DOCN – DigitalOcean Holdings – June 30, 2022

Cloud computing is revolutionizing how companies across the globe develop and deploy applications. The cloud offers lower upfront cost and superior flexibility and scalability when compared to on-premise software development environments. These benefits are especially valuable for start-ups and small and medium-sized businesses, as they typically have more limited financial resources, operational expertise, and IT personnel.

DigitalOcean’s mission is to simplify cloud computing so that developers and businesses can spend more time building software that changes the world. With its leading cloud computing platform providing critical on-demand infrastructure, tools, and fully managed offerings, the company helps developers, start-ups and SMBs rapidly build, deploy and scale applications to accelerate innovation and increase productivity and agility. Combining this simplicity, with a vast open-source community and support, customers can spend less time managing their infrastructure and more time building innovative applications that drive business growth.

Serving over 600k individual and business customers, DigitalOcean users include software engineers, researchers, data scientists, system administrators, students, and hobbyists. Users are spread across numerous industry verticals and for a wide range of applications, such as web and mobile applications, website hosting, e-commerce, media and gaming, personal web projects, and managed services, among many others.

Taking advantage of the strong secular adoption in Infrastructure-as-a-Service (IaaS) and Platform-as-a-Service (PaaS) markets, DigitalOcean expects its massive addressable opportunity to continue to grow rapidly. Particularly as it focuses on further expanding both its existing customer usage and new customer bases with investment in innovative product offerings, augmenting its platform with strategic acquisitions, whilst also continuing to grow and engage its dedicated 140k-strong community.

In 2003, Ben and Moisey Uretsky, who founded the managed hosting business, ServerStack, wanted to create a new product that would combine web hosting and virtual servers and target entrepreneurial software developers after seeing most companies were targeting corporate clients only. In 2011, after extensive research, the Uretskys founded DigitalOcean to fill the void, making it easy for individual software developers and small-scale start-ups to host a website with one-click solutions. By 2012, the company had bolstered its team and secured a place in the Techstars startup accelerator program. As a result, DigitalOcean was able to sign up nearly 400 customers and provided more than 10,000 instances of cloud servers.

At the beginning of 2013, It was among the first few companies to offer SSD-based virtual machines for a seamless experience. Spurred by a glowing TechCrunch review, the company saw a rapid increase in customers, leading to its rapid expansion, opening new data centers around the globe. Delivering solid profits early in its history, DigitalOcean has had few issues securing funding in the following years and ultimately went public on the NYSE in 2021.

The strong growth has allowed the company to build out its capability with acquisitions of CSS-Tricks, a learning website for front-end developers, and Nimbella, a serverless start-up. Based on technology acquired from Nimbella, the company released DigitalOcean Functions in May 2022, providing a serverless platform that allows developers to build and run applications without having to manage servers.

Chief executive officer, Yancey Spruill, took over from former Citrix CEO Mark Templeton in mid-2019. Driving the overall strategy for DigitalOcean through its next phase of growth, he brings a wealth of technical, financial, and leadership experience having spent the last 15 years in CEO and CFO roles at NYSE-listed technology companies including SendGrid and DigitalGlobe.

At SendGrid, he grew revenue from $50 million to over $170 million and nearly tripled the company’s customer base. He also helped guide the company through its IPO in late 2017 and its $3 billion all-stock sale in early 2019 to Twilio. Previously, at DigitalGlobe, he helped drive revenue growth from $50 million to nearly $700 million, again helping guide the company through its IPO in 2009.

Spruill is joined by the chief operating officer, Jeff Guy, who currently oversees strategy deployment, customer success, and business development among other things. He also has extensive experience in senior-level financial, operations, and transformation roles, including building out the operations of GPS SaaS technology leader, Trimble Inc, during a period of growth from $300 million to $1.2 billion.

Targeting the needs of the overlooked developer audience that works independently at start-ups and within SMBs, DigitalOcean’s customer base is incredibly diverse. It includes everyone from individuals running their personal web projects and learning cloud computing and modern technologies, to start-ups and SMBs creating SaaS applications or providing customer relationship management (CRM) products, developer tools, and API services.

These customers are active across numerous industry verticals, including education, finance, advertising, e-commerce, media, gaming, and many more. In addition, managed hosting companies provide value-added services on top of DigitalOcean’s platform to their customers, including maintenance and control of servers, managing websites, and operating content management systems (CMS), whilst web development agencies build custom websites and projects for their clients.

Since DigitalOcean provides products across the spectrum from infrastructure to fully-managed PaaS, they serve users of all technical skill levels, including system administrators, backend developers, frontend developers, and DevOps practitioners, among others. Increasingly, the company is also seeing a trend where people without a traditional software development background can utilize services for compute-intensive workloads such as data analytics, video conferencing systems, and popular online gaming servers. Additionally, its marketplace offers a rich set of pre-configured applications that allow non-developers to simply start using popular open-source software without worrying about infrastructure configuration.

The company offers mission-critical infrastructure solutions across compute, storage and networking, and it also enables developers to extend the native capabilities of the cloud solution with fully managed application, container and database offerings. In minutes, developers can set up thousands of virtual machines, secure their projects, enable performance monitoring, and scale up and down as needed.

