Revenue Increased 37% Year-over-Year

Improving Profitability Drives 15% Free Cash Flow Margin

DigitalOcean Holdings, Inc. (NYSE:DOCN), the cloud for developers, startups and SMBs, today announced results for its third quarter ended September 30, 2022.

"I'm proud that we delivered top-line acceleration combined with significant operating margin and free cash flow leverage in the third quarter, despite the difficult operating environment due to global macro challenges," said Yancey Spruill, CEO of DigitalOcean. "In addition, we made a significant investment to expand our addressable market with the acquisition of Cloudways. We will continue to leverage our capabilities to provide exceptional value to support the growth of SMBs. We are committed to delivering durable 30% growth with increasing profitability and cash flow."

Third Quarter 2022 Financial Highlights:

Revenue was $152.1 million, an increase of 37% year-over-year and included a $4.1 million net revenue contribution from Cloudways, and revenue growth was 33% on a standalone basis.
Annual Run-Rate Revenue (ARR) ended the quarter at $640.6 million, representing 41% year-over-year growth.
Gross profit of $97.6 million or 64% of revenue, an increase of 300 basis points year-over-year, and adjusted gross profit of $121.5 million or 80% of revenue.
Income from operations was $9.4 million and operating margin was 6%.
Non-GAAP income from operations was $39.7 million and non-GAAP operating margin was 26%.
Net income per share was $0.10 and non-GAAP diluted net income per share was $0.38.
Free cash flow was $22.4 million as compared to $13.5 million during Q3'21.
Cash, cash equivalents, and marketable securities was $825 million as of September 30, 2022.

Third Quarter 2022 Operational Highlights:

Acquired Cloudways, a rapidly growing managed hosting provider, for $350 million.
Net Dollar Retention Rate (NDR) improved 600 basis points versus the prior quarter to 118%.
Average Revenue Per Customer (ARPU) was $79.22, an increase of 28% from the third quarter of 2021.
Customers spending more than $50 per month grew 50% year-over-year to 142,000, which was an increase of 37,000 from the prior quarter. DigitalOcean added 17,000 and Cloudways contributed 20,000 in the period.
The company repurchased approximately 1.1 million shares in the quarter, which completes its share repurchase programs.

Financial Outlook:

Based on information available as of November 7, 2022, for the fourth quarter of 2022 we expect:

Total revenue of $160 to $162 million.
Non-GAAP operating margin of 16%.
Non-GAAP diluted net income per share of $0.18 to $0.19.
Fully diluted weighted average shares outstanding of approximately 114 to 115 million shares.

For the full year 2022, we expect:

Total revenue of $573 to $575 million.
Non-GAAP operating margin of 17%.
Free cash flow in the range of 10% to 11% of revenue.
Non-GAAP diluted net income per share of $0.79 to $0.80.
Fully diluted weighted average shares outstanding of approximately 116 to 117 million shares.

A reconciliation of non-GAAP guidance measures to corresponding GAAP measures is not available on a forward-looking basis without unreasonable effort due to the uncertainty regarding, and the potential variability of, expenses that may be incurred in the future. For example, stock-based compensation expense-related charges are impacted by the timing of employee stock transactions, the future fair market value of our common stock, and our future hiring and retention needs, all of which are difficult to predict and subject to constant change. Accordingly, a reconciliation is not available without unreasonable effort and we are unable to assess the probable significance of the unavailable information, although it is important to note that these factors could be material to our results computed in accordance with GAAP.

Conference Call Information:

DigitalOcean will host a conference call today, November 7, 2022, at 4:30 p.m. ET to review its results. The conference call can be accessed by dialing (888) 330-3637 with conference ID 7741047. A live webcast and replay of the conference call can be accessed from the DigitalOcean investor relations website at http://investors.digitalocean.com.

Following the completion of the call, a telephonic replay will be available through November 14, 2022, by dialing (800) 770-2030 conference ID 7741047.

