DigitalOcean Holdings, Inc. — FY2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021; comparisons are primarily with FY2020. DigitalOcean provides cloud infrastructure and platform services to developers, start-ups and small and medium-sized businesses. The company reported approximately 609,000 customers across more than 185 countries.
Financial and operating performance
| Metric | FY2021 | FY2020 | Change |
|---|---|---|---|
| Revenue | $428.6 million | $318.4 million | +35% |
| Gross profit / GAAP gross margin | $258.0 million / 60% | $172.8 million / 54% | Margin +6 percentage points |
| Operating loss / margin | $(11.2) million / (3)% | $(15.8) million / (5)% | Loss narrowed |
| Net loss attributable to common stockholders | $(19.5) million | $(43.6) million | Loss narrowed |
| Operating cash flow | $133.1 million | $58.1 million | Increased |
| Free cash flow (non-GAAP) | $24.0 million | $(57.5) million | Turned positive |
Revenue growth reflected 25% higher average revenue per customer (ARPU), to $59.96, and approximately 36,000 additional customers. Customers paying more than $50 monthly grew 24% to about 99,000; these customers generated 82% of revenue, up from 78%. Net dollar retention was 113%, versus 103%. Annual run-rate revenue at year-end was $490 million, up from $357 million.
Cost of revenue increased 17%, slower than revenue, supporting gross-margin improvement. Operating expenses rose 43% to $269.2 million, led by research and development (+54%) and sales and marketing (+52%). Stock-based compensation was $61.6 million, versus $29.5 million. Adjusted EBITDA, a non-GAAP measure, was $136.3 million, or 32% of revenue, compared with $95.9 million, or 30%.
Cash, debt and liquidity
Cash and cash equivalents were $1.713 billion at year-end, compared with $100.3 million a year earlier. The company reported total current assets of $1.770 billion and current liabilities of $58.2 million. Net cash provided by investing activities was not reported; net cash used in investing activities was $113.6 million, primarily reflecting property and equipment, software development, intangible assets and acquisition spending.
In November 2021, DigitalOcean issued $1.5 billion of 0% convertible senior notes due 2026, receiving approximately $1.462 billion net proceeds. The balance-sheet carrying amount was $1.463 billion after unamortized issuance costs. The notes are senior unsecured and may be settled in cash, shares or a combination, at the company’s election; management stated its current intent was to settle principal in shares. The company also repurchased and retired 2.94 million shares for $350 million in connection with the issuance. It had $150 million available under its revolving credit facility and reported compliance with its covenants. Management said cash, operating cash flow and available financing were expected to support working capital, capital expenditure needs and commitments for at least the next 12 months.
Material changes, outlook and risks
- The company completed its March 2021 IPO, receiving $723.0 million in net proceeds, and used $263.2 million to repay prior debt. It repaid outstanding credit-facility and note-payable balances during the first quarter.
- It acquired Nimbella in September 2021 for approximately $33.6 million of total consideration, adding serverless technology; it planned to integrate the offering with App Platform in 2022. It also launched Premium Droplets and Managed MongoDB during 2021.
- No formal revenue or earnings guidance is provided in the supplied filing text. Management describes continued investment in product development, infrastructure, customer growth, sales and marketing, and international expansion; it expects related expenses to increase in absolute dollars.
- Key risks include intense competition from major cloud providers and niche vendors; customer churn and usage volatility under largely month-to-month contracts; cybersecurity, service availability and reliance on leased third-party data centers; capacity and equipment-supply constraints; international, privacy and regulatory compliance; and the company’s history of GAAP losses. The filing states COVID-19 had not significantly affected operations or financial performance to date, but its future effects were uncertain.
- The filing identifies ongoing legal proceedings, including a lawsuit arising from a customer’s conduct, but management did not believe proceedings would have a material adverse effect. A $300 million share-repurchase authorization was approved on February 23, 2022, after year-end; the company is not obligated to repurchase a particular amount.
Most important facts for investors to verify
- Whether revenue growth, ARPU, retention and larger-customer expansion continue, and how customer churn and usage-based billing evolve.
- How infrastructure investment, rising operating expenses and substantial stock-based compensation affect GAAP profitability and free cash flow.
- The terms, conversion and settlement outcomes of the $1.5 billion convertible notes, including potential dilution and liquidity needs.
- Capital expenditure and data-center capacity requirements, and the adequacy of cash and borrowing capacity relative to commitments.
- Developments in the customer-related litigation, cybersecurity and service-reliability risks, and the execution and cost of international and product expansion.