DigitalOcean Holdings, Inc. - Quarter Report: 2023 March (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2023

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ______ to ______

Commission File Number: 001-40252


DigitalOcean Holdings, Inc.
(Exact Name of Registrant as Specified in Its Charter)


Delaware						45-5207470
(State or other jurisdiction of incorporation or organization)						(I.R.S. Employer Identification No.)

101 6th Avenue

New York, New York 10013

(Address of principal executive offices and Zip Code)

(646) 827-4366

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol	Name of each exchange on which registered
Common stock, par value $0.000025 per share	DOCN	The New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer	☒	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☐
		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of April 27, 2023, there were 88,812,515 shares of the registrant’s common stock, with a par value of $0.000025 per share, outstanding.


TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION
		Page
Item 1.	Financial Statements (unaudited)
	Condensed Consolidated Balance Sheets as of March 31, 2023 and December 31, 202 2	1
	Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2023 and 2022	2
	Condensed Consolidated Statements of Comprehensive Loss for the Three Months Ended March 31, 2023 and 2022	3
	Condensed Consolidated Statements of Stockholders ’ (Deficit) Equity for the Three Months Ended March 31, 2023 and 2022	4
	Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2023 and 202 2	5
	Notes to Condensed Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	21
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	33
Item 4.	Controls and Procedures	33

	PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	35
Item 1a.	Risk Factors	35
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	35
Item 3.	Defaults Upon Senior Securities	35
Item 4.	Mine Safety Disclosures	35
Item 5.	Other Information	35
Item 6.	Exhibits	36
	Signatures	37

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements about us and our industry that involve substantial risks and uncertainties. All statements other than statements of historical facts contained in this Quarterly Report on Form 10-Q, including statements regarding our future results of operations or financial condition, business strategy and plans and objectives of management for future operations, are forward-looking statements. In some cases, you can identify forward-looking statements because they contain words such as “anticipate,” “believe,” “contemplate,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “should,” “target,” “will” or “would” or the negative of these words or other similar terms or expressions. These forward-looking statements include, but are not limited to, statements concerning the following:

•our expectations regarding our revenue, expenses and other operating results;

•our ability to achieve profitability on an annual basis and then sustain such profitability;

•future investments in our business, our anticipated capital expenditures and our estimates regarding our capital requirements;

•our ability to acquire new customers and successfully engage and expand usage of our existing customers;

•the costs and success of our marketing efforts, and our ability to promote our brand;

•our reliance on key personnel and our ability to identify, recruit and retain skilled personnel;

•our ability to effectively manage our growth;

•our ability to successfully integrate acquired businesses, including Cloudways, and achieve expected synergies and benefits;

•our ability to compete effectively with existing competitors and new market entrants; and

•the growth rates of the markets in which we compete.

You should not rely on forward-looking statements as predictions of future events. We have based the forward-looking statements contained in this Quarterly Report on Form 10-Q primarily on our current expectations and projections about future events and trends that we believe may affect our business, financial condition and operating results. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties and other factors described in Item 1A–Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2022, as such factors may be updated from time to time in our subsequent periodic filings with the SEC, and elsewhere in this Quarterly Report on Form 10-Q. Moreover, 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 Quarterly Report on Form 10-Q. The results, events and circumstances reflected in the forward-looking statements may not be achieved or occur, and actual results, events or circumstances could differ materially from those described in the forward-looking statements.

In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based on information available to us as of the date of this Quarterly Report on Form 10-Q. And while we believe that information provides a reasonable basis for these statements, that information may be limited or incomplete. Our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all relevant information. These statements are inherently uncertain, and investors are cautioned not to unduly rely on these statements.

The forward-looking statements made in this Quarterly Report on Form 10-Q relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statements made in this Quarterly Report on Form 10-Q to reflect events or circumstances after the date of this Quarterly Report on Form 10-Q or to reflect new information or the occurrence of unanticipated events, except as required by law. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements, and you should not place undue reliance on our forward-looking statements. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments.

We may announce material business and financial information to our investors using our investor relations website (https://investors.digitalocean.com/). We therefore encourage investors and others interested in our company to review the

information that we make available on our website, in addition to following our filings with the Securities and Exchange Commission, webcasts, press releases and conference calls.

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

DIGITALOCEAN HOLDINGS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share amounts)

(unaudited)


	March 31, 2023		December 31, 2022
Current assets:
Cash and cash equivalents	$	20,872	$	140,772
Marketable securities	591,681		723,462
Accounts receivable, less allowance for credit losses of $6,148 and $6,099, respectively	54,972		53,833
Prepaid expenses and other current assets	31,087		28,485
Total current assets	698,612		946,552

Property and equipment, net	277,957		273,170
Restricted cash	1,747		1,935
Goodwill	296,579		313,718
Intangible assets, net	117,638		118,928
Operating lease right-of-use assets, net	185,516		154,501
Deferred tax assets	753		751
Other assets	5,594		6,353
Total assets	$	1,584,396	$	1,815,908

Current liabilities:
Accounts payable	$	11,005	$	21,138
Accrued other expenses	38,220		33,987
Deferred revenue	5,015		5,550

Operating lease liabilities, current	73,058		57,682
Other current liabilities	58,856		45,913
Total current liabilities	186,154		164,270

Deferred tax liabilities	3,771		18,209
Long-term debt	1,472,148		1,470,270
Operating lease liabilities, non-current	133,471		108,243
Other long-term liabilities	6,506		3,826
Total liabilities	1,802,050		1,764,818
Commitments and Contingencies (Note 8)



Preferred stock ($0.000025 par value per share; 10,000,000 shares authorized; 0 shares issued and outstanding as of March 31, 2023 and December 31, 2022)	—		—
Common stock ($0.000025 par value per share; 750,000,000 shares authorized; 89,983,568 and 96,732,507 issued and outstanding as of March 31, 2023 and December 31, 2022, respectively)	2		2

Additional paid-in capital	28,781		263,957
Accumulated other comprehensive loss	(679)		(2,048)
Accumulated deficit	(245,758)		(210,821)
Total stockholders’ (deficit) equity	(217,654)		51,090

Total liabilities and stockholders’ equity	$	1,584,396	$	1,815,908

See accompanying notes to condensed consolidated financial statements

DIGITALOCEAN HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

(unaudited)


	Three Months Ended
	March 31,
	2023		2022
Revenue	$	165,134	$	127,327
Cost of revenue	71,879		47,202
Gross profit	93,255		80,125
Operating expenses:
Research and development	38,272		37,241
Sales and marketing	17,709		19,044
General and administrative	48,939		37,424
Restructuring and other charges	20,869		—
Total operating expenses	125,789		93,709

Loss from operations	(32,534)		(13,584)

Other (income) expense:
Interest expense	2,189		2,059
Loss on extinguishment of debt	—		407
Other (income) expense, net	(7,394)		(820)
Other (income) expense	(5,205)		1,646

Loss before income taxes	(27,329)		(15,230)
Income tax expense	7,608		3,338
Net loss attributable to common stockholders	$	(34,937)	$	(18,568)
Net loss per share attributable to common stockholders, basic and diluted	$	(0.37)	$	(0.17)

Weighted-average shares used to compute net loss per share, basic and diluted	95,565		106,980

See accompanying notes to condensed consolidated financial statements

DIGITALOCEAN HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(in thousands)

(unaudited)


	Three Months Ended
	March 31,
	2023		2022
Net loss attributable to common stockholders	$	(34,937)	$	(18,568)
Other comprehensive loss:
Foreign currency translation adjustments, net of taxes	126		(18)
Unrealized gain (loss) on available-for-sale marketable securities, net of taxes	1,243		(1,908)
Comprehensive loss	$	(33,568)	$	(20,494)

See accompanying notes to condensed consolidated financial statements

DIGITALOCEAN HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ (DEFICIT) EQUITY

(in thousands, except share amounts)

(unaudited)


	Common Stock			Treasury Stock			Additional Paid-In Capital		Accumulated Other Comprehen-sive Loss		Accumulated Deficit		Total
	Shares	Amount		Shares	Amount
Balance at December 31, 2022	96,732,507	$	2	—	$	—	$	263,957	$	(2,048)	$	(210,821)	$	51,090
Issuance of common stock under equity incentive plan, net of taxes withheld	1,011,034	—		—	—		1,461		—		—		1,461


Repurchase and retirement of common stock	(7,759,973)	—		—	—		(268,560)		—		—		(268,560)
Stock-based compensation	—	—		—	—		31,923		—		—		31,923
Other comprehensive income	—	—		—	—		—		1,369		—		1,369
Net loss attributable to common stockholders	—	—		—	—		—		—		(34,937)		(34,937)
Balance at March 31, 2023	89,983,568	$	2	—	$	—	$	28,781	$	(679)	$	(245,758)	$	(217,654)


	Common Stock			Treasury Stock			Additional Paid-In Capital		Accumulated Other Comprehen-sive Loss		Accumulated Deficit		Total
	Shares	Amount		Shares	Amount
Balance at December 31, 2021	109,175,863	$	2	(1,968,228)	$	(4,598)	$	769,705	$	(374)	$	(186,538)	$	578,197
Issuance of common stock under equity incentive plan, net of taxes withheld	1,357,665	—		—	—		(6,709)		—		—		(6,709)
Repurchase and retirement of common stock	(2,577,471)	—		—	—		(150,000)		—		—		(150,000)
Stock-based compensation	—	—		—	—		26,392		—		—		26,392
Other comprehensive loss	—	—		—	—		—		(1,926)		—		(1,926)
Net loss attributable to common stockholders	—	—		—	—		—		—		(18,568)		(18,568)
Balance at March 31, 2022	107,956,057	$	2	(1,968,228)	$	(4,598)	$	639,388	$	(2,300)	$	(205,106)	$	427,386

