, capitalized internal-use software costs and purchase of intangible assets. Free cash flow margin is calculated as free cash flow divided by total revenue. We believe that free cash flow and free cash flow margin are useful indicators of liquidity that provide information to management and investors about the amount of cash generated from our core operations that, after the purchases of property and equipment, can be used for strategic initiatives, including investing in our business and selectively pursuing acquisitions and strategic investments. We further believe that historical and future trends in free cash flow and free cash flow margin, even if negative, provide useful information about the amount of Net cash provided by operating activities that is available (or not available) to be used for strategic initiatives. For example, if free cash flow is negative, we may need to access cash reserves or other sources of capital to invest in strategic initiatives. One limitation of free cash flow and free cash flow margin is that they do not reflect our future contractual commitments. Additionally, free cash flow does not represent the total increase or decrease in our cash balance for a given period.

Key Business Metrics:

We utilize the key metrics set forth below to help us evaluate our business and growth, identify trends, formulate financial projections and make strategic decisions.

Customers

We define a customer at the end of any period as a person or entity who has incurred usage in the period and, as a result, has generated an invoice of greater than $0 for that period. We treat each customer that generates an invoice as a unique customer, and a single organization with multiple divisions, segments or subsidiaries may be counted as multiple customers if they separately signed up on our platform. We define customers paying more than $50 per month as customers having generated an invoice of greater than $50 for that period.

ARPU

We calculate ARPU on a monthly basis as our total revenue in that period divided by the number of customers determined as of the last day of that period. For a quarterly or annual period, ARPU is determined as the weighted average monthly ARPU over such three or 12-month period.

ARR

We calculate ARR at a point in time by multiplying the latest monthly period’s revenue by 12.

Net Dollar Retention Rate

We calculate net dollar retention rate monthly by starting with the revenue from the cohort of all customers during the corresponding month 12 months prior, or the Prior Period Revenue. We then calculate the revenue from these same customers as of the current month, or the Current Period Revenue, including any expansion and net of any contraction or attrition from these customers over the last 12 months. The calculation also includes revenue from customers that generated revenue before, but not in, the corresponding month 12 months prior, but subsequently generated revenue in the current month and are therefore reflected in the Current Period Revenue. We include this group of re-engaged customers in this calculation because our customers frequently use our platform for projects that stop and start over time. We then divide the total Current Period Revenue by the total Prior Period Revenue to arrive at the net dollar retention rate for the relevant month. For a quarterly or annual period, the net dollar retention rate is determined as the average monthly net dollar retention rates over such three or 12-month period.

 

DIGITALOCEAN HOLDINGS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share amounts)

(unaudited)

 

March 31, 2022

December 31, 2021

Current assets:

Cash and cash equivalents

$

464,836

$

1,713,387

Marketable securities

1,090,370

Accounts receivable, less allowance for doubtful accounts of $5,155 and $4,212, respectively

42,527

39,619

Prepaid expenses and other current assets

14,171

17,050

Total current assets

1,611,904

1,770,056

Property and equipment, net

259,385

249,643

Restricted cash

2,038

2,038

Goodwill

32,170

32,170

Intangible assets, net

46,453

42,915

Deferred tax assets

89

88

Other assets

4,789

4,085

Total assets

$

1,956,828

$

2,100,995

Current liabilities:

Accounts payable

16,329

12,657

Accrued other expenses

25,627

31,907

Deferred revenue

5,248

4,826

Other current liabilities

15,247

8,849

Total current liabilities

$

62,451

$

58,239

Deferred tax liabilities

421

421

Long-term debt

1,464,525

1,462,676

Other long-term liabilities

1,600

1,462

Total liabilities

$

1,528,997

$

1,522,798

Commitments and Contingencies (Note 8)

Preferred stock ($0.000025 par value per share; 10,000,000 shares authorized; 0 shares issued and outstanding as of March 31, 2022 and December 31, 2021)

$

$

Common stock ($0.000025 par value per share; 750,000,000 shares authorized; 107,956,057 and 109,175,863 issued; and 105,987,829 and 107,207,635 outstanding as of March 31, 2022 and December 31, 2021, respectively)

2

2

Treasury stock, at cost (1,968,228 shares at March 31, 2022 and December 31, 2021)

(4,598

)

(4,598

)

Additional paid-in capital

639,388

769,705

Accumulated other comprehensive loss

(2,300

)

(374

)

Accumulated deficit

(204,661

)

(186,538

)

Total stockholders’ equity

$

427,831

$

578,197

Total liabilities and stockholders’ equity

$

1,956,828

$

2,100,995

 

DIGITALOCEAN HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

(unaudited)

 

Three Months Ended

March 31,

2022

2021

Revenue

$

127,327

$

93,661

Cost of revenue

46,757

39,544

Gross profit

80,570

54,117

Operating expenses:

Research and development

37,241

22,402

Sales and marketing

19,044

10,421

General and administrative

37,424

18,040

Total operating expenses

93,709

50,863

(Loss) income from operations

(13,139

)

3,254

Other (income) expense:

Interest expense

2,059

2,256

Loss on extinguishment of debt

407

3,435

Other income, net

(820

)

(94

)

Other (income) expense

1,646

5,597

Loss before income taxes

(14,785

)

(2,343

)

Income tax expense

3,338

996

Net loss attributable to common stockholders

$

(18,123

)

$

(3,339

)

Net loss per share attributable to common stockholders, basic and diluted

$

(0.17

)

