DigitalOcean Holdings, Inc. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. DigitalOcean provides cloud infrastructure and platform tools, primarily to developers, startups and small-to-medium-sized businesses. Its usage-based services are billed monthly in arrears.
Financial and operating results
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $111.4 million | $81.2 million | $308.9 million | $230.9 million |
| Gross profit / margin | $67.9 million / 61% | $44.1 million / 54% | $182.7 million / 59% | $123.9 million / 54% |
| Operating loss | $1.7 million | $6.7 million | $1.0 million | $17.4 million |
| Net loss attributable to common stockholders | $1.9 million | $10.2 million | $7.4 million | $29.7 million |
| Adjusted EBITDA and margin | $36.4 million / 33% | $26.4 million / 33% | $98.5 million / 32% | $68.8 million / 30% |
Q3 diluted loss per share was $0.02, versus $0.24 a year earlier; nine-month diluted loss per share was $0.08, versus $0.72. Adjusted EBITDA is a non-GAAP measure and excludes specified items.
- Growth metrics: Revenue rose 37% in Q3 and 34% for the nine-month period. Customers increased to 597,978 from 559,310 year over year; Q3 ARPU rose to $61.97 from $48.58. ARR, defined by the company as latest monthly revenue multiplied by 12, was $455 million versus $335 million. Net dollar retention was 116% versus 104%.
- Cash flow and investment: Nine-month operating cash flow was $100.4 million, compared with $40.1 million. Investing cash outflow was $81.2 million, including $66.5 million of property-and-equipment purchases and $4.3 million of internal-use software spending. Financing cash inflow was $470.3 million, principally reflecting IPO proceeds.
- Liquidity and debt: Cash and cash equivalents were $589.8 million at September 30, 2021; restricted cash was an additional $2.2 million. No debt was outstanding, and $150 million remained available under the revolving credit facility. The company repaid $259.7 million of debt during the period.
- Balance sheet: Total assets were $965.8 million and stockholders’ equity was $906.4 million. Accumulated deficit was $174.4 million.
Changes, transactions and unusual items
- Gross margin improved year over year, while operating expenses rose 37% in Q3, led by research and development and sales and marketing. Management cited higher infrastructure costs and network-equipment depreciation as drivers of cost of revenue.
- The March 2021 IPO generated $723.1 million in net proceeds. Preferred shares converted to common stock at the IPO, and the company’s capital structure shifted to positive stockholders’ equity.
- DigitalOcean acquired Nimbella on September 1, 2021, for $5 million cash and 636,994 common shares. The preliminary allocation included $29.5 million of goodwill and $3.3 million of intangible assets. A portion of the shares is treated as compensation subject to vesting.
- Q3 and nine-month results included a $3.2 million release of a VAT reserve, which management excluded from certain non-GAAP measures. Nine-month results also included a $3.4 million loss on debt extinguishment. Stock-based compensation was $18.6 million in Q3 and $37.4 million for nine months.
Outlook, risks and contingencies
- The filing provides no specific revenue or earnings guidance. Management said cash, cash equivalents and operating cash flow should support working-capital and capital-expenditure needs for at least the next 12 months. It expects research and development, sales and marketing, and general and administrative expenses to increase in absolute dollars.
- Management stated that COVID-19 had not significantly affected operations or financial performance to date, but future effects remained uncertain. It also cited continued investment in the platform and infrastructure to support growth.
- Key risks include the company’s history of losses and uncertainty about achieving or sustaining profitability; dependence on customer acquisition, retention and usage; intense competition; data-center capacity, reliability and third-party-provider risks; cybersecurity and privacy exposure; and regulatory, international, and macroeconomic uncertainty.
- Operating leases run through 2025, with $92.4 million of disclosed future minimum payments. The company reported ordinary-course legal proceedings and did not expect them to materially affect its financial position, results or liquidity; elsewhere, it disclosed a lawsuit related to a customer’s conduct.
- Disclosure controls and procedures were assessed as effective at the reasonable-assurance level as of September 30, 2021. The company remains an emerging growth company and uses the extended transition period for certain accounting standards.
Important facts for investors to verify
- Track whether customer growth, ARPU, ARR and net dollar retention continue to support revenue growth, noting the company’s definitions of these metrics.
- Assess the sustainability of improving GAAP gross margins and adjusted EBITDA, including the effects of infrastructure spending, stock-based compensation and reserve releases.
- Review capital expenditure requirements, operating cash generation and available revolver capacity against the company’s growth plans and data-center commitments.
- Monitor dilution from equity awards, including the CEO’s market-based award for up to 3 million shares, and from acquisition consideration and employee plans.
- Review the Nimbella purchase accounting and integration, and clarify the status and potential exposure of the customer-conduct lawsuit disclosed in the risk factors.