See accompanying notes to condensed consolidated financial statements

DIGITALOCEAN HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)


	Three Months Ended March 31,
	2023		2022
Operating activities
Net loss attributable to common stockholders	$	(34,937)	$	(18,568)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization	28,913		23,933
Stock-based compensation	31,531		25,981
Provision for expected credit losses	3,987		4,023

Loss on extinguishment of debt	—		407
Net accretion of discounts and amortization of premiums on investments	(3,436)		(117)
Non-cash interest expense	1,983		1,959
Loss on impairment of long-lived assets	553		—

Deferred income taxes	4,150		—

Operating lease right-of-use assets and liabilities, net	9,523		445
Other	590		697
Changes in operating assets and liabilities:
Accounts receivable	(5,125)		(6,931)
Prepaid expenses and other current assets	(2,755)		2,843
Accounts payable and accrued expenses	(11,031)		(10,455)

Deferred revenue	(535)		422
Other assets and liabilities	12,804		5,762
Net cash provided by operating activities	36,215		30,401

Investing activities
Capital expenditures - property and equipment	(23,314)		(23,045)
Capital expenditures - internal-use software development	(1,794)		(2,276)


Cash paid for asset acquisitions	(2,500)		(4,000)
Purchase of available-for-sale securities	(195,910)		(1,091,279)

Maturities of available-for-sale securities	331,581		—
Purchased interest on available-for-sale securities	(113)		(1,530)
Proceeds from interest on available-for-sale securities	—		649
Proceeds from sale of equipment	6		457
Net cash provided by (used in) investing activities	107,956		(1,121,024)

Financing activities








Payment of debt issuance costs	—		(921)


Proceeds related to the issuance of common stock under equity incentive plan	5,535		5,426


Employee payroll taxes paid related to net settlement of equity awards	(3,864)		(12,384)


Repurchase and retirement of common stock	(265,901)		(150,000)

Net cash used in financing activities	(264,230)		(157,879)

Effect of exchange rate changes on cash, cash equivalents, and restricted cash	(29)		(49)
Decrease in cash, cash equivalents and restricted cash	(120,088)		(1,248,551)
Cash, cash equivalents and restricted cash - beginning of period	151,807		1,715,425
Cash, cash equivalents and restricted cash - end of period	$	31,719	$	466,874

See accompanying notes to condensed consolidated financial statements

DIGITALOCEAN HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)


Supplemental disclosures of cash flow information:
Cash paid for interest	$	126	$	92
Cash paid for taxes, net of refunds	393		1,003
Cash paid for amounts included in the measurement of lease liabilities	16,579		10,702
Non-cash investing and financing activities:
Capitalized stock-based compensation	$	392	$	411
Property and equipment received but not yet paid, included in Accounts payable and Accrued other expenses	20,437		20,846



Debt issuance costs included in accounts payable and accrued liabilities	—		297
Operating right-of-use assets obtained in exchange for operating lease liabilities	48,597		23,196

See accompanying notes to condensed consolidated financial statements

DIGITALOCEAN HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share amounts)

Note 1. Nature of the Business and Organization

DigitalOcean Holdings, Inc. and its subsidiaries (collectively, the “Company”, “we”, “our”, “us”) is a leading cloud computing platform offering on-demand infrastructure, platform and software tools for startups and small and medium-sized businesses (“SMBs”). The Company was founded with the guiding principle that the transformative benefits of the cloud should be easy to leverage, broadly accessible, reliable and affordable. The Company’s platform simplifies cloud computing, enabling its customers to rapidly accelerate innovation and increase their productivity and agility. The Company offers mission-critical solutions across Infrastructure-as-a-Service (“IaaS”), Platform-as-a-Service (“PaaS”) and Software-as-a-Service (“SaaS”).

The Company has adopted a holding company structure and the primary operations are performed globally through its wholly-owned operating subsidiaries.

Note 2. Summary of Significant Accounting Policies

Basis of Presentation and Principles of Consolidation

The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and include accounts of the Company and all wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. In the opinion of management, the unaudited condensed consolidated financial statements reflect all adjustments, which include normal recurring adjustments, necessary for a fair statement of the Company’s financial position as of March 31, 2023, results of operations for the three months ended March 31, 2023 and 2022, cash flows for the three months ended March 31, 2023 and 2022, and stockholders' (deficit) equity for the three months ended March 31, 2023 and 2022.

Use of Estimates

The preparation of these condensed consolidated financial statements in conformity with U.S. GAAP requires management to make, on an ongoing basis, estimates, judgments and assumptions that affect the amounts reported and disclosed in the condensed consolidated financial statements and accompanying notes. Actual results could differ from those estimates. Such estimates include, but are not limited to, those related to revenue recognition, accounts receivable and related reserves, useful lives and realizability of long-lived assets, capitalized internal-use software development costs, accounting for stock-based compensation, the incremental borrowing rate used to determine lease liabilities, valuation allowances against deferred tax assets, and the fair value and useful lives of tangible and intangible assets acquired and liabilities assumed resulting from business combinations. Management bases its estimates on historical experience and on various other assumptions which management believes to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities.

Reclassifications

As previously disclosed in the Annual Report on Form 10-K for the year ended December 31, 2022, the Company adopted Accounting Standard Update 2016-02, Leases (“ASC 842”) using the modified retrospective transition method as of the first day of fiscal year 2022. The impact of the adoption of ASC 842 on previously reported interim financial statements during the year ended December 31, 2022, included the recognition of right-of-use assets and lease liabilities for operating leases. The adoption of ASC 842 also resulted in changes to certain lines within operating activities in the Condensed Consolidated Statements of Operations and Condensed Consolidated Statement of Cash Flows due to changes in operating assets and liabilities for the related accounts. These changes to previously disclosed amounts conform to the current period presentation. Additionally, certain other reclassifications were made to prior period amounts in order to conform to the current period presentation.

Restricted Cash

The following table reconciles cash, cash equivalents and restricted cash per the Condensed Consolidated Statements of Cash Flows:


	March 31,
	2023		2022
Cash and cash equivalents	$	20,872	$	464,836
Restricted cash included in Prepaid expenses and other current assets(1)	9,100		—
Restricted cash(2)	1,747		2,038
Total cash, cash equivalents and restricted cash	$	31,719	$	466,874

___________________

(1)Includes contingent compensation deposits related to the Cloudways acquisition.

(2)Includes deposits in financial institutions related to letters of credit used to secure lease agreements.

Accounts Receivable Net of Allowance for Expected Credit Losses

Accounts receivable primarily represents revenue recognized that was not invoiced at the balance sheet date and is primarily billed and collected in the following month. Trade accounts receivable are carried at the original invoiced amount less an estimated allowance for expected credit losses based on the probability of future collection. Management determines the adequacy of the allowance based on historical loss patterns, the number of days that customer invoices are past due, reasonable and supportable forecasts of future economic conditions to inform adjustments over historical loss data, and an evaluation of the potential risk of loss associated with specific accounts. When management becomes aware of circumstances that may further decrease the likelihood of collection, it records a specific allowance against amounts due, which reduces the receivable to the amount that management reasonably believes will be collected. The Company records changes in the estimate to the allowance for expected credit losses through provision for expected credit losses and reverses the allowance after the potential for recovery is considered remote.

The following table presents the changes in our allowance for expected credit losses for the period presented:


	Amount


Balance as of December 31, 2022	$	6,099
Provision for expected credit losses	3,987

Write-offs and other	(3,938)
Balance as of March 31, 2023	$	6,148

Deferred Revenue

Deferred revenue was $5,015 and $5,550 as of March 31, 2023 and December 31, 2022, respectively. Revenue recognized during the three months ended March 31, 2023 and 2022 was $2,118 and $1,735, respectively, which was included in each deferred revenue balance at the beginning of each respective period.

Restructuring Expenses

The Company records restructuring expenses when management commits to a restructuring plan, the restructuring plan identifies all significant actions, the period of time to complete the restructuring plan indicates that significant changes to the plan are not likely, and employees who are impacted have been notified.

Segment Information

The Company’s chief operating decision maker, the chief executive officer, reviews discrete financial information presented on a consolidated basis for purposes of regularly making operating decisions, allocation of resources, and assessing financial performance. Accordingly, the Company has one operating and reporting segment.

Geographical Information

Revenue, as determined based on the billing address of the Company’s customers, was as follows:


	Three Months Ended March 31,
	2023		2022
North America	38	%	38	%
Europe	29		29
Asia	23		23
Other	10		10
Total	100	%	100	%

Revenue derived from customers in the United States was 31% of total revenue for the three months ended March 31, 2023 and 2022.