About DigitalOcean

DigitalOcean simplifies cloud computing so builders can spend more time creating software that changes the world. With its mission-critical infrastructure and fully managed offerings, DigitalOcean helps developers, startups and small and medium-sized businesses (SMBs) rapidly build, deploy and scale applications to accelerate innovation and increase productivity and agility. DigitalOcean combines the power of simplicity, community, open source and customer support so customers can spend less time managing their infrastructure and more time building innovative applications that drive business growth.

Forward‑Looking Statements

This release contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, regarding our performance, including but not limited to statements in the section titled "Financial Outlook." The forward-looking statements contained in this release and the accompanying earnings call referenced in this release are subject to known and unknown risks, uncertainties, assumptions, and other factors that may cause actual results or outcomes to be materially different from any future results or outcomes expressed or implied by the forward-looking statements. These risks, uncertainties, assumptions, and other factors include, but are not limited to: (1) our recent growth may not be indicative of our future growth; (2) our history of operating losses; (3) our limited operating history; (4) our ability to attract and retain customers and/or expand usage of our platform by such customers; (5) breaches in our security measures allowing unauthorized access to our platform, our data, or our customers' data; (6) our ability to release updates and new features to our platform and adapt and respond effectively to rapidly changing technology or customer needs; (7) the competitive markets in which we participate; (8) the rapidly evolving laws and industry standards that relate to privacy, data security, liability for service providers regarding the activities of customers, and access to the internet; (9) risks associated with successfully managing our growth; (10) our ability to successfully integrate acquired businesses, including Cloudways, and achieve expected synergies and benefits; and (11) general market, political, economic, and business conditions.

Further information on these and additional risks, uncertainties, assumptions and other factors that could cause actual results or outcomes to differ materially from those included in or contemplated by the forward-looking statements contained in this release are included under the caption "Risk Factors" and elsewhere in our Annual Report on Form 10-K for the year ended December 31, 2021, filed with the SEC on February 25, 2022, our Quarterly Report on Form 10-Q for the quarter ended September 30, 2022, filed with the SEC on November 7, 2022, and other filings and reports we make with the SEC from time to time.

We operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time, and it is not possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this release. The results, events and circumstances reflected in the forward-looking statements may not be achieved or occur. The forward-looking statements made in this release relate only to events as of the date on which the statements are made. We assume no obligation to, and do not currently intend to, update any such forward-looking statements after the date of this release.

About Non-GAAP Financial Measures

To supplement our consolidated financial statements, which are prepared and presented in accordance with generally accepted accounting principles in the United States, or GAAP, we provide investors with non-GAAP financial measures including: (i) adjusted gross profit and adjusted gross margin; (ii) non-GAAP income from operations and non-GAAP operating margin; (iii) non-GAAP net income and non-GAAP diluted net income per share; and (iv) free cash flow and free cash flow margin. These measures are presented for supplemental informational purposes only, have limitations as analytical tools and should not be considered in isolation or as a substitute for financial information presented in accordance with GAAP. In particular, free cash flow is not a substitute for cash used in operating activities. Additionally, the utility of free cash flow as a measure of our financial performance and liquidity is further limited as it does not represent the total increase or decrease in our cash balance for a given period. Our calculations of each of these measures may differ from the calculations of measures with the same or similar titles by other companies and therefore comparability may be limited. Because of these limitations, when evaluating our performance, you should consider each of these non-GAAP financial measures alongside other financial performance measures, including the most directly comparable financial measure calculated in accordance with GAAP and our other GAAP results. A reconciliation of each of our non-GAAP financial measures to the most directly comparable financial measure calculated in accordance with GAAP is set forth in the tables in the section "Reconciliation of GAAP to Non-GAAP Data."

Adjusted Gross Profit and Adjusted Gross Margin

We believe adjusted gross profit and adjusted gross margin, when taken together with our GAAP financial results, provides a meaningful assessment of our performance, and is useful for the preparation of our annual operating budget and quarterly forecasts.

