Summary
DigitalOcean closed fiscal 2023 with revenue growth that cooled from the full-year pace and a gross margin under pressure. Fourth quarter revenue was $180.87 million, up 11.0% from $163.00 million in the prior-year quarter. Fiscal year revenue was $692.88 million, up 20.2%. Gross profit for the quarter was $103.26 million, flat against the prior-year quarter at up 0.4%, and the quarterly gross margin fell to 57.1% from 63.1%. Full year gross profit was $408.92 million, up 12.2%, with a gross margin of 59.0% against 63.2% in fiscal 2022. Management attributes the squeeze to co-location costs rising as a percentage of revenue faster than revenue itself.
Profitability swung the other way. Operating income was $10.98 million in the quarter against an operating loss of $11.37 million a year earlier, and the operating margin improved to 6.1% from -7.0%. Net income was $15.94 million, compared with a net loss of $10.07 million in the prior-year quarter, and diluted earnings per share were $0.17. For the full year, operating income was $11.90 million and the operating margin was 1.7%, against an operating loss and an operating margin of -4.5% in fiscal 2022. Net income for the year was $19.41 million versus a net loss of $27.80 million, and diluted earnings per share were $0.20 against a loss of $0.28 per share. A large reversal tied to the former chief executive's forfeited share award ran through general and administrative expense, research and development and sales and marketing spending both fell for the year, and the restructuring plan announced in February 2023 was substantially completed by the end of the third quarter of 2023.
Cash generation held up. Operating cash flow was $80.52 million in the quarter, up 28.1% from $62.83 million in the prior-year quarter, and $234.94 million for the full year, up 20.4%. Capital expenditures rose to $52.22 million from $26.71 million, up 95.5%, and reached $119.30 million for the year, up 12.1%, with the increase tied to AI/ML capacity following the Paperspace acquisition and to co-location build-out. Adjusted free cash flow, a non-GAAP measure, was $29 million for the quarter against $36 million a year earlier, but $156 million for the full year against $78 million. Cash, cash equivalents and marketable securities totaled $412 million as of December 31, 2023. Deferred revenue was $5.34 million, down 3.8% from $5.55 million, a small line because customers are billed monthly in arrears.
Customer metrics are the soft spot. Average revenue per customer rose 6% over the prior-year quarter, the number of Builders and Scalers rose 8%, and their revenue grew 12%. Annual run-rate revenue growth was 11%. Net dollar retention was 96% for the quarter against 112% a year earlier, and the annual figure was 101% against 115% in 2022. The company returned $488 million to shareholders in fiscal 2023 by repurchasing 14,487,509 shares, and in February 2024 the board authorized up to $140 million of additional buybacks through fiscal 2025.
Guidance points to a slower first quarter of 2024. Management guides to an adjusted EBITDA margin of 37% to 38% and non-GAAP diluted net income per share of $0.37 to $0.39 for the next quarter. For the full year 2024, it guides to an adjusted EBITDA margin of 36% to 38%, an adjusted free cash flow margin of 19% to 21% of revenue, and non-GAAP diluted net income per share of $1.60 to $1.67. Those margin targets sit below the 40% adjusted EBITDA margin reported for fiscal 2023. Risks include a material weakness in internal control over financial reporting, competitive markets, macroeconomic weakness, and integration risk on Paperspace. Paddy Srinivasan became chief executive officer on February 12, 2024, the same day the former CEO departed.
Forecast
Reported figures
GAAP, from SEC filings| Metric | Q4 FY2023 | Q3 FY2023 | QoQ | Q4 FY2022 | YoY |
|---|---|---|---|---|---|
| Revenue | $180.9M | $177.1M | +2.2% | $163.0M | +11.0% |
| Gross profit | $106.5M | $106.7M | -0.2% | $99.6M | +6.9% |
| Gross margin | 58.9% | 60.3% | -1.4 pp | 61.1% | -2.3 pp |
| Research & development | $30.9M | $32.6M | -5.3% | $39.4M | -21.7% |
| Sales & marketing | $19.7M | $19.0M | +3.5% | $25.2M | -21.9% |
| General & administrative | $44.9M | $20.1M | +123.7% | $50.1M | -10.4% |
| Total operating expenses | $95.5M | $71.3M | +34.0% | $114.7M | -16.8% |
| Operating income (loss) | $11.0M | $35.5M | -69.0% | -$15.1M | +172.8% |
| Operating margin | 6.1% | 20.0% | -14.0 pp | -9.3% | +15.3 pp |
| Net income (loss) | $15.9M | $19.2M | -16.9% | -$10.1M | +258.3% |
| Net margin | 8.8% | 10.8% | -2.0 pp | -6.2% | +15.0 pp |
| Diluted EPS | $0.17 | $0.20 | -$0.03 | — | — |
Risks
The company identified a material weakness in internal control over financial reporting that continued to exist as of December 31, 2023, caused by inadequate controls over tax processes. Management concluded that internal control over financial reporting and disclosure controls and procedures were not effective.
Padmanabhan Srinivasan joined as CEO on February 12, 2024 and the former CEO departed the same day. The filing flags risk that the transition is not successfully managed or that executive officers and key employees depart, disrupting operations and future growth.
DigitalOcean now competes with AI/ML infrastructure providers including Coreweave and Lambda Labs after the Paperspace acquisition. The filing notes rapid generative AI developments and uncertainty about success of AI/ML products and related regulatory and social considerations.
Demand for GPUs is at an all time high, and the company has faced and may continue to face supply chain issues that may impact its ability to service AI/ML customers and expand revenue.
Gross margin was down to 59.0% for the year ended December 31, 2023 from 63.2% for the year ended December 31, 2022, primarily due to co-location costs increasing as a percentage of revenue. Capital expenditures increased 12.1% year to date and 95.5% in Q4, increasing capacity risk.
Net dollar retention rate declined to 101% in 2023 from 115% in 2022. Most contracts are month-to-month and customers can terminate or decrease usage without advance notice, so churn or reduced expansion could pressure growth.
MD&A highlights unfavorable economic conditions including inflation, interest rates, bank failures, geopolitical conflicts, and political instability in regions where the company operates. These could reduce IT spending and negatively affect revenue growth.
The company has $1.5 billion aggregate principal amount of 0% Convertible Senior Notes due December 1, 2026. Conditional conversion can require cash settlement and reduce liquidity, and future debt or equity issuances could dilute stockholders.
The company may need to change its pricing model or offer price concessions if competitors introduce lower cost products. This could adversely affect revenue, gross margin, profitability, and cash flow.
AI/ML and privacy laws such as the EU AI Act and export controls on semiconductors to China may increase compliance costs or limit operations. The filing says new export controls include strict licensing restrictions on certain chips and supercomputer-related products.
In 2023 the company completed a restructuring that reduced workforce and shifted roles. The filing notes restructuring may not achieve expected cost savings and could cause loss of institutional knowledge, attrition, and morale issues.
A putative securities class action was filed in September 2023 and two stockholder derivative actions were filed in December 2023, each voluntarily dismissed without prejudice. Additional similar litigation could be costly and divert management attention.
SaaS KPIs
All quarters →Adjusted EBITDA Margin
Adjusted EBITDA
Average Revenue Per Customer (ARPU)
Annual Run-Rate Revenue (ARR)
Adjusted free cash flow
Adjusted free cash flow margin
Net Dollar Retention Rate (NDR)
Builders
Scalers
Summary, forecast, risks and KPIs are extracted from DigitalOcean Holdings, Inc.'s SEC filings for Q4 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 2, 2026.