Long-lived assets includes property and equipment and operating leases. The geographic locations of the Company’s long-lived assets, net, based on physical location of the assets is as follows:


	March 31, 2023		December 31, 2022
United States	$	207,448	$	206,118
Singapore	57,150		60,607
Germany	71,232		50,274
Netherlands	54,777		35,951
Other	72,866		74,721
Total	$	463,473	$	427,671

Concentration of Credit Risk

The amounts reflected in the Condensed Consolidated Balance Sheets for cash and cash equivalents, marketable securities, restricted cash, and trade accounts receivable are exposed to concentrations of credit risk. Although the Company maintains cash and cash equivalents with multiple financial institutions, the deposits, at times, may exceed federally insured limits. The Company believes that the financial institutions that hold its cash and cash equivalents are financially sound and, accordingly, minimal credit risk exists with respect to these balances.

The Company’s customer base consists of a significant number of geographically dispersed customers. No customer represented 10% or more of accounts receivable, net as of March 31, 2023 and December 31, 2022. Additionally, no customer accounted for 10% or more of total revenue during the three months ended March 31, 2023 and 2022.

Note 3. Acquisitions, Goodwill and Intangible Assets

Cloudways Ltd.

On September 1, 2022 (“Acquisition Date”), the Company acquired 100% of the outstanding equity interests of Cloudways, Ltd. (“Cloudways”) pursuant to a Share Purchase Agreement, dated as of August 19, 2022. This acquisition has been accounted for as a business combination. The results of Cloudways’ operations have been included in the accompanying condensed consolidated financial statements since the Acquisition Date. The acquisition of Cloudways, a leading managed cloud hosting and software-as-a-service provider for SMBs, strengthens the Company’s ability to simplify cloud computing by enabling customers to launch a business and scale it effortlessly. Cloudways was a customer of the Company prior to the acquisition, and the Company recognized revenue of approximately $6,000 from Cloudways from January 1, 2022 through the Acquisition Date.

The acquisition purchase consideration, in accordance with ASC 805, totaled $311,237 and was paid in cash. The Share Purchase Agreement includes customary representations and warranties and covenants of the parties. The Company contributed $42,000 to an escrow account on the Acquisition Date to support certain post-closing indemnification obligations. The final accounting has been completed with the exception of tax procedures which is still in process. The provisional tax amounts for this business combination are subject to revision until these evaluations are completed.

The following table sets forth the components and the allocation of the purchase price for the business combination and summarizes the fair values of the assets acquired and liabilities assumed at the Acquisition Date:


Total consideration:
Cash paid to Cloudways sellers	$	278,187
Cash contributed to escrow accounts	42,000
Other expenses	150
Less: Cash pre-funded from contingent compensation	(9,100)
Total consideration paid	$	311,237

Cash and cash equivalents	$	5,827
Accounts receivable	4,753
Prepayments and other current assets	547
Other long term assets	9
Identifiable intangible assets	72,000
Accounts payable	(1,820)
Accrued expenses	(957)
Deferred revenue	(1,013)
Deferred tax liabilities	(3,097)
Other current liabilities	(29,660)
Net identifiable assets acquired	46,589
Goodwill	264,648
Total fair value of net assets acquired	$	311,237

During the three months ended March 31, 2023, the Company recorded measurement period adjustments of $17,139 to decrease Goodwill and corresponding $18,589 to decrease Deferred tax liabilities, $748 to decrease Prepaid expenses and other current assets, and $702 to decrease Other assets on the Condensed Consolidated Balance Sheets. Additionally, the change to the provisional amount resulted in an increase to Income tax expense and Deferred tax liabilities of $1,589. The measurement period adjustments are a result of new information obtained about facts and circumstances that existed as of the acquisition date.

The Company amortizes its intangible assets assuming no residual value over periods in which the economic benefit of these assets is consumed (the useful life). The fair values allocated to the identifiable intangible assets and their estimated useful lives are as follows:


Intangible assets	Fair Value		Weighted Average Useful Life in Years
Trade name	$	9,500	10
Developed technology	31,500		5
Customer relationships	31,000		7
Total identifiable intangible assets	$	72,000

Cloudways’ assets and liabilities were measured at estimated fair values on September 1, 2022. Estimates of fair value represent management’s best estimate and require a complex series of judgments about future events and uncertainties. Third-party valuation specialists were engaged to assist in the valuation of these assets and liabilities. The Company used the relief from royalty method to fair value the developed technology and the trade name intangible assets, and the multi-period excess earnings method to fair value the customer relationship intangible assets. The significant assumptions used to estimate the value of the intangible assets included discount rates, projected revenue growth rates, EBITDA margins, technology obsolescence and royalty rates.

The goodwill is attributable primarily to the revenue synergies expected from combining the operations of both entities, and intangible assets that do not qualify for separate recognition, including the existing workforce acquired through the acquisition. None of the goodwill is expected to be deductible for income tax purposes.

Contingent compensation

Contingent compensation costs relate to payments due to a Cloudways seller for $38,830, of which $16,851 will be earned on September 1, 2023, and $7,326 will be earned on each of March 1, 2024, September 1, 2024 and March 1, 2025. Contingent compensation represents compensation for post-combination services because the payments are contingent on continuing employment of the Cloudways seller, with limited exceptions, at each payment date.

Unaudited Pro Forma Financial Information

The unaudited pro forma information below summarizes the combined results of the Company and Cloudways as if the Company’s acquisition of Cloudways closed on January 1, 2021 but does not necessarily reflect the combined actual results of operations of the Company and Cloudways that would have been achieved, nor are they necessarily indicative of future results of operations. The unaudited pro forma information reflects certain adjustments that were directly attributable to the acquisition of Cloudways, including additional amortization adjustments for the fair value of the assets acquired and liabilities assumed and other adjustments the Company believes are reasonable for the pro forma presentation.


	Pro Forma Three Months Ended March 31, 2022
Pro-forma revenue	$	137,404
Pro-forma net loss	23,044

Other Asset Acquisitions

In January 2023, the Company acquired certain assets of SnapShooter Limited for $2,500, which was accounted for as an asset acquisition as substantially all of the fair value of the assets acquired was concentrated in a developed technology intangible asset and will be amortized over five years.

Additionally, the Company recognized a contingent compensation liability of $1,000 that is payable one year from the date of acquisition, contingent on continuing employment and will be recognized as compensation expense over the period that it is earned.

Note 4. Marketable Securities

The following is a summary of available-for-sale marketable securities, excluding those securities classified within cash and cash equivalents, on the Condensed Consolidated Balance Sheets as of March 31, 2023 and December 31, 2022.


	March 31, 2023
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
U.S. treasury securities	$	469,846	$	134	$	(107)	$	469,873

Commercial paper	121,856		25		(73)		121,808
Total Marketable securities	$	591,702	$	159	$	(180)	$	591,681


	December 31, 2022
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
U.S. treasury securities	$	549,944	$	29	$	(849)	$	549,124
Corporate debt securities	35,293		—		(86)		35,207
Commercial paper	139,489		9		(367)		139,131
Total Marketable securities	$	724,726	$	38	$	(1,302)	$	723,462

Interest income from investments was $7,670 and $946 for the three months ended March 31, 2023 and 2022, respectively. As of March 31, 2023, all of the Company’s available-for-sale short-term investments were due within one year.

As of March 31, 2023, the Company held nine securities that were in an unrealized loss position. The Company does not intend to sell and expects that it is more likely than not that it will not be required to sell these securities until such time as the value recovers or the securities mature. Unrealized losses from fixed-income securities are primarily attributable to changes in interest rates and not credit-related factors based on the Company’s evaluation of available evidence. To determine whether a decline in value is related to credit loss, the Company evaluates, among other factors: the extent to which the fair value is less than the amortized cost basis, changes to the rating of the security by a rating agency and any adverse conditions specifically related to an issuer of a security or its industry. Management does not believe any remaining unrealized losses represent impairments based on our evaluation of available evidence. Unrealized gains and losses on marketable securities are presented net of tax.

Note 5. Fair Value Measurements

The fair value of our financial assets measured on a recurring basis is as follows:


	March 31, 2023
	Level I		Level II		Total
Cash and cash equivalents:
Cash	$	19,689	$	—	$	19,689
Money market funds	1,183		—		1,183


Total Cash and cash equivalents	$	20,872	$	—	$	20,872
Marketable securities:
U.S. treasury securities	$	469,873	$	—	$	469,873

Commercial paper	—		121,808		121,808
Total Marketable securities	$	469,873	$	121,808	$	591,681


	December 31, 2022
	Level I		Level II		Total
Cash and cash equivalents:
Cash	$	95,117	$	—	$	95,117
Money market funds	45,655		—		45,655


Total Cash and cash equivalents	$	140,772	$	—	$	140,772

Marketable securities:
U.S. treasury securities	$	549,124	$	—	$	549,124
Corporate debt securities	—		35,207		35,207
Commercial paper	—		139,131		139,131
Total Marketable securities	$	549,124	$	174,338	$	723,462

The Company classifies its highly liquid money market funds and U.S. treasury securities within Level 1 of the fair value hierarchy because they are valued based on quoted market prices in active markets. The Company classifies its commercial paper and corporate debt securities within Level 2 because they are valued using inputs other than quoted prices that are directly or indirectly observable in the market, including readily available pricing sources for the identical underlying security which may not be actively traded. The Company had no Level 3 financial assets as of March 31, 2023 and December 31, 2022.

