DigitalOcean Holdings, Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. DigitalOcean provides cloud infrastructure and platform services primarily to developers and small and medium-sized businesses. Figures below are in millions of dollars except per-share data and operating metrics.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $152.1 | $111.4 | $413.3 | $308.9 |
| Gross profit / margin | $97.6 / 64% | $67.9 / 61% | $264.8 / 64% | $182.7 / 59% |
| Operating income (loss) | $9.4 | $(1.7) | $(11.1) | $(1.0) |
| Net income (loss) | $10.1 | $(1.9) | $(14.2) | $(7.4) |
| Diluted earnings (loss) per share | $0.10 | $(0.02) | $(0.14) | $(0.08) |
Q3 revenue grew 37% year over year; management attributed growth mainly to higher customer usage and expansion in larger customers. Average revenue per customer (ARPU) rose 28% to $79.22, customers paying more than $50 monthly increased 50% to approximately 142,000, and annual run-rate revenue (ARR) reached $641 million, up from $455 million. Net dollar retention was 118%, versus 116% a year earlier.
For the first nine months, operating cash flow was $130.0 million, compared with $100.4 million. Free cash flow, as defined by the company, was $40.8 million versus $24.0 million, with a 10% margin versus 8%. Capital expenditures for property and equipment were $77.7 million; internal-use software spending was $6.6 million.
Liquidity, debt and balance sheet
- At September 30, cash and cash equivalents were $24.1 million and current marketable securities were $800.5 million, for combined cash and securities of approximately $824.7 million. The securities were available-for-sale and due within one year.
- Long-term debt was $1.468 billion, principally the 0% convertible senior notes due December 2026. Their estimated fair value was $1.099 billion. The company reported no borrowings under its $250 million revolving credit facility and was in compliance with its covenants.
- Total assets were $1.624 billion, total liabilities $1.593 billion and stockholders’ equity $30.2 million. The company said available cash, securities, operating cash flow and credit capacity should cover working capital, capital expenditures and commitments for at least 12 months.
Material changes and unusual items
- DigitalOcean acquired Cloudways on September 1 for consideration of $311.2 million. The preliminary allocation included $72.0 million of identifiable intangible assets and $283.2 million of goodwill. Cloudways contributed $4.9 million of revenue and a $3.6 million net loss from acquisition through quarter-end; the purchase accounting remained preliminary.
- During the first nine months, the company repurchased and retired 13.6 million shares for $600 million, completing two $300 million repurchase authorizations. This was the principal reason financing cash flow was negative $610.5 million.
- Investing cash outflow was $1.200 billion, including purchases of marketable securities, Cloudways and other asset acquisitions. Cash, cash equivalents and restricted cash declined by $1.680 billion, largely reflecting these investments and repurchases.
- Stock-based compensation was $23.6 million in Q3 and $77.8 million for the nine months, up from $18.6 million and $37.4 million, respectively, in the comparable periods.
Management commentary and risks
Management cited higher usage and customer adoption as growth drivers and improved gross margin as depreciation and data-center costs declined as a share of revenue. Operating expenses increased 27% in Q3, led by general and administrative costs, which rose 47%; the filing cites stock compensation, taxes, bad debt and acquisition-related costs among the factors. No numerical forward guidance is provided in the supplied filing text.
- Russia, Belarus and Ukraine-related customer activity represented approximately 2.1% of Q3 revenue, down from 3.6% a year earlier. Sanctions have affected the ability to collect certain payments; further effects remain uncertain.
- The filing highlights risks in integrating Cloudways, retaining personnel, realizing expected synergies and addressing potential pre-acquisition liabilities.
- Unrealized losses on available-for-sale securities totaled $3.5 million; management did not consider them credit-related. The company also reported increased bad-debt expense and maintains a full valuation allowance on U.S. deferred tax assets.
- Operating lease payments, net of sublease receipts, totaled $255.7 million in future minimum commitments. The company remains responsible to landlords if its subtenants fail to perform.
Key facts for investors to verify
- Whether customer usage, ARPU, larger-customer growth and retention continue to support revenue growth.
- Cloudways’ contribution, integration costs, final purchase-price allocation and progress toward expected benefits.
- Cash and marketable-securities levels, cash generation after capital spending, and the economics of the $600 million share repurchases alongside $1.468 billion of convertible debt.
- The persistence of higher operating expenses, stock-based compensation and bad-debt costs, and any collection impact from geopolitical sanctions.