We define adjusted gross profit as gross profit exclusive of stock-based compensation, amortization of capitalized internal-use software development costs and depreciation of our data center equipment included within Cost of revenue. We exclude stock-based compensation, which is a non-cash item, because we do not consider it indicative of our core operating performance. We exclude depreciation and amortization, which primarily relates to our investments in our data center servers that are long lived assets with an economic life of five years, because it may not reflect our current or future cash spending levels to support our business. While we intend to spend a significant amount on capital expenditures on an absolute basis in the coming years, our capital expenditures as a percentage of revenue has declined significantly and will continue to decline. We define adjusted gross margin as a percentage of adjusted gross profit to revenue.

Non-GAAP Income from Operations and Non-GAAP Operating Margin

We define non-GAAP income from operations as (Loss) income from operations, excluding stock-based compensation, acquisition related compensation, amortization of acquired intangibles, acquisition and integration related costs, loss on sublease, asset impairment, restructuring and severance, and other unusual or non-recurring transactions as they occur. We define non-GAAP operating margin as non-GAAP income from operations as a percentage of revenue. We use non-GAAP income from operations to understand and evaluate our core operating performance and trends and to develop short-term and long-term operating plans. We believe that non-GAAP income from operations facilitates comparison of our operating performance on a consistent basis between periods, and when viewed in combination with our results prepared in accordance with GAAP, helps provide a broader picture of factors and trends affecting our results of operations.

Non-GAAP Net Income and Non-GAAP Diluted Net Income Per Share

We define non-GAAP net income (loss) as Net loss attributable to common stockholders, excluding stock-based compensation, acquisition related compensation, amortization of acquired intangibles, acquisition and integration related costs, release of VAT reserve, loss on sublease, loss on extinguishment of debt, asset impairment, restructuring and severance expense, revaluation of warrants, and other unusual or non-recurring transactions as they occur. We define non-GAAP diluted net income per share as non-GAAP net income divided by the weighted-average shares including the dilutive effects of our convertible preferred stock, warrants, stock options, RSUs, PRSUs, ESPP and Convertible Notes.

We believe non-GAAP net income per share provides our management and investors consistency and comparability with our past financial performance and facilitates period-to-period comparisons of operations, as this metric generally eliminates the effects of unusual or non-recurring items from period to period for reasons unrelated to overall operating performance.

Free Cash Flow and Free Cash Flow Margin

Free cash flow is a non-GAAP financial measure that we define as Net cash provided by operating activities less purchases of property and equipment, capitalized internal-use software costs and purchase of intangible assets. Free cash flow margin is calculated as free cash flow divided by total revenue. We believe that free cash flow and free cash flow margin are useful indicators of liquidity that provide information to management and investors about the amount of cash generated from our core operations that, after the purchases of property and equipment, can be used for strategic initiatives, including investing in our business and selectively pursuing acquisitions and strategic investments. We further believe that historical and future trends in free cash flow and free cash flow margin, even if negative, provide useful information about the amount of Net cash provided by operating activities that is available (or not available) to be used for strategic initiatives. For example, if free cash flow is negative, we may need to access cash reserves or other sources of capital to invest in strategic initiatives. One limitation of free cash flow and free cash flow margin is that they do not reflect our future contractual commitments. Additionally, free cash flow does not represent the total increase or decrease in our cash balance for a given period.

Key Business Metrics:

We utilize the key metrics set forth below to help us evaluate our business and growth, identify trends, formulate financial projections and make strategic decisions.

Customers

We define customers paying more than $50 per month as customers having generated an invoice of greater than $50 for that period.

ARPU

We calculate ARPU on a monthly basis as our total revenue in that period divided by the number of customers determined as of the last day of that period. For a quarterly or annual period, ARPU is determined as the weighted average monthly ARPU over such three or 12-month period.

ARR

We calculate ARR at a point in time by multiplying the latest monthly period's revenue by 12.