Financial Instruments Not Recorded at Fair Value on a Recurring Basis

The Company reports financial instruments at fair value, with the exception of the 0% Convertible Senior Notes due December 1, 2026 (“Convertible Notes”). Financial instruments that are not recorded at fair value on a recurring basis are measured at fair value on a quarterly basis for disclosure purposes. The carrying values and estimated fair values of financial instruments not recorded at fair value are as follows:


	March 31, 2023				December 31, 2022
	Carrying Value		Fair Value		Carrying Value		Fair Value
Convertible Notes	$	1,472,148	$	1,175,280	$	1,470,270	$	1,134,030

The carrying value of the Convertible Notes as of March 31, 2023 and December 31, 2022 was net of unamortized debt issuance costs of $27,852 and $29,730, respectively.

The total fair value of the Convertible Notes was determined based on the closing trading price as of the last day of trading for the period. The Company considers the fair value to be a Level 2 valuation due to the limited trading activity.

Note 6. Balance Sheet Details

Property and equipment, net

Property and equipment, net consisted of the following:



	March 31, 2023		December 31, 2022
Computers and equipment	$	575,294	$	564,763
Furniture and fixtures	1,511		1,511
Leasehold improvements	6,820		6,820
Internal-use software	80,132		78,649
Property and equipment, gross	$	663,757	$	651,743

Less: accumulated amortization	$	(63,876)	$	(61,244)
Less: accumulated depreciation	(321,924)		(317,329)
Property and equipment, net	$	277,957	$	273,170

Depreciation expense on property and equipment for the three months ended March 31, 2023 and 2022 was $22,372 and $20,326, respectively.

The Company capitalized costs related to the development of computer software for internal use of $2,199 and $2,687 for the three months ended March 31, 2023 and 2022, respectively, which is included in internal-use software costs within Property and equipment, net. Amortization expense related to internal-use software for the three months ended March 31, 2023 and 2022 was $2,750 and $3,145, respectively.

During the three months ended March 31, 2023 and 2022, the Company recorded an impairment loss of $553 and $120, respectively, related to software that is no longer being used. This impairment loss is included in Cost of revenue and Research and development on the Condensed Consolidated Statements of Operations.

Note 7. Debt

Credit Facility

In February and March 2020, the Company entered into and subsequently amended a second amended and restated credit agreement with KeyBank National Association as administrative agent. In November 2021, the Company further amended such credit agreement to revise certain covenants that restricted the incurrence of indebtedness to permit the issuance of the convertible notes discussed below. In March 2022, the Company entered into a third amended and restated credit agreement (the “Credit Facility”) to, among other modifications, (i) remove the term loan component of the existing credit facility which had been previously repaid in full; (ii) increase the maximum borrowing limit of the revolving credit facility from $150,000 to $250,000; (iii) extend the maturity date; (iv) replace the existing maximum total net leverage ratio financial covenant with a maximum senior secured net leverage ratio financial covenant; (v) eliminate the financial covenant requirement of maintaining a minimum debt service coverage ratio; (vi) reduce the interest rates applicable to any principal amounts outstanding on the revolving credit facility as well as the annual commitment fee for unused amounts on the revolving credit facility; and (vii) replace the benchmark reference rate for U.S. Dollar loans from LIBOR to the forward-looking term rate based on the secured overnight financing rate plus a customary adjustment (“Adjusted Term SOFR”).

At March 31, 2023, the Company had available borrowing capacity of $250,000 on the Credit Facility. The Credit Facility will mature on the earlier of (a) March 29, 2027 and (b) 90 days before the maturity date applicable to any outstanding convertible notes issued by the Company in an aggregate principal amount equal to or greater than $100,000.

The Credit Facility is secured by a first-priority security interest in substantially all of the assets of the Company. The Credit Facility contains certain financial and operational covenants, including a maximum senior secured net leverage ratio financial covenant of 3.50x. As of March 31, 2023, the Company was in compliance with all covenants under the Credit Facility.

The per annum interest rate applicable to any principal amounts outstanding under the Credit Facility for U.S. Dollar loans will be equal to (i) Adjusted Term SOFR plus (ii) an applicable margin varying from 1.25% to 2.00%, subject to a pricing grid based on the senior secured net leverage ratio. The Credit Facility provides for an annual commitment fee varying from 0.20% to 0.30%, also subject to a pricing grid based on the senior secured net leverage ratio, applied to the average daily unused amount of the revolving credit facility. The Company incurred commitment fees on the unused balance of the Credit Facility of $125 and $95 for the three months ended March 31, 2023 and 2022, respectively.

Amortization of deferred financing fees for the three months ended March 31, 2023 and 2022 was $105 and $92, respectively.

Convertible Notes

In November 2021, the Company issued $1,500,000 aggregate principal amount of Convertible Notes in a private offering, including the exercise in full of the over-allotment option granted to the initial purchasers of $200,000. The Convertible Notes are senior unsecured obligations of the Company and do not bear interest, and the principal amount of the Convertible Notes does not accrete. The Convertible Notes will mature on December 1, 2026 unless earlier converted, redeemed, or repurchased. The net proceeds from this offering were $1,461,795 after deducting underwriting fees, expenses and commissions. Amortization of deferred financing fees for the three months ended March 31, 2023 and 2022 was $1,879 and $1,868, respectively.

Each $1 of principal of the Convertible Notes will initially be convertible into 5.6018 shares of the Company’s common stock, which is equivalent to an initial conversion price of approximately $178.51 per share, subject to adjustment as set forth in the indenture governing the Convertible Notes. Holders of these Convertible Notes may convert their Convertible Notes at their option at any time prior to the close of the business day immediately preceding June 1, 2026, only under the following circumstances:

1.during any calendar quarter commencing after the calendar quarter ending on March 31, 2022, if the last reported sale price of the Company’s common stock exceeds 130% of the conversion price for each of at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter on each applicable trading day;

2.during the five business day period after any ten consecutive trading day period (such ten consecutive trading day period, the “measurement period”) in which the trading price of the Convertible Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price per share of the common stock on such trading day and the conversion rate on such trading day;

3.if the Company calls such Convertible Notes for redemption, at any time prior to the close of business on the business day immediately preceding the redemption date; and

4.upon the occurrence of specified corporate events or distributions on the common stock.

As none of the above circumstances have occurred as of March 31, 2023, the Convertible Notes were not convertible for the fiscal quarter ending March 31, 2023.

On or after June 1, 2026 until the close of business on the scheduled trading day immediately preceding the maturity date, holders may convert all or any portion of their Convertible Notes at the option of the holder regardless of the foregoing circumstances.

Upon conversion of the Convertible Notes, the Company will pay or deliver, as the case may be, cash, shares of common stock or a combination of cash and shares of common stock, at the Company’s election.

The Company may redeem for cash all or any portion of the Convertible Notes, at its option, on or after December 2, 2024 and on or before the 25th scheduled trading day immediately before the maturity date, if the last reported sale price per share of the Company’s common stock exceeds 130% of the conversion price then in effect on each

of at least 20 trading days (whether or not consecutive) during the 30 consecutive trading days ending on, and including, the trading day immediately preceding the date on which the Company provides a notice of redemption at a redemption price equal to 100% of the principal amount of the Convertible Notes to be redeemed, plus any accrued and unpaid special interest and additional interest, if any, to, but excluding, the redemption date.

Upon the occurrence of a fundamental change (as defined in the indenture governing the Convertible Notes), subject to certain conditions, holders may require the Company to repurchase all or a portion of the Convertible Notes for cash at a price equal to 100% of the principal amount of the Convertible Notes to be repurchased, plus any accrued and unpaid special interest and additional interest, if any, to, but excluding, the fundamental change repurchase date.

Note 8. Commitments and Contingencies

Purchase Commitments

As of March 31, 2023, the Company had long-term commitments for bandwidth usage with various networks and internet service providers and entered into purchase orders with various vendors. The Company’s purchase commitments have not materially changed since December 31, 2022.

Letters of Credit

In conjunction with the execution of certain office space operating leases, a letter of credit in the amount of $1,747 and $1,935 was issued and outstanding as of March 31, 2023 and December 31, 2022, respectively. No draws have been made under the letter of credit. These funds are included as Restricted cash on the Condensed Consolidated Balance Sheets as they are related to long-term operating leases and are included in beginning and ending Cash, cash equivalents and restricted cash in the Condensed Consolidated Statements of Cash Flows. The letter of credit was reduced on an annual basis until the end of 2022 and, beginning January 1, 2023, the deposit required is the minimum threshold required until the lease expiration.

Legal Proceedings

The Company may be involved in various legal proceedings and litigation arising in the ordinary course of business. While it is not feasible to predict or determine the ultimate disposition of any such litigation matters, the Company believes that any such legal proceedings will not have a material adverse effect on its condensed consolidated financial position, results of operations, or liquidity.

Note 9. Stockholders’ Equity

Common Stock

The Company’s amended and restated certificate of incorporation authorizes the issuance of common and preferred stock. Holders of common stock are entitled to one vote per share.

As of March 31, 2023 and December 31, 2022, the Company was authorized to issue 750,000,000 shares of common stock with a par value of $0.000025 per share.

Preferred Stock

In connection with the IPO, the Company’s amended and restated certificate of incorporation became effective, which authorized the issuance of 10,000,000 shares of preferred stock with a par value of $0.000025 per share with rights and preferences, including voting rights, designated from time to time by the Company’s Board of Directors. No shares of preferred stock were issued or outstanding as of March 31, 2023 or December 31, 2022.

