Summary
DigitalOcean closed the third quarter of fiscal 2021 with revenue of $111.4 million, up 37% from $81.2 million in the prior-year quarter. Growth came from both more customers and more spending per customer. Average revenue per customer rose 28% from a year earlier, and the customer base grew to roughly 598,000 from about 559,000. Annual run-rate revenue grew 36% year over year. Net dollar retention was 116%, up 1,200 basis points from the third quarter of 2020.
Profitability improved faster than the top line. Gross profit rose 54% to $67.9 million, and gross margin was 61.0%, up 6.6 percentage points from 54.3% a year earlier. The operating loss narrowed to $1.7 million from $6.7 million, lifting operating margin to -1.5% from -8.3%. Net loss narrowed to $1.85 million from $10.2 million, and GAAP diluted loss per share was $0.02 compared with $0.24. The non-GAAP picture is starker. Adjusted EBITDA was $36.4 million, or 33% of revenue, matching the prior-year margin, and non-GAAP diluted net income per share was $0.12 versus $0.03. Adjusted gross margin was 80%, up from 77%. The bridge between the two views is mostly stock-based compensation.
Cash generation was the standout. Operating cash flow was $40.2 million, or 36% of revenue, up 73% from $23.3 million, or 29% of revenue, a year earlier. Capital expenditures were $19.4 million, down from $21.8 million. The company also bought Nimbella, a serverless platform that fits its developer focus. DigitalOcean ended the quarter with no debt after repaying its term loan and notes payable earlier in the year, a move that lowered interest expense and helped the bottom line.
Through the first nine months of 2021, revenue was $308.9 million, up 34% from $230.9 million, and gross margin was 59.1%, up from 53.7%. Net loss was $7.4 million, or $0.08 per diluted share, compared with $29.7 million, or $0.72 per share, in the same period a year earlier. Operating cash flow year to date was $100.4 million, up 150% from $40.1 million, while capital expenditures fell to $66.5 million from $69.8 million.
Guidance points to continued growth with a slightly lower margin. For the fourth quarter of 2021, management expects revenue of $117 million to $119 million and an adjusted EBITDA margin of 30% to 31%, with 122 to 124 million fully diluted weighted average shares outstanding. For the full year 2021, the company expects revenue of $426 million to $428 million, an adjusted EBITDA margin of 30% to 31%, 116 to 118 million fully diluted weighted average shares, and capital expenditures of 25% to 26% of revenue. No GAAP reconciliation is offered for these forward-looking non-GAAP measures, and management frames the spending as building a foundation for durable 30%+ revenue growth.
The risk list reads like a checklist for a fast-growing infrastructure company. DigitalOcean has a history of operating losses and a limited operating history, and management cautions that recent growth may not be indicative of future growth. The business depends on attracting new customers and expanding usage among existing ones. It competes in markets that change quickly, faces the possibility of security breaches, and must keep pace with evolving privacy and data security rules. Managing headcount and infrastructure growth is another challenge. COVID-19 remains an uncertainty for operations and customer spending. Customer concentration is not a concern for now, with the top 25 customers accounting for about 10% of revenue.
Forecast
Reported figures
GAAP, from SEC filings| Metric | Q3 FY2021 | Q2 FY2021 | QoQ | Q3 FY2020 | YoY |
|---|---|---|---|---|---|
| Revenue | $111.4M | $103.8M | +7.3% | — | — |
| Gross profit | $67.9M | $60.7M | +12.0% | — | — |
| Gross margin | 61.0% | 58.4% | +2.5 pp | — | — |
| Research & development | $29.9M | $27.1M | +10.3% | — | — |
| Sales & marketing | $13.3M | $11.8M | +12.7% | — | — |
| General & administrative | $26.4M | $24.4M | +8.2% | — | — |
| Total operating expenses | $69.6M | $63.3M | +10.0% | — | — |
| Operating income (loss) | -$1.7M | -$2.6M | +36.5% | — | — |
| Operating margin | -1.5% | -2.5% | +1.0 pp | — | — |
| Net income (loss) | -$1.9M | -$2.2M | +15.3% | — | — |
| Net margin | -1.7% | -2.1% | +0.4 pp | — | — |
| Diluted EPS | -$0.02 | -$0.02 | ±$0.00 | — | — |
| Customers | 598,000 | 602,000 | -0.7% | — | — |
| Net retention rate | 116.0% | 113.0% | +3.0 pp | — | — |
Risks
The vast majority of customer contracts are based on terms of service, do not require a specific contractual period, and permit customers to terminate or decrease usage without advance notice. This ease of termination could cause results to fluctuate significantly from quarter to quarter and lead to high churn if customer needs are not met.
DigitalOcean competes with large diversified technology companies including Amazon AWS, Microsoft Azure, Google GCP, IBM and Oracle, as well as niche providers such as OVH, Vultr, Heroku and Linode. Larger competitors have greater name recognition, larger sales and marketing budgets, and the ability to bundle products.
The company operates fourteen data centers through third-party leases in the United States, India, Germany, the United Kingdom, Canada, the Netherlands and Singapore. It has only limited redundant functionality for these facilities, and a failure of a core data center could degrade the network, reduce product functionality and impact billing.
The platform stores and transmits customer data, and the company has experienced breaches in the past and may continue to be targeted. Customers require compliance certifications such as SOC 1, SOC 2, SOC 3, PCI-DSS and NIST 800-53, and failure to maintain them could result in fines, customer contract breaches and churn.
If DigitalOcean underestimates or overestimates data center capacity requirements and capital expenditures, it may be unable to serve current or new customers or may incur excess capacity costs. Capital expenditures as a percentage of revenue was 24% for the three months ended September 30, 2021, down from 32% for the prior-year period.
Success depends largely on continued services of executive officers, particularly CEO Yancey Spruill, and a number of executive officers have only recently joined. Competition for engineers experienced in cloud computing and infrastructure solutions is intense, and failure to retain key personnel could harm future growth.
The core customer base consists of individual developers, early stage start-ups and small-to-medium size businesses, many of which have limited budgets and may be disproportionately affected by economic weakness or the COVID-19 pandemic. This could reduce usage, delay purchasing decisions, lengthen sales cycles or increase churn.
DigitalOcean has customers in approximately 185 countries and around two-thirds of revenue has historically come from outside the United States. Further geographic expansion creates operational challenges including localizing products, complying with privacy and data security regulations, managing foreign currency exposure and potential adverse tax consequences.
DigitalOcean has limited history with its consumption-based pricing model and may need to change prices in the future. Customers may demand substantial price concessions or reduce usage to lower-cost pricing tiers, which could adversely affect revenue, gross margin and profitability.
SaaS KPIs
All quarters →Adjusted EBITDA Margin
Adjusted EBITDA
Net Dollar Retention Rate
Average Revenue Per Customer (ARPU)
ARR
Adjusted Gross Margin
Total customers
Capital Expenditures as a Percentage of Revenue
Summary, forecast, risks and KPIs are extracted from DigitalOcean Holdings, Inc.'s SEC filings for Q3 FY2021 (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.