Net Dollar Retention Rate

We calculate net dollar retention rate monthly by starting with the revenue from the cohort of all customers during the corresponding month 12 months prior, or the Prior Period Revenue. We then calculate the revenue from these same customers as of the current month, or the Current Period Revenue, including any expansion and net of any contraction or attrition from these customers over the last 12 months. The calculation also includes revenue from customers that generated revenue before, but not in, the corresponding month 12 months prior, but subsequently generated revenue in the current month and are therefore reflected in the Current Period Revenue. We include this group of re-engaged customers in this calculation because our customers frequently use our platform for projects that stop and start over time. We then divide the total Current Period Revenue by the total Prior Period Revenue to arrive at the net dollar retention rate for the relevant month. For a quarterly or annual period, the net dollar retention rate is determined as the average monthly net dollar retention rates over such three or 12-month period.

DIGITALOCEAN HOLDINGS, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except share amounts) (unaudited)

	September 30, 2022			December 31, 2021
Current assets:
Cash and cash equivalents	$	24,115		$	1,713,387
Marketable securities		800,539			—
Accounts receivable, less allowance for doubtful accounts of $6,402 and $4,212, respectively		52,425			39,619
Prepaid expenses and other current assets		31,277			17,050
Total current assets		908,356			1,770,056

Property and equipment, net		270,985			249,643
Restricted cash		1,935			2,038
Goodwill		315,161			32,170
Intangible assets, net		122,543			42,915
Deferred tax assets		82			88
Other assets		4,625			4,085
Total assets	$	1,623,687		$	2,100,995

Current liabilities:
Accounts payable	$	11,762		$	12,657
Accrued other expenses		36,645			31,907
Deferred revenue		5,476			4,826
Other current liabilities		44,925			8,849
Total current liabilities		98,808			58,239

Deferred tax liabilities		22,107			421
Long-term debt		1,468,393			1,462,676
Other long-term liabilities		4,162			1,462
Total liabilities		1,593,470			1,522,798
Commitments and Contingencies

Preferred stock ($0.000025 par value per share; 10,000,000 shares authorized; 0 shares issued and outstanding as of September 30, 2022 and December 31, 2021)		—			—
Common stock ($0.000025 par value per share; 750,000,000 shares authorized; 96,229,736 and 109,175,863 issued; and 96,229,736 and 107,207,635 outstanding as of September 30, 2022 and December 31, 2021, respectively)		2			2
Treasury stock, at cost (0 shares at September 30, 2022 and 1,968,228 at December 31, 2021)		—			(4,598	)
Additional paid-in capital		235,278			769,705
Accumulated other comprehensive loss		(4,308	)		(374	)
Accumulated deficit		(200,755	)		(186,538	)
Total stockholders' equity		30,217			578,197

Total liabilities and stockholders' equity	$	1,623,687		$	2,100,995

DIGITALOCEAN HOLDINGS, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share amounts) (unaudited)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2022			2021			2022			2021
Revenue	$	152,115		$	111,428		$	413,324		$	308,899
Cost of revenue		54,536			43,506			148,539			126,195
Gross profit		97,579			67,922			264,785			182,704
Operating expenses:
Research and development		30,243			29,927			104,440			79,450
Sales and marketing		19,097			13,312			56,360			35,545
General and administrative		38,847			26,354			115,109			68,756
Total operating expenses		88,187			69,593			275,909			183,751

Income (loss) from operations		9,392			(1,671	)		(11,124	)		(1,047	)

Other (income) expense:
Interest expense		2,127			186			6,281			2,675
Loss on extinguishment of debt		—			—			407			3,435
Other (income) expense, net		(3,274	)		140			(6,206	)		(157	)
Other (income) expense		(1,147	)		326			482			5,953