Share Buyback Program

On February 14, 2023, the Company’s Board of Directors approved the repurchase of up to an aggregate of $500,000 of the Company’s common stock (the “2023 Share Buyback Program”). Pursuant to the 2023 Share Buyback Program, repurchases of the Company’s common stock 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 SEC and other applicable legal requirements. The 2023 Share Buyback Program is authorized throughout fiscal year 2023; however, the Company is not obligated to acquire any particular amount of common stock and the 2023 Share Buyback Program may be extended, modified, suspended or discontinued at any time at the Company’s discretion.

During the three months ended March 31, 2023, the Company repurchased and retired 7,759,973 shares of common stock pursuant to the 2023 Share Buyback Program for an aggregate purchase price of $265,901, which excludes the 1%

excise tax of $2,659 imposed under the Inflation Reduction Act. All purchased shares were retired and are reflected as a reduction of Common stock for the par value of shares, with the excess applied to Additional paid-in capital. As of March 31, 2023, the dollar value of shares that remained available to be repurchased by the Company under the 2023 Share Buyback Program was $234,099.

Note 10. Stock-Based Compensation

Equity Incentive Plan

In March 2021, the Company’s Board of Directors adopted, and the stockholders approved, the 2021 Equity Incentive Plan. The 2021 Equity Incentive Plan is a successor to and continuation of the 2013 Stock Plan. The 2021 Equity Incentive Plan became effective on the date of the IPO with no further grants being made under the 2013 Stock Plan, however, awards outstanding under the 2013 Stock Plan will continue to be governed by their existing terms. The 2021 Equity Incentive Plan provides for the grant of incentive stock options, nonstatutory stock options, stock appreciation rights, restricted stock awards, restricted stock units awards (“RSUs”), performance awards, and other awards to employees, directors, and consultants. Shares issued pursuant to the exercise of these awards are transferable by the holder.

In February 2023, the Company initiated a restructuring plan to adjust its cost structure and accelerate its timeline to achieve greater than 20% adjusted free cash flow margins (the “Restructuring Plan”), which includes both the elimination of positions across the Company as well as the shifting of additional positions across a broader geographical footprint. In connection with the Restructuring Plan, the Company recorded $3,937 of stock-based compensation related to the accelerated vesting of certain restricted stock, performance-based restricted stock units (“PRSUs”), and RSU awards during the three months ended March 31, 2023. Refer to Note 13, Restructuring, for further details of the Restructuring Plan.

Stock Options

Stock options granted have a maximum term of ten years from the grant date, are exercisable upon vesting and vest over a period of four years. Stock option activity for the three months ended March 31, 2023 was as follows:


	Number of Options Outstanding	Weighted-Average Exercise Price		Weighted-Average Remaining Life in Years	Aggregate Intrinsic Value
Outstanding at January 1, 2023	10,153,916	$	7.23	6.16	$	185,188

Exercised	(814,602)	6.81
Forfeited or cancelled	(205,644)	11.37
Outstanding at March 31, 2023	9,133,670	7.18		5.54	292,231
Vested and exercisable at March 31, 2023	7,314,438	6.49		5.34	239,011
Vested and unvested expected to vest at March 31, 2023	8,842,139	$	7.02	5.50	$	284,271

The aggregate intrinsic value represents the difference between the fair value of common stock and the exercise price of outstanding in-the-money options. The aggregate intrinsic value of exercised options for the three months ended March 31, 2023 and 2022 was $21,037 and $54,392, respectively. The tax benefit from stock options exercised was $1,129 and $5,758 for the three months ended March 31, 2023 and 2022, respectively.

No options were granted during the three months ended March 31, 2023 and 2022. The aggregate estimated fair value of stock options granted to participants that vested during the three months ended March 31, 2023 and 2022 was $3,836 and $4,698, respectively.

As of March 31, 2023, there was $12,600 of unrecognized stock-based compensation related to outstanding stock options granted that is expected to be recognized over a weighted-average period of 1.35 years.

RSUs

RSUs granted typically vest over four years. RSU activity for the three months ended March 31, 2023 was as follows:


	Shares	Weighted-Average Fair Value
Unvested balance at January 1, 2023	4,802,435	$	44.25
Granted	3,713,808	33.97
Vested	(352,763)	48.46
Forfeited or cancelled	(912,505)	46.69
Unvested balance at March 31, 2023	7,250,975	38.47
Vested and expected to vest at March 31, 2023	4,596,651	$	38.67

Forfeitures and cancellations of 912,505 shares during the three months ended March 31, 2023 were primarily due to the Restructuring Program.

As of March 31, 2023, there was $165,227 of unrecognized stock-based compensation related to outstanding RSUs granted that is expected to be recognized over a weighted-average period of 3.15 years.

PRSUs

The Company issued PRSUs which will vest based on the achievement of each award’s established performance targets. PRSU activity for the three months ended March 31, 2023 was as follows:


	Shares	Weighted-Average Fair Value
Unvested balance at January 1, 2023	666,122	$	57.41
Granted	1,118,528	31.75
Vested	(21,947)	41.24
Forfeited or cancelled	(250,596)	34.25
Adjusted by performance factor	(436,387)	60.72
Unvested balance at March 31, 2023	1,075,720	$	35.08

At the end of each reporting period, the Company will adjust compensation expense for the PRSUs based on its best estimate of attainment of specified performance metrics. The cumulative effect on current and prior periods of a change in the estimated number of PRSUs that are expected to be earned during the performance period will be recognized as an adjustment to earnings in the period of the revision. Compensation cost in connection with the probable number of shares that will vest will be recognized using the accelerated attribution method.

LTIP PRSUs

The Company grants Long Term Incentive Plan (“LTIP”) PRSUs to certain executives of the Company during the first fiscal quarter. A percentage of the LTIP PRSUs will become eligible to vest based on the Company’s financial performance level at the end of each fiscal year. The financial performance level is determined as the percentage equal to the sum of the revenue growth percentage and profitability percentage.

The number of LTIP PRSUs received will depend on the achievement of financial metrics relative to the approved performance targets. Depending on the actual financial metrics achieved relative to the target financial metrics throughout the defined performance period of the award, the number of LTIP PRSUs that vest could range from 0% to 200% of the target amount and are subject to the Board of Directors’ approval of the level of achievement against the approved performance targets.

Assuming the minimum performance target is achieved, one-third of the aggregate number of the LTIP PRSUs shall vest on the later of (i) March 1 of the year after grant or (ii) two trading days following the public release of the Company’s financial results, and the remainder shall vest in eight equal quarterly installments subject, in each case, to the individual’s continuous service through the applicable vesting date.

On February 24, 2022, the financial performance of the LTIP PRSUs granted in 2021 was determined to be achieved at 155% of the target amount. This resulted in a performance factor reduction of 89,769 shares from the original maximum shares achievable of 398,949.

On February 16, 2023, it was determined that the financial performance of the LTIP PRSUs granted in 2022 was not achieved. This resulted in a performance factor reduction of 436,387 shares from the original maximum shares achievable of 436,387.

On March 1, 2023, the Company granted an LTIP PRSU award (the “2023 LTIP PRSU”) with a maximum shares achievable of 1,118,528, subject to the above actual financial metrics achieved relative to the target financial metrics for fiscal year 2023. As of March 31, 2023, the Company determined that it was probable that the 2023 LTIP PRSUs granted with respect to the Company’s 2023 financial performance would vest.

There is $14,429 of unrecognized stock-based compensation that is expected to be recognized over a weighted-average period of 1.52 years in regards to the LTIP PRSUs.

Other PRSUs

In addition to the above awards, certain other PRSUs have been awarded subject to other various performance measures including the achievement of revenue targets.

As part of the Restructuring Plan, 20,000 PRSU shares were deemed achieved and $1,262 of stock-based compensation was included in Restructuring and other charges in the Condensed Consolidated Statements of Operations for the three months ended March 31, 2023.

MRSUs

On July 27, 2021, the Company’s Board of Directors granted a market-based restricted stock unit (“MRSU”) award for 3,000,000 shares of the Company’s common stock to the Company’s Chief Executive Officer, Yancey Spruill, which will vest upon the satisfaction of certain service conditions and the achievement of certain Company stock price goals, as described below.

The MRSU, which has a grant date fair value of $75,300 derived by using a discrete model based on multiple stock price-paths developed through the use of a Monte Carlo simulation, is divided into five tranches that will be earned based on the achievement of stock price goals, measured based on the average of the Company’s closing stock price over a consecutive ninety (90) trading day period during the performance period as set forth in the table below.


Tranche	Company Stock Price Target	Number of Eligible MRSUs
1	$93.50	475,000
2	$140.00	575,000
3	$187.00	650,000
4	$233.50	650,000
5	$280.50	650,000

To the extent earned based on the stock price targets set forth above, the MRSU will vest over a seven-year period beginning on the date of grant in annual amounts equal to 14%, 14%, 14%, 14%, 14%, 15% and 15%, respectively, on each anniversary of the date of grant.

MRSU activity for the three months ended March 31, 2023 was as follows:


	Shares	Weighted-Average Fair Value
Unvested balance at January 1, 2023	3,000,000	$	25.12
Granted	—	—


Unvested balance at March 31, 2023	3,000,000	$	25.12

As of March 31, 2023, there was $46,142 of unrecognized stock-based compensation related to the MRSUs granted that is expected to be recognized over a weighted-average period of 3.37 years.

