DigitalOcean Holdings, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; unaudited, with comparison to Q1 2020. DigitalOcean provides cloud infrastructure and platform tools, principally to developers, startups and small-to-medium-sized businesses. It completed its IPO on March 26, 2021.
Key financial metrics
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| Revenue | $93.7 million | $72.8 million |
| Gross profit / margin | $54.1 million / 58% | $38.1 million / 52% |
| Operating income (loss) | $3.3 million | $(12.5) million |
| Net loss attributable to common stockholders | $(3.3) million; $(0.07) per share | $(16.9) million; $(0.42) per share |
| Adjusted EBITDA / margin | $30.7 million / 33% | $18.4 million / 25% |
| Cash from operating activities | $19.8 million | $1.3 million |
| Cash used in investing activities | $(23.7) million | $(28.2) million |
| Cash, cash equivalents and restricted cash at quarter end | $562.3 million | $93.4 million |
| Total debt at quarter end | $0 | Not stated here for the comparable quarter |
Cash capital expenditures were $23.8 million, comprising property and equipment and internal-use software development. Operating cash flow less these expenditures was approximately negative $4.0 million. At March 31, 2021, the company also reported $150 million of available revolving-credit capacity.
Business performance and changes versus the prior period
- Revenue increased 29% year over year, primarily reflecting higher usage and customer growth. Customers rose to 585,466 from 546,453; average revenue per customer increased 20% to $53.68 from $44.68.
- Annual run-rate revenue, defined by the company as latest monthly revenue multiplied by 12, was $388 million, up from $299 million. Net dollar retention was 107%, compared with 101%.
- Gross margin expanded to 58% from 52%. Cost of revenue increased 14%, slower than revenue growth, while the company cited higher network-equipment depreciation and colocation costs.
- Operating expenses were nearly flat overall. Research and development rose 15% and sales and marketing 10%; general and administrative expense fell 17%, partly because Q1 2020 included $7.6 million of stock-based compensation tied to employee secondary share sales.
- The company recorded $5.6 million of other expense, including a $3.4 million loss on extinguishment of debt. IPO proceeds funded repayment of all outstanding term-loan, revolving-facility and note-payable balances during the quarter. The balance sheet showed no debt at March 31.
- The IPO issued 16.5 million shares at $47 per share and generated $723.1 million in net proceeds. Convertible preferred stock converted into common stock upon the offering.
Outlook, commentary and risks
- Management said cash and cash flows from operations should support working-capital and capital-expenditure requirements for at least the next 12 months. The filing provides no specific forward revenue or earnings guidance.
- Management expects continued investment in product development, infrastructure, sales and marketing, and public-company compliance; these costs may increase. The company has a history of losses and cautions that it may not achieve or sustain profitability.
- Management reported that COVID-19 had not significantly affected operations or financial performance to date, but said the future effect remained uncertain.
- Principal risks include competition from larger cloud providers, customer retention and usage variability under month-to-month contracts, cybersecurity and service availability, reliance on third-party data centers and equipment suppliers, international and regulatory exposure, and the company’s ability to manage growth and infrastructure investment.
- Operating leases require future minimum payments of $104.9 million as of March 31, 2021. The company reported ordinary-course legal proceedings and stated it did not expect them to have a material adverse effect.
- Disclosure controls and procedures were assessed as effective at the reasonable-assurance level; management noted inherent limits to control systems. The company is an emerging growth company and has elected the extended transition period for certain accounting standards.
Important facts for investors to verify
- How revenue growth, ARPU and net dollar retention develop, including whether customer usage and expansion offset churn.
- Whether the reported margin and adjusted EBITDA improvements persist; adjusted EBITDA is a non-GAAP measure and should be considered alongside GAAP results.
- Cash generation relative to substantial infrastructure investment, and the terms and continued availability of the $150 million revolving facility.
- The impact of post-IPO share issuance, equity compensation, and lock-up expirations on dilution and trading supply.
- Any developments in cybersecurity, service reliability, data-center capacity, privacy regulation, or other contingencies that could materially affect operations.