Income (loss) before income taxes		10,539			(1,997	)		(11,606	)		(7,000	)
Income tax expense (benefit)		442			(145	)		2,611			378
Net income (loss) attributable to common stockholders	$	10,097		$	(1,852	)	$	(14,217	)	$	(7,378	)
Basic and diluted net income (loss) per share	$	0.10		$	(0.02	)	$	(0.14	)	$	(0.08	)
Weighted average shares used to compute basic net income (loss) per share		96,559			107,955			102,134			88,265
Weighted average shares used to compute diluted net income (loss) per share		104,931			107,955			102,134			88,265

DIGITALOCEAN HOLDINGS, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (unaudited)

	Nine Months Ended September 30,
	2022			2021
Operating activities
Net loss attributable to common stockholders	$	(14,217	)	$	(7,378	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization		73,900			64,922
Stock-based compensation		77,758			37,380
Bad debt expense		12,217			6,055
Loss on extinguishment of debt		407			3,435
Net accretion of discounts and amortization of premiums on investments		(3,099	)		—
Release of VAT reserve		—			3,188
Non-cash interest expense		5,898			386
Loss on impairment		144			212
Revaluation of warrants		—			(556	)
Deferred income taxes		247			—
Other		2,396			477
Changes in operating assets and liabilities, net of acquisition:
Accounts receivable		(20,270	)		(14,462	)
Prepaid expenses and other current assets		(4,580	)		(134	)
Accounts payable and accrued expenses		(5,771	)		4,001
Deferred revenue		(364	)		263
Other assets and liabilities		5,342			2,587
Net cash provided by operating activities		130,008			100,376

Investing activities
Capital expenditures - property and equipment		(77,717	)		(66,480	)
Capital expenditures - internal-use software development		(6,593	)		(4,297	)
Purchase of intangible assets		(4,915	)		(5,636	)
Cash paid for acquisition of businesses, net of cash acquired		(305,163	)		(5,000	)
Cash paid for asset acquisitions		(5,400	)		—
Purchase of available-for-sale securities		(1,379,277	)		—
Sales of available-for-sale securities		19,992			—
Maturities of available-for-sale securities		558,371			—
Purchased interest on available-for-sale securities		(1,556	)		—
Proceeds from interest on available-for-sale securities		1,549			—
Proceeds from sale of equipment		967			209
Net cash used in investing activities		(1,199,742	)		(81,204	)

Financing activities
Repayment of notes payable		—			(33,214	)
Repayment of term loan		—			(166,813	)
Repayment of borrowings under revolving credit facility		—			(63,200	)
Payment of debt issuance costs		(1,520	)		—
Proceeds related to the issuance of common stock under equity incentive plan		10,352			13,145
Proceeds from the issuance of common stock under employee stock purchase plan		5,245			—
Employee payroll taxes paid related to net settlement of equity awards		(24,618	)		(2,777	)
Proceeds from initial public offering, net of underwriting discounts and commissions and other offering costs		—			723,126
Repurchase and retirement of common stock		(600,000	)		—
Net cash (used in) provided by financing activities		(610,541	)		470,267

(Decrease) increase in cash, cash equivalents and restricted cash		(1,680,275	)		489,439
Cash, cash equivalents and restricted cash - beginning of period		1,715,425			102,537
Cash, cash equivalents and restricted cash - end of period	$	35,150		$	591,976

DIGITALOCEAN HOLDINGS, INC. RECONCILIATION OF GAAP TO NON-GAAP DATA (unaudited)

Adjusted Gross Profit and Adjusted Gross Margin

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
(In thousands)	2022			2021			2022			2021
Gross profit	$	97,579		$	67,922		$	264,785		$	182,704
Adjustments:
Depreciation and amortization		23,442			20,838			68,278			60,105
Stock-based compensation		492			196			1,405			797
Adjusted gross profit	$	121,513		$	88,956		$	334,468		$	243,606
Gross margin		64	%		61	%		64	%		59	%
Adjusted gross margin		80	%		80	%		81	%		79	%