ESPP

In March 2021, the Company’s Board of Directors adopted, and the stockholders approved, the 2021 Employee Stock Purchase Plan (“ESPP”). Eligible employees enroll in the offering period at the start of each purchase period, whereby they may purchase a number of shares at a price per share equal to 85% of the lesser of (1) the stock price at the employee’s first participation in the offering period or (2) the fair market value of the Company’s common stock on the purchase date. After the end of an offering period, a new offering will automatically begin on the date that immediately follows the conclusion of the preceding offering.

2022 Offerings

A new offering period commenced on May 23, 2022 and was scheduled to consist of two purchase periods, with purchase dates of November 18, 2022 and May 19, 2023 (the “First 2022 Offering”). In connection with the purchase period that ended on November 18, 2022, there were 111,851 shares of common stock, net of shares withheld for taxes, purchased by employees at a price of $24.03. Under the terms of the ESPP, since the Company’s stock price on the first day of the purchase period beginning on November 21, 2022 was lower than the stock price at the beginning of the First 2022 Offering, the First 2022 Offering terminated and a new 12 month offering automatically commenced on November 21, 2022, with scheduled purchase dates on May 19, 2023 and November 20, 2023 (the “Second 2022 Offering”).

The termination of the First 2022 Offering and commencement of the Second 2022 Offering was accounted for as a modification, which resulted in an incremental stock-based compensation of $2,069, which will be recognized over the remaining term of Second 2022 Offering.

During the three months ended March 31, 2023 and 2022, the Company recorded stock-based compensation associated with the ESPP of $625 and $1,361, respectively. As of March 31, 2023, $2,292 has been withheld on behalf of employees.

Restricted Shares

In connection with the closing of the Nimbella acquisition on September 1, 2021, the Company issued 200,204 shares of restricted stock for $63.11 per share for a total value of $12,635 to the founders of Nimbella. These shares vest equally on March 1, 2023 and September 1, 2024 and are expensed on a straight line basis over 36 months. The restricted stock is subject to forfeiture and dependent upon each founder’s continuous service on the vesting date.

As part of the Restructuring Plan, 33,963 shares of restricted stock that were issued to a former founder were vested upon the employee’s departure during the first quarter of 2023 and $2,147 of stock-based compensation was included in Restructuring and other charges in the Condensed Consolidated Statements of Operations for the three months ended March 31, 2023.

Total stock-based compensation for the three months ended March 31, 2023 and 2022 was $934 and $1,053, respectively. As of March 31, 2023, there was $3,946 of unrecognized stock-based compensation related to outstanding restricted shares granted that is expected to be recognized over a weighted-average period of 1.44 years.

Stock-Based Compensation

Stock-based compensation was included in the Condensed Consolidated Statements of Operations as follows:


	Three Months Ended March 31,
	2023		2022
Cost of revenue	$	392	$	432
Research and development	9,590		9,720
Sales and marketing	3,332		3,346
General and administrative	14,280		12,483
Restructuring and other charges	3,937		—
Total stock-based compensation	$	31,531	$	25,981
Excess income tax benefit related to stock-based compensation	$	1,580	$	9,418

Note 11. Net Loss per Share Attributable to Common Stockholders

The following table presents the calculation of basic and diluted net loss per share:


	Three Months Ended March 31,
	2023		2022
Numerator:
Net loss attributable to common stockholders	$	(34,937)	$	(18,568)
Denominator:
Weighted average shares used to compute net loss per share, basic and diluted	95,565		106,980
Net loss per share attributable to common stockholders, basic and diluted	$	(0.37)	$	(0.17)

Potentially dilutive securities that were not included in the diluted per share calculations because they would be anti-dilutive were as follows:


	As of March 31,
	2023	2022

Stock Options	9,133,670	11,234,682
RSUs	7,250,975	3,937,760

PRSUs	1,075,720	792,011
MRSU	3,000,000	3,000,000
ESPP	404,536	125,524
Convertible Notes	8,402,700	8,402,700
Total	29,267,601	27,492,677

Note 12. Income Taxes

The computation of the provision for or benefit from income taxes for interim periods is determined by applying the estimated annual effective tax rate to year-to-date income (loss) before tax and adjusting for discrete tax items recorded in the period, if any.

For the three months ended March 31, 2023, the Company recorded a tax expense of $7,608. The effective tax rate for the three months ended March 31, 2023 was (27.8)%. The effective tax rate differs from the statutory rate primarily as a result of not recognizing deferred tax assets for U.S. losses due to a full valuation allowance against the U.S. deferred tax assets, excess tax benefits from stock-based compensation, and the mix of income in foreign jurisdictions.

For the three months ended March 31, 2022, the Company recorded a tax expense of $3,338. The effective tax rate for the three months ended March 31, 2022 was (21.9)%. The effective tax rate differs from the statutory rate primarily as a result of not recognizing deferred tax assets for U.S. losses due to a full valuation allowance against the U.S. deferred tax assets, and excess tax benefits from stock-based compensation.

The provision for income taxes consists primarily of income taxes related to international jurisdictions in which the Company conducts business. Based on the available supporting evidence, including the amount and timing of future taxable income, the Company has concluded that it is more likely than not that a significant portion of the deferred tax assets will not be realized. As such, the Company maintains a full valuation allowance on its U.S. deferred tax assets.

For both the three months ended March 31, 2023 and 2022, uncertain tax positions recorded by the Company resulted in an expense of $83, respectively. To the extent the remaining uncertain tax positions are ultimately recognized, the Company’s effective tax rate may be impacted in future periods. The Company’s policy is to recognize interest and penalties related to uncertain tax positions in income tax expense.

Note 13. Restructuring

In February 2023, the Company initiated the Restructuring Plan to adjust its cost structure and accelerate its timeline to achieve greater than 20% adjusted free cash flow margins, which includes both the elimination of positions across the Company as well as the shifting of additional positions across a broader geographical footprint. The aggregate restructuring charges in connection with the Restructuring Plan is approximately $24,000, which is expected to be substantially complete by the end of the third quarter of 2023.

The Company recorded Restructuring and other charges of $20,869 for the three months ended March 31, 2023, which consisted of $16,932 primarily related to one-time severance and benefit payments, as well as $3,937 of stock-based compensation related to vesting of certain equity awards.

The following table summarizes the Company’s restructuring liability that is included in Other current liabilities in the Condensed Consolidated Balance Sheets:


	Severance and Other Employee Costs
Balance as of December 31, 2022	$	—
Restructuring charges	16,932
Cash payments	(11,261)
Balance as of March 31, 2023	$	5,671

Note 14. Subsequent Events

From April 1, 2023 through May 5, 2023, the Company repurchased and retired 1,646,270 shares of common stock pursuant to the 2023 Share Buyback Program for an aggregate purchase price of $59,949, which excludes the 1% excise tax of $599 imposed under the Inflation Reduction Act.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and our audited consolidated financial statements and the related notes and the discussion under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2022. This discussion, particularly information with respect to our future results of operations or financial condition, business strategy, plans and objectives of management for future operations, includes forward-looking statements that involve risks and uncertainties as described under the heading “Special Note Regarding Forward-Looking Statements” in this Quarterly Report on Form 10-Q.

Overview

DigitalOcean is a leading cloud computing platform offering on-demand infrastructure and platform tools for startups and small and medium-sized businesses (SMBs). We were founded with the guiding principle that the transformative benefits of the cloud should be easy to leverage, broadly accessible, reliable and affordable. Our platform simplifies cloud computing, enabling our customers to rapidly accelerate innovation and increase their productivity and agility.

The lifecycle of a customer typically begins with users coming to our platform to explore a new technology or test an idea. Thousands of users come to DigitalOcean every month, paying a small amount to learn and to complete their discrete tasks. In many cases, these early users do not intend to remain on our platform beyond their initial testing. We refer to these users that spend less than $50 per month and utilize our platform for three months or less as “Testers”. Given their short time on our platform and their relatively small individual and aggregate spend, we do not consider Testers to be a meaningful part of our customer base. Once a user has remained on our platform for longer than three months, or spends greater than $50 per month, we consider them to be active and ongoing customers that have the intention to remain on our platform and to potentially scale their utilization of our products. We divide this customer population into the following three categories:

•Learners: users that both (i) spend less than or equal to $50 for the month-end period and (ii) have been on our platform for more than three months.

•Builders: users that spend greater than $50 and less than or equal to $500 for the month-end period.

•Scalers: users that spend greater than $500 for the month-end period.

As of March 31, 2023, we had approximately 614,000 Learners, Builders and Scalers using our platform to build, deploy and scale applications. While the number of Testers on our platform in any month has averaged approximately 60,000, the exact number of Testers at any point in time varies and revenue from Testers collectively represents less than

$1 million in revenue in a single month. The Company views Learners, Builders and Scalers as the most appropriate measure of our customer population, and Testers have therefore been excluded from the total customer population count.

Our users include software engineers, researchers, data scientists, system administrators, students and hobbyists. Our customers use our platform across numerous industry verticals and for a wide range of use cases, such as web and mobile applications, website hosting, e-commerce, media and gaming, personal web projects, and managed services, among many others. We believe that our focus on simplicity, community, open source and customer support are the four key differentiators of our business, driving a broad range of customers around the world to build their applications on our platform.

