DigitalOcean Holdings, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; filed May 9, 2023. DigitalOcean provides cloud infrastructure, platform and software services, primarily to startups and small and medium-sized businesses. Unless noted otherwise, financial amounts below are in millions of dollars.
Financial performance and position
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Revenue | $165.1 | $127.3 |
| Gross profit / margin | $93.3 / 56% | $80.1 / 63% |
| Operating loss | $(32.5) | $(13.6) |
| Net loss | $(34.9) | $(18.6) |
| Net loss per share, diluted | $(0.37) | $(0.17) |
| Cash provided by operations | $36.2 | $30.4 |
| Adjusted free cash flow and margin (non-GAAP) | $25.7 / 16% | $5.2 / 4% |
| Adjusted EBITDA and margin (non-GAAP) | $56.2 / 34% | $37.2 / 29% |
At March 31, 2023, cash and cash equivalents were $20.9 and marketable securities were $591.7, all short-term. Long-term debt carrying value was $1,472.1, primarily the company’s $1.5 billion, 0% convertible notes due December 2026. The $250 million revolving credit facility was undrawn, and the company reported compliance with its covenants. Current assets were $698.6 versus current liabilities of $186.2.
Capital expenditures were $25.1, comprising $23.3 for property and equipment and $1.8 for internal-use software. Cash, cash equivalents and restricted cash declined by $120.1 to $31.7, largely reflecting $265.9 of share repurchases; investing activities provided $108.0, principally reflecting maturities of marketable securities.
Changes versus the prior comparable period
- Revenue grew 30%, primarily reflecting the Cloudways acquisition, 16% higher average revenue per customer (ARPU: $88.35 versus $76.45), and 43% growth in customers spending more than $50 per month.
- Gross margin fell 7 percentage points to 56%, mainly because colocation and depreciation costs increased faster than revenue; cost of revenue rose 52%.
- Operating loss widened, including $20.9 of restructuring and other charges. General and administrative expense rose 31%; sales and marketing expense declined 7%.
- Net dollar retention declined to 107% from 117%. ARR, calculated by the company as the latest month’s revenue multiplied by 12, rose to $669 million from $524 million.
- Operating cash flow increased to $36.2 million. The company’s non-GAAP adjusted free cash flow margin improved to 16% from 4%; this measure excludes specified restructuring and acquisition-related costs.
Outlook, commentary and notable items
- The company said existing cash, operating cash flow and available credit should fund working capital, capital expenditures and contractual commitments for at least 12 months from issuance of the filing. No specific revenue or earnings guidance was provided in the supplied filing text.
- In February 2023, DigitalOcean began a restructuring intended to adjust its cost structure and accelerate achievement of greater than 20% adjusted free cash flow margins. The plan includes position eliminations and geographic shifts, with approximately $24 million of total charges expected and substantial completion anticipated by the end of Q3 2023. Q1 charges were $20.9 million.
- The board authorized a $500 million 2023 share buyback program. The company repurchased 7.76 million shares for $265.9 million during Q1; $234.1 million remained authorized at quarter-end. From April 1 through May 5, it repurchased a further 1.65 million shares for $59.9 million.
- Cloudways acquisition accounting remained subject to tax-related measurement-period procedures. Q1 adjustments decreased goodwill by $17.1 million and included a $1.6 million increase in income tax expense.
- Management highlighted macroeconomic risks that could reduce customer IT spending, including inflation, higher interest rates, financial-market volatility and geopolitical events. It reported no material changes to the risk factors in its 2022 Form 10-K, no material litigation expected to affect the company, and effective disclosure controls at the reasonable-assurance level.
Important facts for investors to verify
- Whether revenue growth and higher-spend customer expansion can persist while retention has weakened.
- Whether colocation and depreciation costs stabilize enough to recover gross margin.
- Progress, total costs and realized savings from the restructuring, and whether the greater-than-20% adjusted free cash flow margin target is achieved.
- Liquidity and capital allocation after substantial buybacks, given the large convertible-note balance and low cash-and-cash-equivalent balance.
- The effect of Cloudways integration, acquisition-related compensation and final tax accounting on future results.
- Reconciliations and assumptions behind non-GAAP adjusted EBITDA and adjusted free cash flow; these measures are not substitutes for GAAP results or operating cash flow.