DigitalOcean Holdings Inc (DOCN) Reports Solid Revenue Growth and Robust Free Cash Flow in FY 2023 GuruFocus Research Wed, February 21, 2024 at 2:37 PM MST·3 min read
Revenue Growth: DigitalOcean Holdings Inc (NYSE:DOCN) reported a 20% increase in annual revenue, reaching $693 million for the fiscal year 2023.
Operating Cash Flow: The company generated a robust operating cash flow of $235 million, indicating healthy cash-generating capabilities.
Net Income: DOCN achieved a net income of $19 million, with a net income margin of 3% for the fiscal year.
Adjusted EBITDA: Adjusted EBITDA grew by 39% year-over-year to $277 million, showcasing operational efficiency and profitability.
Stock Repurchase Plan: A new stock repurchase program was approved, authorizing the repurchase of up to $140 million of stock through fiscal year 2025.
Strategic Acquisitions: The acquisition of Paperspace, a leading provider of cloud infrastructure, expanded DOCN's addressable market and capabilities in AI/ML.
On February 21, 2024, DigitalOcean Holdings Inc (NYSE:DOCN), a leading cloud computing platform, released its 8-K filing, announcing financial results for the fourth quarter and fiscal year ended December 31, 2023. The company, known for its developer-friendly cloud solutions, caters to startups and growing digital businesses, offering a range of services from web and mobile application development to e-commerce and managed services. With a global presence, DOCN continues to focus on product-led growth and developer experience enhancement.
Fiscal Year 2023 Performance Highlights DOCN's revenue for the fiscal year 2023 was $693 million, marking a 20% increase from the previous year. The company's focus on margin improvement and market expansion through strategic acquisitions, such as Paperspace, has laid a solid foundation for double-digit growth. The full-year operating cash flow stood at $235 million, reflecting the company's strong cash generation capabilities.
The net income attributable to common stockholders was $19 million, translating to a net income margin of 3%. Adjusted EBITDA saw a significant increase of 39% year-over-year, reaching $277 million, with an adjusted EBITDA margin of 40%. This margin expansion is indicative of DOCN's operational efficiency and its ability to scale profitably.
Financial Metrics and Shareholder Returns Key financial metrics such as the Annual Run-Rate Revenue (ARR) ended the quarter at $730 million, up by 11% year-over-year. The Adjusted Free Cash Flow for the fiscal year was $156 million, compared to $78 million in the prior year, demonstrating the company's enhanced liquidity and financial health.
DOCN also returned $488 million to shareholders through the repurchase of 14,487,509 shares, underscoring the company's commitment to enhancing shareholder value. The newly approved stock repurchase program further reflects this commitment and the confidence in the company's future cash flow generation.
Operational Successes and Future Outlook Operational highlights include the introduction of premium CPU-optimized droplets and a new managed Kafka offering, which are expected to drive customer growth and retention. The Average Revenue Per Customer (ARPU) increased by 6% over the fourth quarter of 2022, and the Net Dollar Retention Rate (NDR) was 96%, compared to 112% in the prior year.
For the first quarter of 2024, DOCN expects total revenue of $182 to $183 million, with an adjusted EBITDA margin of 37% to 38%. The full year 2024 outlook anticipates total revenue of $755 to $775 million and an adjusted free cash flow margin in the range of 19% to 21% of revenue.
DOCN's CEO, Paddy Srinivasan, expressed enthusiasm for the company's trajectory and its focus on product-led growth, while CFO Matt Steinfort highlighted the strong balance sheet and free cash flow as enablers for future expansion initiatives.
Value investors may find DOCN's consistent revenue growth, solid cash flow generation, and strategic investments in AI solutions compelling reasons to consider the stock. The company's financial health and operational achievements position it well for sustained growth in the competitive cloud computing market.
Microsoft's (NASDAQ: MSFT) stock rallied nearly 1,000% over the past 10 years and minted a lot of millionaires. That history rally was driven by the aggressive expansion of its Azure cloud infrastructure platform, the transformation of its desktop software into cloud-based services and mobile apps, and a rapid rollout of new AI services.
Microsoft could still have plenty of room to run, but it's already the world's most valuable company and probably won't soar another 1,000% over the next decade. Therefore, investors looking for bigger gains should check out smaller tech stocks with more upside potential like DigitalOcean (NYSE: DOCN), a provider of cloud infrastructure services for smaller companies.
What does DigitalOcean do? Microsoft's Azure, Amazon Web Services (AWS), and Alphabet's Google Cloud Platform (GCP) are the three largest cloud infrastructure platforms in the world, but these platforms mainly serve large enterprise customers instead of smaller businesses and start-ups.
DigitalOcean addresses that gap by carving out smaller and cheaper "droplets" of individual servers for smaller companies. It also acquired the cloud start-up Paperspace last year to add GPU-powered AI processing services to its servers.
When DigitalOcean went public in 2021, the bears claimed it would struggle to stay relevant as Microsoft, Amazon, and Google rolled out more cloud infrastructure services for smaller customers. The bulls claimed it could carve out a niche with a cheaper and more flexible solution that wasn't tethered to a stickier cloud ecosystem.