DigitalOcean’s customers are spread across over 185 countries, and around two-thirds of its revenue came from customers located outside the United States in 2021. And with its top 25 customers making up only around 10% of total revenue, it has no material customer concentration. Furthermore, the company has historically generated almost all of its revenue from an efficient, low-friction, self-service marketing model, which enables customers to get started on the platform very quickly and without the need for assistance, whilst eliminating the need for complicated and costly implementation and training. As a result, DigitalOcean has grown its customer base while avoiding the expensive customer acquisition costs typical of high-touch enterprise sales models.

DigitalOcean believes that the transformative benefits of the cloud should be easy to leverage, broadly accessible, reliable, and affordable. As a result, it focuses on simplicity, community, open-source, and customer support as key differentiators of the business. Improving the developer experience and increasing developer productivity are critical. This simplicity extends beyond an easy-to-use interface and core platform capabilities to predictable and transparent pricing.

Global developer and open-source communities are fundamental to DigitalOcean’s business, providing a key source of ideas and innovations that support ongoing growth. A developer-centric approach has helped the company foster a large and loyal following, attracting approximately 6 million monthly unique visitors to its websites. They also host one of the largest hackathons in the world and offer a comprehensive library of high-quality technical tutorials and community-generated questions and answers.

Developers and SMBs especially value open-source technology as it allows them greater choice, affordability, and flexibility while providing customers with a much more efficient way to work. DigitalOcean’s participation in and support of the open-source community further enhance the attractiveness, depth, and scalability of the company’s offering.

Given customers rely on their technology infrastructure for critical business needs, DigitalOcean is unwavering in providing superior 24×7 customer support to all customers, regardless of size. This support, coupled with easy-to-use self-help resources and the active developer community, has created tremendous brand loyalty amongst its growing customer base, ultimately leading to customers becoming effective advocates and ultimately a common source of new customer referrals.

This dedication is helping DigitalOcean exploit two of the largest and fastest-growing markets across all industries. The worldwide IaaS and PaaS markets for individuals and companies with less than 500 employees are estimated to reach $72.0 billion in 2022 and are poised to grow to an astonishing $144.6 billion by 2025. DigitalOcean believes there is a substantial opportunity to further expand its customer base, investing in strategies that drive new customer adoption, especially among SMB customers, including new marketing initiatives that optimize its self-service revenue funnel, along with a targeted expansion of its sales teams, particularly in select international locations.

In addition, the company’s existing base of over 600k customers also represents a significant opportunity through increased usage and adoption of additional product offerings. DigitalOcean’s average revenue per user (APRU) has increased significantly in recent years, from $40.16 in 2019 to $59.96 in 2021. The introduction of new products tailored to current clients along with an expanded go-to-market initiative focused on larger customers and specific use cases are expected to drive enhanced usage of the platform and continue to increase the company’s ARPU.

Consequently, DigitalOcean will continue to invest significantly in delivering innovative products, features, and functionality, as it believes the market opportunity for serving developers, start-ups, and SMBs is very large and goes far beyond providing the core IaaS services of computing, storage, and networking.

Since going public in March 2021, DigitalOcean has recorded accelerating growth each quarter. These strong numbers are being driven primarily by higher ARPU as a result of greater product adoption by existing customers and somewhat by customer count growth. Despite an uncertain macro environment, DigitalOcean had a good start to the year with strong growth and free cash flow.

Total revenue hit $127.3 million, for an increase of 36% year-over-year. This took annual run-rate revenue to $524 million at the end of the quarter. Net dollar retention and revenue per customer were both significant contributors to top-line growth, as revenue from customers spending more than $50 per month grew 43% year over year. Furthermore, these customers had an NDR of 118% and now represent 84% of total revenue.

The strong results contributed to a gross profit of $80.6 million, while the company’s non-GAAP income from operations which removes stock-based compensation came in at $13.6 million.

Looking ahead, DigitalOcean expects the momentum to continue and is forecasting total revenue to be in the range of $564 million to $568 million representing year-over-year growth of over 32%, in-line with consensus estimates. While earnings per share estimates of $0.66 represent a 95% increase on FY21’s adjusted EPS of $0.34.

DigitalOcean competes primarily with large, diversified technology companies that focus on large enterprise customers and provide cloud computing as just a portion of the products and services that they offer. The primary vendors in this category include Amazon (AWS), Microsoft (Azure), Google (GCP), IBM, and Oracle. They also compete with smaller niche cloud service providers, including OVH, Vultr, Heroku, and Linode, that typically target individuals and smaller businesses.

Despite the competitive intensity, DigitalOcean focuses solely on solutions for individual developers, start-ups, and SMBs, and by combining simplicity, its developer community, and the advantages of open source, the company is highly differentiated from its enterprise cloud competitors. In addition, their ability to address complex use cases that allow customers to scale as they grow also differentiates them from the many niche competitors who have less robust and extensible product suites.

Benefitting from a highly competitive offering to a rapidly expanding, yet overlooked segment of the market, coupled with DigitalOcean’s ability to capture a loyal following has it well placed to deliver continued growth. The company’s efforts to provide straightforward scalability to the fastest-growing new businesses give it a lucrative competitive edge in an enormous industry.