Non-GAAP Income from Operations and Non-GAAP Operating Margin

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
(In thousands)	2022			2021			2022			2021
(Loss) income from operations	$	9,392		$	(1,671	)	$	(11,124	)	$	(1,047	)
Adjustments:
Stock-based compensation		23,594			18,555			77,758			37,380
Acquisition related compensation		2,361			—			2,361			—
Amortization of acquired intangibles		1,661			168			2,687			320
Acquisition and integration related costs		2,700			280			2,868			280
Loss on sublease		—			—			1,471			—
Asset impairment		24			212			144			212
Non-GAAP income from operations	$	39,732		$	17,544		$	76,165		$	37,145
Operating margin		6	%		(1	)%		(3	)%		—	%
Non-GAAP operating margin		26	%		16	%		18	%		12	%

Non-GAAP Net Income and Non-GAAP Diluted Net Income Per Share

	Three Months Ended					Nine Months Ended
	September 30,					September 30,
(In thousands)	2022		2021			2022			2021
GAAP Net income (loss) attributable to common stockholders	$	10,097	$	(1,852	)	$	(14,217	)	$	(7,378	)
Stock-based compensation		23,594		18,555			77,758			37,380
Acquisition related compensation		2,361		—			2,361			—
Amortization of acquired intangible assets		1,661		168			2,687			320
Acquisition and integration related costs		2,700		280			2,868			280
Reclaim of VAT reserve		—		(3,188	)		—			(3,188	)
Loss on sublease		—		—			1,471			—
Loss on extinguishment of debt		—		—			407			3,435
Asset impairment		24		212			144			212
Revaluation of warrants		—		—			—			(556	)
Income tax effects of non-GAAP adjustments⁽¹⁾		710		(19	)		992			90
Non-GAAP net income⁽²⁾	$	41,147	$	14,156		$	74,471		$	30,595
Non-GAAP diluted net income per share⁽²⁾⁽³⁾	$	0.38	$	0.12		$	0.69		$	0.27
Weighted-average shares used to compute Non-GAAP diluted net income per share		113,334		120,854			114,509			114,815

___________________
	(1)	The income tax effects of non-GAAP adjustments are calculated based on the applicable statutory tax rate for the relevant jurisdiction, except for those items which are non-taxable or subject to valuation allowances for which the tax expense (benefit) was calculated at 0%. The tax benefit for amortization is calculated in a similar manner as the tax effects of the non-GAAP adjustments.
	(2)	Amounts are attributable for both the common and convertible preferred stockholders, treated as one class of stock.
	(3)	Non-GAAP net income has been adjusted for the dilutive impact of deferred financing fees related to the Convertible Notes of $1,480 and $4,428 for the three and nine months ended September 30, 2022. The Convertible Notes were issued in November 2021.

Free Cash Flow and Free Cash Flow Margin

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
(In thousands)		2022			2021			2022			2021
Net cash provided by operating activities	$	54,356		$	40,179		$	130,008		$	100,376
Adjustments:
Capital expenditures - property and equipment		(29,676	)		(19,444	)		(77,717	)		(66,480	)
Capital expenditures - internal-use software development		(2,263	)		(1,584	)		(6,593	)		(4,297	)
Purchase of intangible assets		—			(5,636	)		(4,915	)		(5,636	)
Free cash flow	$	22,417		$	13,515		$	40,783		$	23,963
As a percentage of revenue:
Net cash provided by operating activities		36	%		36	%		31	%		32	%
Free cash flow margin		15	%		12	%		10	%		8	%

DIGITALOCEAN HOLDINGS, INC. SUPPLEMENTAL FINANCIAL INFORMATION (unaudited)
Stock-Based Compensation

	Three Months Ended September 30,				Nine Months Ended September 30,
(In thousands)	2022		2021		2022		2021
Cost of revenue	$	492	$	196	$	1,405	$	797
Research and development		8,236		6,099		28,617		13,794
Sales and marketing		3,356		2,582		10,553		5,621
General and administrative		11,510		9,678		37,183		17,168
Total	$	23,594	$	18,555	$	77,758	$	37,380

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