Summary
DigitalOcean posted second quarter revenue of $169.81 million, up 26.8% from the prior-year quarter. Year-to-date revenue was $334.95 million, up 28.2%. Gross profit rose 19.0% to $102.46 million in the quarter, and first-half gross profit increased 17.8% to $195.72 million. Gross margin fell 3.9 percentage points to 60.3%. The operating loss narrowed 81.1% to $1.50 million, and operating margin improved 5.1 percentage points to negative 0.9%. Net income swung to a profit of $0.66 million, up $7.42 million from the prior-year quarter. Diluted earnings per share was $0.01, up $0.08.
The first half tells a different story on profitability. The net loss narrowed $9.62 million to $15.70 million, yet the operating loss widened $13.03 million to $34.56 million. Restructuring and other charges tied to the plan announced in early 2023 lifted total operating expenses for the six months, and general and administrative expense rose 26% in the quarter. The quarterly profit also leaned on other income, net from interest and accretion on marketable securities. That is a thin cushion under a $0.66 million result.
Operational metrics show steady growth among higher-spend customers. Learners, Builders, and Scalers totaled approximately 616,000 as of June 30, 2023. Builders rose to 134,290 from 94,053, and Scalers rose to 15,847 from 11,321. Learners were 466,072, up from 446,309. Average revenue per customer increased 14% to $90.84 from $79.74 in the quarter, and stood at $89.59 for the first half, up from $78.41. Revenue from Builders and Scalers was 86% of total revenue, up from 85%. The mix was 38% North America, 29% Europe, 23% Asia, and 10% rest of world. The top 25 customers accounted for roughly 7% of revenue, down from 12%, so concentration is not the concern here. Net dollar retention slipped to 104% from 112%, which is the number to watch.
Cash generation held up. Operating cash flow was $64.16 million in the quarter, up 39.3%, and $100.38 million for the first half, up 31.3%. Capital expenditures were $23.53 million, down 8.2% in the quarter, and $46.85 million year to date, down 3.8%. Deferred revenue was $4.98 million, up 5.3%. Management repurchased 10,538,355 shares for $368.9 million in the first half under a $500.0 million program. On July 5, 2023, the company acquired Paperspace for $111 million in cash, adding GPU-accelerated infrastructure for artificial intelligence and machine learning workloads. Adjusted EBITDA was $72.226 million, or 43% of revenue, against $45.476 million, or 34%. Non-GAAP net income was $44.720 million and non-GAAP diluted earnings per share was $0.44, compared with $22.858 million and $0.20.
The restructuring plan aims to adjust the cost structure and accelerate the timeline to reach greater than 20% adjusted free cash flow margins. It is expected to be substantially complete by the end of the third quarter of 2023. Management flagged macroeconomic conditions as a live risk. Unfavorable conditions, including inflationary pressures, rising interest rates, and financial market volatility, could cut business investment in information technology. The company states that existing cash and cash flow from operations should cover working capital and capital expenditure needs for at least the next 12 months. Paperspace adds a growth vector but brings integration execution risk. Between the retention decline, the gross margin contraction, and the dependence on non-operating income for the quarterly profit, the quality of the earnings deserves scrutiny.
Forecast
Reported figures
GAAP, from SEC filings| Metric | Q2 FY2023 | Q1 FY2023 | QoQ | Q2 FY2022 | YoY |
|---|---|---|---|---|---|
| Revenue | $169.8M | $165.1M | +2.8% | $133.9M | +26.8% |
| Gross profit | $102.5M | $93.3M | +9.9% | $86.6M | +18.3% |
| Gross margin | 60.3% | 56.5% | +3.9 pp | 64.7% | -4.4 pp |
| Research & development | $38.6M | $38.3M | +0.8% | $37.0M | +4.4% |
| Sales & marketing | $16.1M | $17.7M | -9.1% | $18.2M | -11.6% |
| General & administrative | $48.9M | $48.9M | -0.2% | $38.8M | +25.8% |
| Total operating expenses | $104.0M | $125.8M | -17.4% | $94.0M | +10.6% |
| Operating income (loss) | -$1.5M | -$32.5M | +95.4% | -$7.4M | +79.7% |
| Operating margin | -0.9% | -19.7% | +18.8 pp | -5.5% | +4.6 pp |
| Net income (loss) | $665.0K | -$34.9M | +101.9% | -$6.2M | +110.7% |
| Net margin | 0.4% | -21.2% | +21.6 pp | -4.6% | +5.0 pp |
| Diluted EPS | $0.01 | -$0.37 | +$0.38 | -$0.06 | +$0.07 |
| Customers | 25 | 25 | ±0.0% | 25 | ±0.0% |
| Net retention rate | 104.0% | 107.0% | -3.0 pp | 112.0% | -8.0 pp |
Risks
The company identified a material weakness in internal control over financial reporting caused by inadequate controls over tax processes, which existed as of December 31, 2022. Management concluded disclosure controls and procedures were not effective as of June 30, 2023, and failure to remediate could lead to restatement, compliance failures, loss of investor confidence, and stock price decline.
Increased focus on AI/ML and the July 2023 Paperspace acquisition may result in new or enhanced governmental or regulatory scrutiny, litigation, confidentiality or security risks, and regulatory restrictions targeting AI/ML products. Compliance could increase cost of doing business or change operations in certain jurisdictions.
The company acquired Paperspace for $111 million in cash in July 2023 and has limited experience operating GPU-accelerated infrastructure. Integration may disrupt the business, divert resources and management attention, and if unsuccessful, expected synergies may not be realized and combined revenue and operating results could be adversely affected.
Paperspace relies on third-party components, particularly GPUs, which may require significant capital expenditure and be difficult to procure given elevated demand in the AI/ML space. Disruption of supplier relationships could adversely affect functionality and availability of the business.
Net dollar retention rate was 104% for the three months ended June 30, 2023 compared with 112% for the three months ended June 30, 2022. Lower expansion or higher contraction could pressure long-term revenue growth.
Gross profit decreased to 60% for the three months ended June 30, 2023 from 64% for the three months ended June 30, 2022, and decreased to 58% for the six months ended June 30, 2023 from 64% for the six months ended June 30, 2022, primarily due to higher co-location and depreciation costs as a percentage of revenue.
The company may explore third-party AI/ML applications for internal operations. The technology may be unproven and expose the company to confidentiality, intellectual property ownership, and bias risks, which could harm reputation, financial condition, or operating results.
The 2023 restructuring plan includes elimination and shifting of positions, and restructuring and other charges increased $21.3 million, or 100%, for the six months ended June 30, 2023 compared with the six months ended June 30, 2022. Execution may disrupt operations and may not achieve the intended cost savings or greater than 20% adjusted free cash flow margin target.
SaaS KPIs
All quarters →Adjusted EBITDA Margin
Adjusted EBITDA
Net Dollar Retention Rate
ARR
ARPU
Builders
Learners
Scalers
Summary, forecast, risks and KPIs are extracted from DigitalOcean Holdings, Inc.'s SEC filings for Q2 FY2023 (10-Q / 10-K and the 8-K earnings release); GAAP figures in the summary are checked against the reported XBRL data. They can contain errors; the filings are authoritative. Processed Oct 1, 2026.