Summary
DigitalOcean closed fiscal 2022 with fourth quarter revenue of $163.0 million, up 36.2% from the prior year quarter. Full year revenue reached $576.3 million, up 34.5%. Net dollar retention rate was 112%, compared with 116% a year earlier. ARPU rose 22% from the fourth quarter of 2021. The company ended the year with 677K total customers, including 129K builders and 15K scalers, and revenue from those cohorts grew 30% and 45% in 2022. Cloudways added managed hosting and SaaS capabilities for SMBs. Other work during the year included DigitalOcean Functions, a new data center in Sydney, CSS-Tricks, JournalDev, and the DO Impact program.
Gross profit was $99.6 million in the fourth quarter, up 32.4% from the prior year quarter, while gross margin was 61.1%, down 1.8 percentage points. Full year gross profit was $364.4 million, up 41.3%, and gross margin was 63.2%, up 3.0 percentage points. The fourth quarter operating loss was $15.1 million, and operating margin was -9.3%, down 0.8 percentage points. For the full year, the operating loss widened to $26.2 million, and operating margin was -4.5%, down 1.9 percentage points. Net loss was $10.1 million in the quarter, and that loss narrowed from the prior year quarter. The full year net loss was $24.3 million, and the loss widened. Diluted loss per share for the full year was $0.24, and the loss widened. Non-GAAP results looked brighter. Fourth quarter adjusted gross profit was $125.1 million, or 77% of revenue. Non-GAAP income from operations was $26.3 million, a 16% margin, and adjusted EBITDA was $51.0 million, a 31% margin. Non-GAAP diluted net income per share was $0.28. For fiscal 2022, non-GAAP income from operations was $102.4 million, an 18% margin, adjusted EBITDA was $198.4 million, a 34% margin, and non-GAAP diluted net income per share was $0.94.
Cash generation improved. Fourth quarter operating cash flow was $65.1 million, up 99.0% from the prior year quarter, and full year operating cash flow was $195.2 million, up 46.6%. Capital expenditures were $28.7 million in the quarter, down 6.3%, and $106.4 million for the full year, up 9.6%. Deferred revenue was $5.55 million, up 15.0% from the prior year quarter. Free cash flow, a separate non-GAAP measure, was $35.7 million in the quarter, a 22% margin, and $77.8 million for the full year, a 13% margin. Operating cash flow and free cash flow are different measures and are not interchangeable.
Management issued guidance for the first quarter of 2023 and for the full year 2023. The first quarter outlook covers revenue along with adjusted EBITDA margin of 31% to 32% and non-GAAP diluted net income per share of $0.28 to $0.29. The full year 2023 outlook covers revenue along with adjusted EBITDA margin of 38% to 39%, a free cash flow margin of 21% to 22%, and non-GAAP diluted net income per share of $1.65 to $1.69. Fully diluted weighted average shares are expected at about 113 million to 115 million for the first quarter and 114 million to 116 million for the full year.
On January 27, 2023, the board approved a restructuring plan that reduces the employee base by roughly 11%. The company estimates $25 million to $27 million in non-recurring charges, mostly cash severance and related costs, with most charges recognized by June 30, 2023. The plan is expected to deliver annualized run-rate savings of $60 million and to speed the timeline to free cash flow margins above 20%. The board also expanded the repurchase program by up to $500 million for 2023, after repurchasing $600 million of stock in 2022. DigitalOcean is committed to at least $230 million of purchases in 2023 and may buy up to an additional $270 million. It expects to repurchase up to 125% of 2024 free cash flow.
Risks in the annual report include recent growth not being indicative of future growth, a history of operating losses, a limited operating history, the ability to attract and retain customers, security breaches, competitive markets, rapid technology shifts, evolving privacy and data security laws, growth management, and Cloudways integration. Macroeconomic conditions, including inflation and rising interest rates, could reduce business spending on information technology. Execution on the restructuring and the push toward higher free cash flow margins is the main open question.