$

(0.07

)

Weighted-average shares used to compute net loss per share, basic and diluted

106,980

49,432

 

DIGITALOCEAN HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

 

Three Months Ended

March 31,

2022

2021

Operating activities

Net loss attributable to common stockholders

$

(18,123

)

$

(3,339

)

Adjustments to reconcile net loss to net cash provided by operating activities:

Depreciation and amortization

23,933

20,951

Stock-based compensation

25,981

6,624

Bad debt expense

4,023

1,607

Loss on extinguishment of debt

407

3,435

Net accretion of discounts and amortization on available-for-sale securities

(117

)

Non-cash interest expense

1,959

205

Revaluation of warrants

(556

)

Other

623

(335

)

Changes in operating assets and liabilities, net of acquisition:

Accounts receivable

(6,931

)

(3,749

)

Prepaid expenses and other current assets

2,878

2,554

Accounts payable and accrued expenses

(10,535

)

(7,413

)

Deferred revenue

422

48

Other assets and liabilities

5,763

(241

)

Net cash provided by operating activities

30,283

19,791

Investing activities

Capital expenditures - property and equipment

(22,976

)

(22,398

)

Capital expenditures - internal-use software development

(2,276

)

(1,370

)

Cash paid for asset acquisition

(4,000

)

Purchase of available-for-sale securities

(1,091,279

)

Purchased interest on available-for-sale securities

(1,530

)

Proceeds from interest on available-for-sale securities

649

Proceeds from sale of equipment

457

81

Net cash used in investing activities

(1,120,955

)

(23,687

)

Financing activities

Repayment of notes payable

(33,213

)

Repayment of term loan

(166,814

)

Repayment of borrowings under revolving credit facility

(63,200

)

Payment of debt issuance costs

(921

)

Proceeds related to the issuance of common stock under equity incentive plan

5,426

3,740

Employee payroll taxes paid related to net settlement of equity awards

(12,384

)

Proceeds from initial public offering, net of underwriting discounts and commissions and other offering costs

723,125

Repurchase and retirement of common stock

(150,000

)

Net cash (used in) provided by financing activities

(157,879

)

463,638

(Decrease) increase in cash, cash equivalents and restricted cash

(1,248,551

)

459,742

Cash, cash equivalents and restricted cash - beginning of period

1,715,425

102,537

Cash, cash equivalents and restricted cash - end of period

$

466,874

$

562,279

DIGITALOCEAN HOLDINGS, INC.

RECONCILIATION OF GAAP TO NON-GAAP DATA (unaudited)

Adjusted Gross Profit and Adjusted Gross Margin

Three Months Ended

March 31,

(In thousands)

2022

2021

Gross profit

$

80,570

$

54,117

Adjustments:

Depreciation and amortization

22,262

19,225

Stock-based compensation

432

196

Adjusted gross profit

$

103,264

$

73,538

Gross margin

63

%

58

%

Adjusted gross margin

81

%

79

%

Non-GAAP Income from Operations and Non-GAAP Operating Margin

Three Months Ended

March 31,

(In thousands)

2022

2021

(Loss) income from operations

$

(13,139

)

$

3,254

Adjustments:

Stock-based compensation

25,981

6,624

Loss on sublease

788

Non-GAAP income from operations

$

13,630

$

9,878

Operating margin

(10

)%

3

%

Non-GAAP operating margin

11

%

11

%

Non-GAAP Net Income and Non-GAAP Diluted Net Income Per Share

Three Months Ended

March 31,

(In thousands)

2022

2021

GAAP Net loss attributable to common stockholders

$

(18,123

)

$

(3,339

)

Stock-based compensation

25,981

6,624

Amortization of acquired intangible assets

462

76

Acquisition related costs

(46

)

Loss on sublease

788

Income tax effects of non-GAAP adjustments(1)

309

135

Non-GAAP net income(2)

$

9,371

$

3,496

Non-GAAP diluted net income per share(2)

$

0.07

$

0.03

Weighted-average shares used to compute Non-GAAP diluted net income per share

126,555

103,403

___________________

(1)

The income tax effects of non-GAAP adjustments are calculated based on the applicable statutory tax rate for the relevant jurisdiction, except for those items which are non-taxable or subject to valuation allowances for which the tax expense (benefit) was calculated at 0%. The tax benefit for amortization is calculated in a similar manner as the tax effects of the non-GAAP adjustments.

(2)

Amounts are attributable for both the common and convertible preferred stockholders, treated as one class of stock.

 

Free Cash Flow and Free Cash Flow Margin

Three Months Ended

March 31,

(In thousands)

2022

2021

Net cash provided by operating activities

$

30,283

$

19,791

Adjustments:

Capital expenditures - property and equipment

$

(22,976

)

$

(22,398

)

Capital expenditures - internal-use software development

(2,276

)

(1,370

)

Free cash flow

$

5,031

$

(3,977

)

As a percentage of revenue:

Net cash provided by operating activities

24

%

21

%

Free cash flow margin

4

%

(4

)%

DIGITALOCEAN HOLDINGS, INC.

SUPPLEMENTAL FINANCIAL INFORMATION (unaudited)

Stock-Based Compensation

Three Months Ended

March 31,

(In thousands)

2022

2021

Cost of revenue

$

432

$

196

Research and development

9,720

2,636

Sales and marketing

3,346

1,137

General and administrative

12,483

2,655

Total

$

25,981

$

6,624

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