Summary
DigitalOcean reported third-quarter 2022 revenue of $152.1 million, an increase of 36.5% from the prior-year quarter. The company said growth was 33% on a standalone basis. The September acquisition of Cloudways contributed $4.1 million of net revenue. Management described the quarter as one of top-line acceleration paired with operating margin and free cash flow leverage, and noted that global macro challenges made the operating environment difficult.
Gross profit rose 43.7% to $97.6 million, and gross margin reached 64.1%, up 3.2 percentage points from the prior-year quarter. Adjusted gross profit was $121.5 million, or 80% of revenue. Operating income was $9.4 million, a swing to profit from an operating loss a year earlier, and operating margin was 6.2%, up 7.7 percentage points. Non-GAAP income from operations was $39.7 million, a 26% non-GAAP operating margin. Net income was $10.1 million, also a swing to profit, and diluted EPS was $0.10 versus a loss per share in the prior-year quarter. Non-GAAP diluted EPS was $0.38.
Operating cash flow was $54.4 million, up 35.3%. Capital expenditures were $29.7 million, up 52.6%. Free cash flow was $22.4 million, compared with $13.5 million in the third quarter of 2021, and free cash flow margin was 15%, compared with 12%. Deferred revenue, current portion only, was $5.5 million, up 6.6%. The company also completed its share repurchase programs during the quarter.
The nine-month view was mixed. Revenue was $413.3 million, up 33.8%, and gross profit was $264.8 million, up 44.9%. Gross margin was 64.1%, up 4.9 percentage points. Below the gross profit line the picture weakened. The operating loss was $11.1 million, a wider loss, and operating margin was -2.7%, down 2.4 percentage points. The net loss was $14.2 million, a wider loss, and diluted EPS was -$0.14, a wider loss. Operating cash flow for the nine months was $130.0 million, up 29.5%, while capital expenditures were $77.7 million, up 16.9%.
Customer metrics held up. Customers spending more than $50 per month reached 142,000, up 50% year over year and up 37,000 from the prior quarter. Cloudways contributed 20,000 of those customers. ARPU was $79.22, up 28% from the third quarter of 2021. Net dollar retention rate was 118%, which the company said was 600 basis points better than the prior quarter; the MD&A reports 118% against 116% a year earlier. The top 25 customers made up approximately 9% of revenue in the quarter.
For the fourth quarter of 2022, DigitalOcean guided non-GAAP operating margin to 16% and non-GAAP diluted EPS to $0.18 to $0.19, on 114 million to 115 million fully diluted shares. For the full year 2022, the company guided non-GAAP operating margin to 17%, free cash flow to 10% to 11% of revenue, and non-GAAP diluted EPS to $0.79 to $0.80, on 116 million to 117 million shares. The company said it is targeting durable 30% growth with improving profitability and cash flow.
Risks include global macro conditions and the Russia-Ukraine conflict. Revenue from customers with business activities in Russia, Belarus and Ukraine was approximately 2.1% of total revenue in the third quarter of 2022, down from 3.6% in the prior-year quarter, and sanctions have affected the company's ability to collect payments from parties in Russia. DigitalOcean also cited its history of operating losses, competition, security breaches, integration of Cloudways, and the need to retain customers and release new features.
Forecast
Reported figures
GAAP, from SEC filings| Metric | Q3 FY2022 | Q2 FY2022 | QoQ | Q3 FY2021 | YoY |
|---|---|---|---|---|---|
| Revenue | $152.1M | $133.9M | +13.6% | $111.4M | +36.5% |
| Gross profit | $97.6M | $86.6M | +12.6% | $67.9M | +43.7% |
| Gross margin | 64.2% | 64.7% | -0.6 pp | 61.0% | +3.2 pp |
| Research & development | $30.2M | $37.0M | -18.2% | $29.9M | +1.1% |
| Sales & marketing | $19.1M | $18.2M | +4.8% | $13.3M | +43.5% |
| General & administrative | $38.8M | $38.8M | +0.0% | $26.4M | +47.4% |
| Total operating expenses | $88.2M | $94.0M | -6.2% | $69.6M | +26.7% |
| Operating income (loss) | $9.4M | -$7.4M | +227.3% | -$1.7M | +662.1% |
| Operating margin | 6.2% | -5.5% | +11.7 pp | -1.5% | +7.7 pp |
| Net income (loss) | $10.1M | -$6.2M | +263.1% | -$1.9M | +645.2% |
| Net margin | 6.6% | -4.6% | +11.3 pp | -1.7% | +8.3 pp |
| Diluted EPS | $0.10 | -$0.06 | +$0.16 | -$0.02 | +$0.12 |
| Customers | 25 | 25 | ±0.0% | 598,000 | -100.0% |
Risks
The September 2022 acquisition of Cloudways introduces integration risk because the company has limited experience operating a managed cloud hosting service and may face difficulties assimilating technology, personnel, and operations, as well as pre-acquisition liabilities. Failure could prevent expected synergies and adversely affect revenue and operating results.
Operating expense growth has outpaced revenue growth, with total operating expenses up 27% for the three months ended September 30, 2022 and up 50% for the nine months ended September 30, 2022. The nine-month GAAP operating loss widened to $11.1 million from $1.0 million in the prior-year period, and net loss widened to $14.2 million from $7.4 million.
The Russia-Ukraine conflict and related sanctions have affected payments from customers with business activities in Russia, Belarus, and Ukraine, which represented approximately 2.1% of total revenue for the three months ended September 30, 2022, compared with 3.6% for the three months ended September 30, 2021. Further sanctions could continue to reduce revenue from these customers.
The company will cease to qualify as an emerging growth company at the end of fiscal 2022, which will require auditor attestation under Section 404, increase disclosure and compliance obligations, and eliminate the extended transition period for adopting new or revised accounting standards.
SaaS KPIs
All quarters →Average Revenue Per Customer (ARPU)
Annual Run-Rate Revenue (ARR)
Adjusted Gross Margin
Net Dollar Retention Rate (NDR)
Non-GAAP Operating Margin
Customers paying more than $50 per month
Free Cash Flow Margin
Summary, forecast, risks and KPIs are extracted from DigitalOcean Holdings, Inc.'s SEC filings for Q3 FY2022 (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 2, 2026.