DigitalOcean Holdings, Inc. — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 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 unless stated otherwise.
Financial performance and liquidity
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $133.9 | $103.8 | $261.2 | $197.5 |
| Gross profit / margin | $86.6 / 65% | $60.7 / 58% | $167.2 / 64% | $114.8 / 58% |
| Operating income (loss) | $(7.4) | $(2.6) | $(20.5) | $0.6 |
| Net income (loss) | $(6.2) | $(2.2) | $(24.3) | $(5.5) |
| GAAP diluted loss per share | $(0.06) | $(0.02) | $(0.23) | $(0.07) |
- Revenue increased 29% in Q2 and 32% in the first half. Management attributed growth to higher customer usage and a larger base of higher-spending customers.
- Q2 operating expenses rose 49% to $94.0 million, led by increases in research and development (36%), sales and marketing (54%), and general and administrative (59%). Stock-based compensation was $28.2 million in Q2, up from $12.2 million.
- Non-GAAP net income was $23.4 million in Q2 and $33.3 million for the first half; non-GAAP diluted earnings per share were $0.20 and $0.27, respectively. These company-defined measures exclude specified costs, including stock-based compensation.
- First-half operating cash flow was $75.7 million. Free cash flow, as defined by the company, was $18.4 million, versus $10.4 million a year earlier.
- At June 30, cash and cash equivalents were $72.2 million and marketable securities were $1.094 billion; current assets totaled $1.231 billion and current liabilities $74.2 million. The company held $1.467 billion of long-term debt, comprising 0% convertible notes due December 2026. It had no borrowings under its $250 million revolving facility and reported compliance with its covenants.
Changes versus prior comparable periods
- Q2 gross margin improved 7 percentage points, to 65%, while operating loss widened to $7.4 million from $2.6 million. First-half operating results shifted from $0.6 million of income to a $20.5 million loss.
- Q2 average revenue per customer (ARPU) increased 24% to $71.76; customers paying more than $50 monthly grew 16% to 105,355. Annual run-rate revenue reached $544 million, up from $426 million. Net dollar retention eased to 112% from 113%.
- First-half stock repurchases totaled $550 million. The company repurchased and retired 12.5 million shares at an average $43.83 per share; $50 million remained authorized under the current program at quarter-end.
- Cash, cash equivalents and restricted cash fell by $1.641 billion during the first half, largely reflecting purchases of marketable securities and share repurchases. The securities purchases account for much of the investing cash outflow, rather than operating cash consumption.
Outlook, commentary and risks
- No quantified forward guidance is provided in the supplied filing text. Management expects cash, marketable securities, operating cash flow and available credit to cover working capital, capital expenditures and contractual commitments for at least the next 12 months.
- A product price increase took effect July 1, 2022; management said its impact would begin appearing in Q3 results.
- Management cited higher infrastructure depreciation and colocation costs as growth-related cost pressures, while negotiated colocation rate reductions and supplier maintenance savings supported margin improvement.
- Customers with business activities in Russia, Belarus and Ukraine generated about 2.4% of Q2 revenue, versus 3.6% a year earlier. Sanctions had affected the company’s ability to receive some Russia-related payments; the conflict’s future effects remained uncertain.
- Other notable items include $8.1 million of first-half bad-debt expense, a $1.5 million first-half sublease loss, and $4.4 million of net unrealized losses on available-for-sale securities. The company did not attribute the securities losses to credit factors. It reported no litigation expected to have a material adverse effect and no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether the July price increase supports revenue growth without weakening customer retention or usage.
- Whether operating expense growth, particularly stock-based compensation and general and administrative costs, moderates relative to revenue.
- Cash generation and capital expenditure needs, while distinguishing cash holdings from short-term marketable securities and noting the $1.467 billion convertible-note obligation.
- Progress and remaining authorization under the share repurchase program, and the effects of repurchases on liquidity and share count.
- Future bad-debt trends, Russia-related payment exposure, and any material changes in marketable-security values or credit-facility covenant headroom.