DigitalOcean is defying the bears with its steady growth DigitalOcean steadily expanded its customer base and grew its average revenue per users (ARPU) over the past three years, even as the macro headwinds reduced its net dollar retention rate and throttled its revenue growth in 2023.
DigitalOcean operates 16 data centers across nine regions and serves customers in 190 countries. Most of its recent customer growth has been driven by its "Builders" and "Scalers", who spend more than $50 and $500 per month, respectively, on its platform. That cohort accounted for 86% of its revenue in 2023. That growth in higher-value customers, along with its improving scale and tighter cost-cutting measures, consistently boosted its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) and adjusted free cash flow (FCF) margins over the past three years.
As a result, DigitalOcean turned profitable for the first time on a generally accepted accounting principles (GAAP) basis in 2023. Those rising profits suggest it still has plenty of pricing power in its growing niche of the cloud market.
DigitalOcean looks cheaper than Microsoft For 2024, DigitalOcean expects its revenue to rise 9% to 12%, its adjusted EBITDA margin to decline to a range of 36% to 38%, and its adjusted FCF margin to dip to a range between 19% and 21%. It attributed that slowdown to the persistent macro challenges, which are driving many companies to rein in their spending on cloud-based services. But as its revenue growth slows down this year, it plans to boost its ARPU and stabilize its net dollar retention rates by expanding its portfolio of machine learning and AI services.
From 2023 to 2026, analysts expect DigitalOcean revenue to grow at a compound annual growth rate (CAGR) of 13%, its adjusted EBITDA margin to expand to 40%, and for its GAAP net income to rise at a CAGR of 67%. Those estimates imply its business will stabilize as the macro environment warms up. Based on those expectations, its stock looks reasonably valued at 6 times this year's sales and 16 times its adjusted EBITDA. It also still trades about 20% below its IPO price.
Microsoft, which is expected to grow its revenue at a CAGR of 15% and its adjusted EBITDA at a CAGR of 18% from fiscal 2023 to fiscal 2026 (which ends in June 2026), trades at 12 times this year's sales and 24 times its adjusted EBITDA.
Why DigitalOcean could outperform Microsoft this year DigitalOcean only has a market cap of $3.4 billion, while Microsoft is worth $3.05 trillion. However, I believe DigitalOcean's smaller size, stable growth, and lower valuations could help it outperform Microsoft's stock this year.
The market doesn't have high expectations for DigitalOcean, but it's set a pretty high bar for Microsoft, which has become one of the market's hottest AI stocks through its investments in OpenAI. If DigitalOcean maintains steady growth rates while Microsoft falls short of Wall Street's rising estimates, it could generate much higher near-term returns.
BROOMFIELD, Colo.--(BUSINESS WIRE)--DigitalOcean Holdings, Inc. (“DigitalOcean”) (NYSE: DOCN), today announced its intent to offer, subject to market conditions and other factors, $500 million aggregate principal amount of convertible senior notes due 2030 (the “notes”) in a private offering to persons reasonably believed to be qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended (the “Securities Act”). DigitalOcean also intends to grant the initial purchasers of the notes an option to purchase, for settlement within a period of 13 days from, and including, the date the notes are first issued, up to an additional $75 million aggregate principal amount of the notes.
The notes will be senior, unsecured obligations of DigitalOcean, will accrue interest payable semi-annually in arrears and will mature on August 15, 2030, unless earlier converted, redeemed or repurchased by DigitalOcean. Noteholders will have the right to convert their notes in certain circumstances and during specified periods. DigitalOcean will settle conversions by paying or delivering, as applicable, cash, shares of DigitalOcean’s common stock, par value $0.000025 per share (the “common stock”), or a combination of cash and shares of common stock, at DigitalOcean’s election. The notes will not be redeemable before August 15, 2028. The notes will be redeemable, in whole or in part (subject to certain limitations), at DigitalOcean’s option at any time, and from time to time, on or after August 15, 2028 and on or before the 40th scheduled trading day immediately before the maturity date, at a cash redemption price equal to the principal amount of the notes to be redeemed, plus accrued and unpaid interest, if any, to, but excluding, the redemption date, but only if the last reported sale price per share of DigitalOcean's common stock exceeds 130% of the conversion price for a specified period of time. The interest rate, initial conversion rate and other terms of the notes will be determined at the time of pricing of the offering.
DigitalOcean expects to use the net proceeds from the offering to pay the cost of the capped call transactions described below and the remainder of the net proceeds from the offering, together with cash on hand and up to $500 million of term loans under DigitalOcean’s credit facility (the “credit facility”), to repurchase for cash a portion of its 0.00% convertible senior notes due 2026 (the “2026 notes”) in the note repurchase transactions described below. If the initial purchasers exercise their option to purchase additional notes, DigitalOcean expects to use any additional net proceeds from the offering to enter into additional capped call transactions and the remainder for general corporate purposes, working capital, operating expenses and capital expenditures, which may include additional repurchases of the 2026 notes.