Forecast
Reported figures
GAAP, from SEC filings| Metric | Q4 FY2022 | Q3 FY2022 | QoQ | Q4 FY2021 | YoY |
|---|---|---|---|---|---|
| Revenue | $163.0M | $152.1M | +7.2% | $119.7M | +36.2% |
| Gross profit | $99.6M | $97.6M | +2.1% | $75.3M | +32.4% |
| Gross margin | 61.1% | 64.2% | -3.0 pp | 62.9% | -1.8 pp |
| Research & development | $39.4M | $30.2M | +30.4% | $36.2M | +8.9% |
| Sales & marketing | $25.2M | $19.1M | +31.9% | $15.3M | +64.2% |
| General & administrative | $50.1M | $38.8M | +28.9% | $33.8M | +48.0% |
| Total operating expenses | $114.7M | $88.2M | +30.1% | $85.4M | +34.3% |
| Operating income (loss) | -$15.1M | $9.4M | -260.7% | -$10.1M | -48.9% |
| Operating margin | -9.3% | 6.2% | -15.4 pp | -8.5% | -0.8 pp |
| Net income (loss) | -$10.1M | $10.1M | -199.7% | -$12.1M | +17.0% |
| Net margin | -6.2% | 6.6% | -12.8 pp | -10.1% | +4.0 pp |
| Customers | 677,000 | 25 | +2707900.0% | 609,000 | +11.2% |
Risks
Unfavorable global economic conditions, including inflation, rising interest rates and the Russia-Ukraine conflict, could reduce IT spending and lengthen sales cycles. The filing states sanctions have impacted customers with business activities in Russia, Belarus or Ukraine, as well as the company's ability to receive payments and realize revenues from them.
The company has a history of operating losses and an accumulated deficit of $210.8 million as of December 31, 2022. Operating loss widened to $26.2 million in FY2022 from $11.2 million in FY2021, and net loss widened to $24.3 million from $19.5 million.
A restructuring plan approved on January 27, 2023 eliminated positions across the company and shifted additional positions geographically to adjust the cost structure and accelerate free cash flow margins. The company warns the plan may cause loss of institutional knowledge, attrition beyond the intended reduction and failure to achieve expected cost savings.
The vast majority of customer contracts are based on terms of service and do not require a specific contractual period, and customers can terminate or decrease usage without advance notice. MD&A states customer contracts are primarily month-to-month and do not include minimum guaranteed quantities or fees, creating churn and revenue variability risk.
Sales to higher spend customers involve longer sales cycles, more complex customer requirements, substantial upfront sales costs and less predictability in closing. MD&A says builders and scalers are a critical focus and revenue from them increased 30% and 45%, respectively, for FY2022, while higher spend customers were 85% of total revenue.
The markets for the platform are highly competitive and rapidly evolving, with primary competitors including Amazon AWS, Microsoft Azure, Google Cloud, IBM and Oracle. Larger competitors have greater name recognition, larger sales and marketing budgets, and the ability to bundle products, which could reduce demand for the company's offerings.
The Cloudways acquisition is recent, and the company may not successfully integrate or develop the business to achieve growth objectives. MD&A says Cloudways added higher spend customers due to its higher price point and contributed $16.7 million of revenue for FY2022; acquisition related compensation was $9.4 million in FY2022.
The company operates internationally, with about two-thirds of revenue historically from customers outside the United States and FY2022 revenue split 38% North America, 30% Europe, 22% Asia and 10% rest of world. Risks include privacy and data security regulation, foreign tax, currency fluctuations and political instability, and a strengthening U.S. dollar increases the real cost of the platform to non-U.S. customers.
The company relies on third-party data center providers in the United States, India, Germany, the United Kingdom, Canada, the Netherlands, Singapore and Australia, with limited redundant functionality and potential concentration issues for customer data. If it underestimates or overestimates data center capacity and capital expenditures, results could be adversely affected, and rising energy prices due to the Russia-Ukraine conflict may increase data center operating costs.
The company has limited history with its pricing model and recently implemented price increases for a number of products. The full impact on customer adoption, retention and spend is not yet known, and customers may demand price concessions, which could adversely affect revenue, gross margin, profitability, financial position and cash flow.
In November 2021 the company issued $1.5 billion aggregate principal amount of 0% Convertible Senior Notes due 2026. Servicing the debt may require significant cash and reduce funds for working capital and capital expenditures, and the conditional conversion feature could require cash settlement or reclassification of principal as a current liability, reducing net working capital.
As of December 31, 2022, the company is no longer an emerging growth company and must comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, provide additional executive compensation disclosure, hold a nonbinding advisory vote on executive compensation and adopt new accounting standards on public company effective dates. These requirements may increase compliance costs.
The company's success depends on retaining executive officers, particularly CEO Yancey Spruill, and other key employees, who are employed at-will. It faces intense competition for cloud computing and infrastructure engineers, and recent stock price fluctuations may require issuing more shares for equity awards, causing dilution and complicating retention.
SaaS KPIs
All quarters →Adjusted EBITDA Margin
Net Dollar Retention Rate
Average Revenue Per Customer (ARPU)
Annual Run-Rate Revenue (ARR)
Adjusted Gross Margin
Total customers
Non-GAAP Operating Margin
Learners
Free Cash Flow Margin
Summary, forecast, risks and KPIs are extracted from DigitalOcean Holdings, Inc.'s SEC filings for Q4 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 1, 2026.