DigitalOcean Holdings, Inc. — Q2 2021 Form 10-Q
Business context and reporting period. The company provides cloud infrastructure and platform tools, primarily to developers, start-ups and small and medium-sized businesses. This unaudited filing covers the quarter and six months ended June 30, 2021; comparisons are with the corresponding 2020 periods. DigitalOcean completed its IPO on March 26, 2021.
Financial performance and liquidity
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $103.8 million | $76.9 million | $197.5 million | $149.7 million |
| Gross profit / margin | $60.7 million / 58% | $41.7 million / 54% | $114.8 million / 58% | $79.8 million / 53% |
| Operating income (loss) | $(2.6) million | $1.8 million | $0.6 million | $(10.7) million |
| Net loss | $(2.2) million | $(2.6) million | $(5.5) million | $(19.5) million |
| Adjusted EBITDA (non-GAAP) / margin | $31.4 million / 30% | $23.9 million / 31% | $62.0 million / 31% | $42.4 million / 28% |
| Operating cash flow | Not separately provided for the quarter | $60.2 million | $16.9 million |
At June 30, cash and cash equivalents were $577.2 million, with a further $2.2 million restricted. The company reported no outstanding debt, having repaid approximately $259.7 million during the first quarter; $150 million of revolving credit capacity remained available. Current assets were $629.1 million and current liabilities $55.4 million. Six-month investing cash use was $49.7 million, including $49.7 million in property, equipment and internal-use software capital expenditures.
Changes versus the prior comparable period
- Q2 revenue grew 35%; six-month revenue grew 32%. Management attributed growth mainly to higher customer usage and customer additions.
- Q2 customer count increased to 601,714 from 554,236; average revenue per customer rose to $58.07 from $46.44. ARR reached $426 million versus $313 million, and net dollar retention was 113% versus 102%.
- Q2 GAAP gross margin improved to 58% from 54%, while operating expenses rose 59% to $63.3 million. The quarter therefore shifted from operating income to operating loss. Management cited higher personnel costs, stock compensation, advertising and infrastructure-related costs.
- Six-month operating cash flow increased, while investing cash use declined from $59.0 million to $49.7 million. IPO proceeds of $723.1 million net of offering costs drove financing cash flow and strengthened equity and liquidity.
Outlook, commentary and risks
- The filing provides no formal numerical revenue or earnings guidance. Management said cash and cash flow from operations should fund working capital and capital expenditures for at least the next 12 months.
- Management expects research and development, sales and marketing, and general and administrative expenses to increase in absolute dollars as the company invests in products, growth and public-company requirements. It expects capital expenditures as a percentage of revenue to continue declining.
- Management said COVID-19 had not significantly affected operations or financial performance to date, but future effects remained uncertain.
- Key risks include sustaining growth and achieving profitability, customer retention and usage, competition, service availability and data-center capacity, cybersecurity and privacy, international operations and regulation, and dependence on third-party data-center and equipment providers. Customer contracts are generally month-to-month and allow usage to fall or stop without advance notice.
- The company reported no litigation it believed would have a material adverse effect, while also identifying customer-content-related litigation as a risk. It stated that disclosure controls were effective at the reasonable-assurance level and reported no material change in internal control over financial reporting during the quarter.
- Subsequent event: on July 27, the board granted the CEO a performance-based award for 3.0 million RSUs, with estimated grant-date fair value of approximately $85 million. Vesting depends on service and stock-price targets over a seven-year period.
Investor verification priorities
- Verify the drivers and durability of revenue growth, ARPU expansion, ARR and net dollar retention, including the contribution from re-engaged customers.
- Assess whether rising operating expenses and stock-based compensation can be balanced with growth; compare GAAP results with the company’s non-GAAP adjusted EBITDA measure.
- Review infrastructure investment needs, capital expenditure trends, cash generation and the terms and availability of the $150 million revolving facility.
- Evaluate customer churn and usage sensitivity, competition, cybersecurity and service-continuity exposure, and the status and potential impact of disclosed litigation.
- Track the CEO performance award’s eventual compensation expense and dilution, as well as post-IPO share supply and equity-plan issuances.