DigitalOcean Holdings, Inc. — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024; filed May 10, 2024. DigitalOcean provides cloud infrastructure, platform, software, and AI/ML products, principally to startups and growing technology businesses. The company reported one operating and reporting segment.
Financial performance and liquidity
| Metric | Q1 2024 | Q1 2023 |
|---|---|---|
| Revenue | $184.7 million | $165.1 million |
| Gross profit / gross margin | $112.1 million / 61% | $93.3 million / 56% |
| Operating income (loss) | $11.5 million | $(33.1) million |
| Net income (loss) | $14.1 million; diluted EPS $0.15 | $(16.4) million; diluted EPS $(0.17) |
| Operating cash flow | $66.7 million | $36.2 million |
| Cash capital expenditures | $45.2 million | $25.1 million |
Cash capital expenditures comprise property and equipment plus internal-use software development. Operating cash flow less these expenditures was approximately $21.5 million, versus $11.1 million in Q1 2023; this is a simple calculation, not a company-reported non-GAAP measure. Adjusted EBITDA was $74.3 million, or 40% of revenue, compared with $55.7 million, or 34%.
At March 31, 2024, cash and cash equivalents were $419.1 million, with no marketable securities reported separately; the company said it had moved those holdings to money market funds. Long-term debt, consisting of 0% convertible notes due December 1, 2026, had a carrying value of $1.480 billion and estimated fair value of $1.262 billion. The company had $250 million available under its revolving credit facility, no borrowings under that facility, and was in covenant compliance. Management believes cash, operating cash flow, and credit availability will cover working capital, capital expenditures, and commitments for at least the next 12 months and in the long term. Total liabilities exceeded total assets, leaving a stockholders’ deficit of $286.1 million.
Business trends and changes versus prior period
- Revenue rose 12%, attributed to new customers, increased usage by existing customers, and growth in Managed Hosting and AI/ML offerings. Gross margin improved primarily as ancillary equipment and bandwidth costs declined relative to revenue.
- Operating expenses fell 20% to $100.5 million. The comparison benefited from the absence of $20.9 million of restructuring charges recorded in Q1 2023; research and development and general and administrative expenses also declined, while sales and marketing expense increased 14%.
- Net dollar retention was 97%, down from 107%. ARPU increased 8% to $95.13; ARR was $749 million, up from $669 million. Builders and Scalers increased to approximately 140,000 and 17,000, respectively, and generated 87% of revenue versus 86% a year earlier.
- Operating cash flow improved, partly due to higher collections and lower severance payments. Investing cash flow was $46.4 million, compared with $108.0 million, reflecting marketable-security activity and higher capital spending. Financing cash use was $11.2 million, versus $264.2 million, primarily because share repurchases were much lower.
- Q1 GAAP income included a $0.1 million income tax expense, compared with an $11.5 million tax benefit in Q1 2023. The company’s U.S. deferred tax assets remain subject to a full valuation allowance.
Outlook, commentary, risks, and unusual items
- The filing provides no specific quarterly or full-year revenue or earnings guidance. Management identified customer expansion, attracting higher-spend customers, and investment in IaaS, PaaS, SaaS, and AI/ML offerings as priorities; it expects research and development, sales and marketing, and general and administrative expenses to increase in absolute dollars over time.
- The board authorized up to $140 million of share repurchases through fiscal 2025. The company repurchased 200,258 shares for $7.8 million in Q1, excluding excise tax; $132.2 million remained authorized at quarter-end.
- A material weakness in internal control over financial reporting related to income tax accounting remained outstanding at March 31, 2024, and disclosure controls were deemed ineffective. The weakness had resulted in prior-period tax-related errors, including material errors in Q1 2023 statements. Management added tax personnel, engaged an outside advisor, and is testing remediation; it said effectiveness must be validated over a sustained period.
- Management cited macroeconomic and geopolitical risks, including inflation, interest rates, financial-market volatility, and instability in regions where the company operates. The company reported no material change to the risk factors in its 2023 Form 10-K.
- The 2023 securities class action and two related derivative actions were voluntarily dismissed without prejudice in January and February 2024, respectively. The company says ordinary-course legal proceedings are not expected to materially affect its financial position, results, or liquidity.
- CEO Padmanabhan Srinivasan joined in February 2024. His stock-price-based award had an estimated grant-date fair value of approximately $8 million. The former CEO’s unvested 3 million-share award was forfeited. The Paperspace acquisition purchase-price allocation remained open for tax-related assessment.
Important facts for investors to verify
- Whether retention remains below 100% and how that compares with growth in ARPU, ARR, and higher-spend customer revenue.
- Whether the income-tax control weakness is remediated after sustained validation and testing, and whether future tax provisions or disclosures require adjustment.
- Capital spending and infrastructure costs relative to operating cash generation, alongside the company’s stated liquidity needs and repurchase plans.
- Convertible-note maturity and potential dilution, including the notes’ terms and the substantial difference between carrying value and estimated fair value.
- Execution and monetization of Paperspace and AI/ML offerings, and whether the related investment supports durable revenue growth and margins.