In connection with the pricing of the notes, DigitalOcean expects to enter into privately negotiated capped call transactions with one or more of the initial purchasers or their affiliates or one or more other financial institutions (the “option counterparties”). The capped call transactions will cover, subject to customary adjustments substantially similar to those applicable to the notes, the number of shares of common stock initially underlying the notes. The capped call transactions are generally expected to reduce the potential dilution to the common stock upon any conversion of the notes and/or offset any potential cash payments DigitalOcean is required to make in excess of the principal amount of converted notes, as the case may be, with such reduction and/or offset subject to a cap. If the initial purchasers exercise their option to purchase additional notes, DigitalOcean expects to use a portion of net proceeds from the sale of the additional notes to enter into additional capped call transactions with respect to such additional notes with the option counterparties.
In connection with establishing their initial hedges of the capped call transactions, DigitalOcean expects the option counterparties or their respective affiliates will enter into various derivative transactions with respect to the common stock and/or purchase shares of common stock concurrently with or shortly after the pricing of the notes, including with, or from, certain investors in the notes. This activity could increase (or reduce the size of any decrease in) the market price of the common stock or the notes at that time.
In addition, the option counterparties or their respective affiliates may modify their hedge positions by entering into or unwinding various derivatives with respect to the common stock and/or purchasing or selling shares of common stock or other securities of DigitalOcean in secondary market transactions following the pricing of the notes and prior to the maturity of the notes (and (x) are likely to do so during any observation period related to a conversion of the notes or following any repurchase of the notes in connection with any fundamental change or following any redemption of the notes and (y) are likely to do so following any other repurchase of the notes, if DigitalOcean elects to unwind a corresponding portion of the capped call transactions, in connection with such repurchase). This activity could also cause or avoid an increase or a decrease in the market price of the common stock or the notes, which could affect a noteholder’s ability to convert the notes and, to the extent the activity occurs during any observation period related to a conversion of notes, it could affect the number of shares, if any, and value of the consideration that a noteholder will receive upon conversion of its notes.
DigitalOcean expects to use a portion of the net proceeds from the offering, together with cash on hand and up to $500 million of term loans under the credit facility to repurchase for cash a portion of the 2026 notes in privately negotiated transactions (each, a “note repurchase transaction”) entered into concurrently with the pricing of the offering through one of the initial purchasers or its affiliate, as agent. The terms of each note repurchase transaction will depend on a variety of factors. No assurance can be given as to how much, if any, of the 2026 notes will be repurchased or the terms on which they will be repurchased. This press release is not an offer to repurchase the 2026 notes, and the offering of the notes is not contingent upon the repurchase of the 2026 notes.
In connection with any note repurchase transaction, DigitalOcean expects that holders of the 2026 notes who agree to have their 2026 notes repurchased and who have hedged their equity price risk with respect to such 2026 notes (the “hedged holders”) will unwind all or part of their hedge positions by buying common stock and/or entering into or unwinding various derivative transactions with respect to the common stock. The amount of common stock to be purchased by the hedged holders or in connection with such derivative transactions may be substantial in relation to the historic average daily trading volume of the common stock. This activity by the hedged holders could increase (or reduce the size of any decrease in) the market price of the common stock, including concurrently with the pricing of the notes, resulting in a higher effective conversion price of the notes. DigitalOcean cannot predict the magnitude of such market activity or the overall effect it will have on the price of the notes or the common stock.
Concurrent with and subject to the pricing of the offering, DigitalOcean plans to adopt a new stock repurchase program authorizing the repurchase of up to $100 million of its common stock, from time to time after the completion of the offering(the “Repurchase Program”). DigitalOcean intends to repurchase shares of its common stock under the Repurchase Program when it is opportune to do so at prevailing market prices or in negotiated transactions off the market. The purchases under the Repurchase Program will occur using a variety of methods, which may include but are not limited to open market purchases, the implementation of a 10b5-1 plan, and/or any other available methods in accordance with Securities and Exchange Commission (“SEC”) and other applicable legal requirements. There can be no assurances as to the timing, amount or manner of any repurchases under the Repurchase Program. Any repurchases under the Repurchase Program will be subject to market conditions and other factors and may be discontinued at any time. The Repurchase Program will expire on July 31, 2027.
The offer and sale of the notes and any shares of common stock issuable upon conversion of the notes have not been, and will not be, registered under the Securities Act, any state securities laws, and unless so registered, may not be offered or sold in the United States absent registration or an applicable exemption from, or in a transaction not subject to, the registration requirements of the Securities Act and other applicable securities laws.
This press release is neither an offer to sell nor a solicitation of an offer to buy any of these securities nor shall there be any sale of these securities in any state or jurisdiction in which such an offer, solicitation or sale would be unlawful prior to the registration or qualification thereof under the securities laws of any such state or jurisdiction.
About DigitalOcean
DigitalOcean is the simplest scalable cloud platform that democratizes cloud and AI for digital native enterprises around the world. Our mission is to simplify cloud computing and AI to allow builders to spend more time creating software that changes the world. More than 600,000 customers trust DigitalOcean to deliver the cloud, AI, and ML infrastructure they need to build and scale their organizations.
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