DigitalOcean Holdings, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; comparisons are with Q1 2021 unless otherwise noted. DigitalOcean operates a cloud computing platform serving developers, start-ups, and small and medium-sized businesses. Financial amounts below are in U.S. dollars; millions are rounded.
Financial performance and liquidity
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Revenue | $127.3m | $93.7m | +36% |
| Gross profit / GAAP gross margin | $80.6m / 63% | $54.1m / 58% | Margin +5 percentage points |
| Operating expenses | $93.7m | $50.9m | +84% |
| Operating income (loss) / margin | $(13.1)m / (10)% | $3.3m / 4% | Shifted to loss |
| Net loss attributable to common stockholders | $(18.1)m | $(3.3)m | Loss increased |
| Net loss per share, diluted | $(0.17) | $(0.07) | Loss per share increased |
| Operating cash flow | $30.3m | $19.8m | Increased |
| Free cash flow, non-GAAP | $5.0m | $(4.0)m | Improved |
Management-reported supplemental measures: adjusted gross margin was 81% versus 79%; non-GAAP operating income was $13.6m versus $9.9m, with an 11% margin in both periods; and non-GAAP net income was $9.4m versus $3.5m. These non-GAAP measures exclude specified items and should not be treated as substitutes for GAAP results. Stock-based compensation was $26.0m, up from $6.6m.
Balance sheet and debt at March 31, 2022: Cash and cash equivalents were $464.8m and marketable securities were $1.09bn, or approximately $1.56bn combined. Current assets were $1.61bn and current liabilities were $62.5m. Long-term debt carrying value was $1.46bn, comprising the 0% convertible senior notes due December 2026; their estimated fair value was $1.20bn. The $250m revolving credit facility was undrawn, and the company reported covenant compliance. Stockholders’ equity was $427.8m.
Cash, cash equivalents, and restricted cash declined $1.25bn during the quarter, primarily reflecting $1.09bn of purchases of marketable securities and $150m of share repurchases, rather than operating cash usage. Investing cash flow was $(1.12)bn. Capital expenditures were $23.0m for property and equipment and $2.3m for internal-use software.
Material changes and business indicators
- Revenue growth reflected a 28% increase in average revenue per customer, to $68.90, and approximately 37,000 more customers. Customers reached 622,749, up from 585,466; customers paying more than $50 per month reached 102,426, up from 85,154.
- Annual run-rate revenue was $524m versus $388m, and net dollar retention was 117% versus 107%. Revenue from customers paying more than $50 monthly represented 84% of revenue, compared with 80%.
- Operating expenses rose substantially: research and development +66%, sales and marketing +83%, and general and administrative +107%. Management cited personnel costs and stock compensation, among other factors; G&A also reflected higher bad debt expense, insurance, and software licensing costs.
- In February, the company authorized a $300m share repurchase program and bought back and retired 2.58m shares for $150m at an average $58.20 per share. $150m remained authorized at quarter-end.
- In March, DigitalOcean acquired the CSS Tricks website assets for $4m; acquired intangibles will be amortized over three to five years. It also amended its credit facility, increasing revolving capacity from $150m to $250m and revising covenants and pricing terms.
Outlook, risks, and notable items
- No specific quarterly or full-year financial guidance is provided in the supplied filing text. Management said cash, marketable securities, operating cash flow, credit availability, and convertible notes were expected to support working capital, capital expenditures, and commitments for at least the next 12 months.
- Russia’s invasion of Ukraine and related sanctions affected payment collection from some customers. Customers with business activities in Russia, Belarus, and Ukraine represented approximately 3.5% of Q1 revenue. The company has no employees or direct operations there; the conflict’s further effects remain uncertain and could include cyber and third-party risks.
- The filing identifies broader risks from economic weakness and reduced IT spending, which could reduce customer usage, delay purchases, or increase churn. It also highlights competitive pressure and the company’s reliance on continued customer acquisition and expansion.
- Other notable charges included a $0.8m sublease loss and a $0.4m non-cash loss on extinguishment of debt. The company recorded $4.0m of bad debt expense, net of recoveries, and maintained a full valuation allowance on U.S. deferred tax assets. Management reported no material litigation expected to adversely affect financial position, results, or liquidity.
- Management expects continued investment in infrastructure, product development, sales and marketing, and public-company support costs. These investments, along with substantially higher stock-based compensation, contributed to the shift from operating income to operating loss.
Most important facts for investors to verify
- Whether revenue growth, ARPU, retention, and higher-spending customer growth remain durable, particularly if economic conditions weaken.
- How operating costs and stock-based compensation evolve, and whether GAAP profitability improves alongside the reported non-GAAP measures.
- Whether the $1.56bn cash-and-securities position, operating cash flow, and undrawn facility remain sufficient after capital spending and any further repurchases.
- The potential dilution or cash settlement implications of the $1.5bn convertible notes, including conversion terms and maturity-related provisions.
- Whether sanctions, payment disruptions, or cyber and regional economic risks cause further customer or revenue impacts beyond the disclosed 3.5% exposure.