We offer mission-critical solutions across Infrastructure-as-a-Service (IaaS), including our Droplet virtual machines, storage and networking offerings; Platform-as-a-Service (PaaS), including our Managed Database and Managed Kubernetes offerings; and Software-as-a-Service (SaaS), including our Managed Hosting and Marketplace offerings. Improving the developer experience and increasing productivity are core to our mission. Our cloud platform was designed with simplicity in mind to ensure that startups and SMBs can spend less time managing their infrastructure and more time building innovative applications that drive business growth. Simplicity guides how we design and enhance our easy-to-use-interface, the core capabilities we offer our customers and our approach to predictable and transparent pricing for our solutions. In just minutes, developers can set up thousands of virtual machines, secure their projects, enable performance monitoring and scale up and down as needed.

We generate revenue from the usage of our cloud computing platform by our customers, including but not limited to compute, storage and networking services. We recognize revenue based on the customer utilization of these resources. Our pricing is consumption-based and billed monthly in arrears, making it easy for our customers to track usage on an ongoing basis and optimize their deployments.

We have historically generated almost all of our revenue from our efficient self-service customer acquisition model, which we complement with a targeted sales force focused on inside sales, outside sales and partnership opportunities to drive revenue growth. Our model enables customers to get started on our platform very quickly and without the need for assistance. We focus heavily on enabling a self-service, low-friction model that makes it easy for users to try, adopt and use our products. For the three months ended March 31, 2023 and 2022, our sales and marketing expense was approximately 11% and 15% of our revenue, respectively. The efficiency of our go-to-market model and our focus on the needs of the SMB market has enabled us to drive organic growth and establish a truly global customer base across a broad range of industries.

Our customers are spread across over 190 countries and around two-thirds of our revenue has historically come from customers located outside the United States. For the three months ended March 31, 2023, 38% of our revenue was generated from North America, 29% from Europe, 23% from Asia and 10% from the rest of the world.

Our average revenue per customer (consisting of the aggregate revenue and customer counts for our Learners, Builders and Scalers, but excluding revenue and user counts for Testers), or ARPU, has increased significantly from $76.45 in the quarter ended March 31, 2022 to $88.35 in the quarter ended March 31, 2023. We had no material customer concentration as our top 25 customers made up approximately 7% and 11% of our revenue in the three months ended March 31, 2023 and 2022, respectively. We have experienced strong and predictable growth in recent periods. Our annual run-rate revenue, or ARR, as of March 31, 2023 was $669 million up from $524 million as of March 31, 2022. ARR as of the end of each month represents total revenue for that month multiplied by 12.

Growing our Builders and Scalers (which we collectively refer to as our higher spend customers) is a critical focus for us, and we have successfully increased the number of these higher spend customers and their percentage of our total revenue. We had approximately 15,000 Scalers as of March 31, 2023, up from approximately 11,000 as of March 31, 2022. We had approximately 131,000 Builders as of March 31, 2023, up from approximately 91,000 as of March 31, 2022. Revenue from Builders and Scalers increased 42% and 27%, respectively, for the three months ended March 31, 2023 and 2022. Revenue from higher spend customers as a percentage of total revenue was 86% in the quarter ended March 31, 2023 and 84% in the quarter ended March 31, 2022.

Macroeconomic Conditions

Unfavorable conditions in the economy both in the United States and abroad, including conditions resulting from changes in gross domestic product growth, labor shortages, supply chain disruptions, inflationary pressures, rising interest rates, financial and credit market fluctuations, volatility in the capital markets, liquidity concerns at, and failures of, banks and other financial institutions, international trade relations, political turmoil, natural catastrophes, outbreaks of contagious

diseases, warfare and terrorist attacks on the United States, Europe or elsewhere, including military actions affecting Russia, Ukraine or elsewhere, could cause a decrease in business investments on information technology and negatively affect the growth of our business and our results of operations.

2023 Restructuring

On January 27, 2023, our Board of Directors approved a restructuring plan to adjust our cost structure and accelerate our timeline to achieve greater than 20% adjusted free cash flow margins. The restructuring plan includes both the elimination of positions across the company as well as the shifting of additional positions across a broader geographical footprint over the next several months, and is expected to be substantially complete by the end of the third quarter of 2023. See Note 13, Restructuring, in our Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for further information regarding these commitments.

Key Factors Affecting Our Performance

Increasing Importance of Cloud Computing and Developers

Our future success depends in large part on the continuing adoption of cloud computing, proliferation of cloud-native start-ups and SMBs and the increasing importance of developers, all of which are driving the adoption of our developer cloud platform. We believe our market opportunity is large and that these factors will continue to drive our growth.

Increasing Usage by Our Existing Customers

Our customer base represents a significant opportunity for further consumption of our services. We are highly focused on gaining a better understanding of the needs and growth plans of our existing customers. This deeper relationship with our customers will help us identify opportunities to educate our customer base on ways to utilize the platform more effectively for their individual use cases, as well as provide a feedback loop to inform our product roadmap. We expect to continue to increase our revenue from existing customers through the introduction of new products and features tailored to our customer base in addition to expanded customer outreach, focused on larger customers and specific use cases.

Growing Our Base of Higher Spend Customers

We believe there is a substantial opportunity to further expand our customer base to attract more businesses that can scale on our platform. We are investing in strategies that we believe will attract higher spend customers, including expansion of our sales team, and new marketing initiatives that further optimize our self-service revenue funnel to help customers expand their usage. In addition, our Cloudways acquisition added a significant number of higher spend customers to our platform due to the higher price point of its Managed Hosting offering.

Enhancing Our Platform and Product Offerings

We believe the market opportunity for serving startups and SMBs is very large and goes far beyond providing the core IaaS services of compute, storage and networking. We have a history of, and will continue to invest significantly in, developing and delivering innovative products, features and functionality targeted at our core customer base. In addition, we may pursue both strategic partnerships and acquisitions that we believe will be complementary to our business, accelerate customer acquisition, increase usage of our platform and/or expand our product offerings in our core markets. Our results of operations may fluctuate as we make these investments to drive usage and take advantage of our expansive market opportunity.

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. We are not aware of any uniform standards for calculating these key metrics, and other companies may not calculate similarly titled metrics in a consistent manner, which may hinder comparability. The table below includes the impact of our Cloudways acquisition with respect to the metrics disclosed for the three months ended March 31, 2023.


	Three Months Ended March 31,
	2023			2022

Learners	467,600			444,320
Builders	131,109			91,425
Scalers	15,398			11,055
ARPU	$	88.35		$	76.45
ARR (in millions)	$	669		$	524
Net dollar retention rate	107		%	117		%

Learners, Builders & Scalers

While we believe the total number of these customers is an important indicator of the growth of our business and future revenue opportunity, the trends relating to our Builders and Scalers is of particular importance to us as these customers represent a significant majority of our revenue and revenue growth, and they are representative of the SMB customers that grow on our platform and use multiple products.

ARPU

We believe that our average revenue per customer, which we refer to as ARPU, is a strong indication of our ability to land new customers with higher spending levels and expand usage of our platform by our existing customers. We calculate ARPU on a monthly basis as our total revenue for Learners, Builders and Scalers in that period divided by the total number of Learner, Builder and Scaler 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

Given the renewable nature of our business, we view annual run-rate revenue as an important indicator of our current progress towards meeting our revenue targets and projected growth rate going forward. We calculate ARR at a point in time by multiplying the latest monthly period’s revenue by 12. For our ARR calculations, we include the total revenue from all customers, including Testers, Learners, Builders and Scalers.

Net Dollar Retention Rate

Our ability to maintain long-term revenue growth and achieve profitability is dependent on our ability to retain and grow revenue from our existing customers. We have a history of retaining customers for multiple years and in many cases increasing their spend with us over time. To help us measure our performance in this area, we monitor our 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 our net dollar retention rate calculations, we include the total revenue from all customers, including Testers, Learners, Builders and Scalers. 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.

Components of Results of Operations

Revenue

We offer mission-critical solutions across IaaS, including our Droplet virtual machines, storage and networking offerings; PaaS, including our Managed Database and Managed Kubernetes offerings; and SaaS, including our Managed Hosting and Marketplace offerings. We recognize revenue based on the customer utilization of these resources. Customer contracts are primarily month-to-month and generally do not include any minimum guaranteed quantities or fees. Fees are billed monthly, and payment is typically due upon invoicing. Revenue is recognized net of allowances for credits and any taxes collected from customers, which are subsequently remitted to governmental authorities. We may offer sales incentives in the form of promotional and referral credits and grant credits to encourage customers to use our services. These types of promotional and referral credits typically expire in two months or less if not used. For credits earned with a purchase, they are recorded as contract liabilities when earned and recognized at the earlier of redemption or expiration. The majority of credits are redeemed in the month they are earned.

Cost of Revenue

Cost of revenue consists primarily of fees related to operating in third-party co-location facilities, personnel expenses for those directly supporting our data centers and non-personnel costs, including amortization of capitalized internal-use software development costs and depreciation of our data center equipment. Third-party co-location facility costs include data center rental fees, power costs, maintenance fees, network and bandwidth. Personnel expenses include salaries, bonuses, benefits, and stock-based compensation.

We intend to continue to invest additional resources in our infrastructure to support our product portfolio and scalability of our customer base. The level, timing and relative investment in our infrastructure could affect our cost of revenue in the future.

Operating Expenses

Research and Development Expenses

Research and development expenses consist primarily of personnel costs including salaries, bonuses, benefits and stock-based compensation. Research and development expenses also include amortization of capitalized internal-use software development costs for research and development activities, which are amortized over three years, and professional services, as well as costs related to our efforts to add new features to our existing offerings, develop new offerings, and ensure the security, performance, and reliability of our global cloud platform. We expect research and development expenses to increase in absolute dollars as we continue to invest in our platform and product offerings.

Sales and Marketing Expenses

Sales and marketing expenses consist primarily of personnel costs of our sales, marketing and customer support employees including salaries, bonuses, benefits and stock-based compensation. Sales and marketing expenses also include costs for marketing programs, commissions, advertising and professional service fees. We expect sales and marketing expenses to continue to increase in absolute dollars as we enhance our product offerings and implement new marketing strategies.

General and Administrative Expenses

General and administrative expenses consist primarily of personnel costs of our human resources, legal, finance, and other administrative functions including salaries, bonuses, benefits, and stock-based compensation. General and administrative expenses also include provision for expected credit losses, software, payment processing fees, business insurance, depreciation and amortization expenses, rent and facilities costs, impairment of long-lived assets, and other administrative costs. We also expect general and administrative expenses to increase in absolute dollars as we continue to grow our business.

Restructuring and other charges

Restructuring and other charges consist primarily of personnel costs, such as notice period, employee severance payments and termination benefits, as well as stock-based compensation related to vesting of certain equity awards.

Other (Income) Expense

Other (income) expense consists primarily of accretion/amortization of premium/discounts and interest income from our available-for-sale investments, interest expense on our convertible notes and existing credit facility, loss on extinguishment of debt, and gains or losses on foreign currency exchange.

Income Tax Expense

Income tax expense consists primarily of income taxes in certain foreign and state jurisdictions in which we conduct business. We maintain a full valuation allowance on our U.S. federal and state deferred tax assets as we have concluded that it is more likely than not that the deferred assets will not be realized.

Results of Operations

The following table sets forth our results of operations for the periods presented:


	Three Months Ended
	March 31,
	2023		2022

	(in thousands)
Revenue	$	165,134	$	127,327
Cost of revenue(1)	71,879		47,202
Gross profit	93,255		80,125
Operating expenses:
Research and development(1)	38,272		37,241
Sales and marketing(1)	17,709		19,044
General and administrative(1)	48,939		37,424
Restructuring and other charges(1)	20,869		—
Total operating expenses	125,789		93,709

Loss from operations	(32,534)		(13,584)
Other (income) expense	(5,205)		1,646
Loss before income taxes	(27,329)		(15,230)
Income tax expense	7,608		3,338
Net loss attributable to common stockholders	$	(34,937)	$	(18,568)

___________________

(1) Includes stock-based compensation as follows:


	Three Months Ended
	March 31,
	2023		2022

	(in thousands)
Cost of revenue	$	392	$	432
Research and development	9,590		9,720
Sales and marketing	3,332		3,346
General and administrative	14,280		12,483
Restructuring and other charges	3,937		—
Total stock-based compensation	$	31,531	$	25,981

The following table sets forth our results of operations as a percentage of revenue for the periods presented:


	Three Months Ended
	March 31,
	2023		2022
Revenue	100	%	100	%
Cost of revenue	44		37
Gross profit	56		63
Operating expenses:
Research and development	23		29
Sales and marketing	11		15
General and administrative	30		29
Restructuring and other charges	13		—
Total operating expenses	77		73

Loss from operations	(21)		(10)
Other (income) expense	(3)		1
Loss before income taxes	(18)		(11)
Income tax expense	5		3
Net loss attributable to common stockholders*	(21)	%	(15)	%

* Does not foot due to rounding

Comparison of the Three Months Ended March 31, 2023 and 2022

Revenue


	Three Months Ended March 31,
	2023		2022		$ Change		% Change

	(in thousands)
Revenue	$	165,134	$	127,327	$	37,807	30	%

Revenue increased $37.8 million, or 30%, for the three months ended March 31, 2023 compared to the three months ended March 31, 2022, primarily due to revenue from the Cloudways acquisition, a 16% increase in ARPU to $88.35 from $76.45, and an increase of 43% in the number of customers who spend more than $50 per month. The increase in ARPU was primarily driven by continued adoption of our products by our customers leading to higher average usage on our platform.

Cost of Revenue


	Three Months Ended March 31,
	2023		2022		$ Change		% Change

	(in thousands)
Cost of revenue	$	71,879	$	47,202	$	24,677	52	%

Cost of revenue increased $24.7 million, or 52%, for the three months ended March 31, 2023 compared to the three months ended March 31, 2022, primarily due to operating and variable lease costs relating to new co-location facilities, expansion of existing co-location facilities, and to a lesser extent higher depreciation, to support the growth in our business. Gross profit decreased to 56% for the three months ended March 31, 2023 from 63% for the three months ended March 31, 2022, primarily due to an increase in colocation and depreciation costs as a percentage of revenue.

Operating Expenses


	Three Months Ended March 31,
	2023		2022		$ Change		% Change

	(in thousands)
Research and development	$	38,272	$	37,241	$	1,031	3	%
Sales and marketing	17,709		19,044		(1,335)		(7)	%
General and administrative	48,939		37,424		11,515		31	%
Restructuring and other charges	20,869		—		20,869		100	%
Total operating expenses	$	125,789	$	93,709	$	32,080	34	%

Research and development expenses increased $1.0 million, or 3%, for the three months ended March 31, 2023 compared to the three months ended March 31, 2022, primarily due to higher software license and professional services costs, partially offset by depreciation and amortization expense.

Sales and marketing expenses decreased $1.3 million, or 7%, for the three months ended March 31, 2023 compared to the three months ended March 31, 2022, primarily due to decreases in advertising costs partially offset by amortization of acquired intangible assets.

General and administrative expenses increased $11.5 million, or 31%, for the three months ended March 31, 2023 compared to the three months ended March 31, 2022, primarily due to acquisition related compensation, stock-based compensation, payment processing fees, and VAT and other foreign non-income taxes, partially offset by software license costs.

Restructuring and other charges increased $20.9 million, or 100%, for the three months ended March 31, 2023 compared to the three months ended March 31, 2022, primarily due to one-time severance and benefit payments, as well as stock-based compensation related to vesting of certain equity awards in connection with the restructuring we announced on February 16, 2023.

Other (Income) Expense


	Three Months Ended March 31,
	2023		2022		$ Change		% Change

	(in thousands)
Other (income) expense	$	(5,205)	$	1,646	$	(6,851)	(416)	%

Other (income) expense decreased $6.9 million, or 416%, for the three months ended March 31, 2023 compared to the three months ended March 31, 2022, primarily due to interest income and accretion from our marketable securities.

Income Tax Expense


	Three Months Ended March 31,
	2023		2022		$ Change		% Change

	(in thousands)
Income tax expense	$	7,608	$	3,338	$	4,270	128	%

Income tax expense increased $4.3 million, or 128%, for the three months ended March 31, 2023 compared to the three months ended March 31, 2022, primarily due to income taxes related to international jurisdictions in which we conduct business.

Liquidity and Capital Resources

We have funded our operations since inception primarily with cash flow generated by operations, private offerings of our equity and debt securities, borrowings under our existing credit facility and capital expenditure financings. Cash provided from these sources is used primarily for operating expenses, such as personnel costs, and capital expenditures. From time to time, we may also use excess cash for share repurchases.

In February 2023, we began a common stock buyback program whereby we can repurchase up to an aggregate of $500.0 million of our common stock throughout fiscal year 2023. During the first quarter of 2023, we repurchased and retired 7,759,973 shares of common stock for a purchase price of $265.9 million.

As of March 31, 2023, we had $20.9 million in cash and cash equivalents and $591.7 million in marketable securities. Our cash and cash equivalents primarily consist of cash and money market funds. Our marketable securities consist of U.S. treasury securities and commercial paper.

We believe our existing cash and cash equivalents, cash flow from operations and availability under our Credit Facility will be sufficient to support working capital and capital expenditure requirements and our outstanding contractual commitments for at least the next 12 months from the date of issuance.

We may from time to time seek to retire or purchase our outstanding equity or debt, including the repurchase of our common stock or the Convertible Notes, through cash purchases and/or exchanges for equity securities, in open market purchases, privately negotiated transactions or otherwise. Such repurchases or exchanges, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions, and other factors. The amounts involved in any such transactions, individually or in the aggregate, may be material. Further, any such purchases or exchanges may result in us acquiring and retiring a substantial amount of such indebtedness, which could impact the trading liquidity of such indebtedness.

The following table summarizes our cash flows for the periods presented:


	Three Months Ended March 31,
(In thousands)	2023		2022
Net cash provided by operating activities	$	36,215	$	30,401
Net cash provided by (used in) investing activities	107,956		(1,121,024)
Net cash used in financing activities	(264,230)		(157,879)
Decrease in cash, cash equivalents and restricted cash	(120,088)		(1,248,551)

Operating Activities

Our largest source of operating cash is cash collections from sales to our customers. Our primary uses of cash from operating activities are for personnel costs, data center co-location expenses, marketing expenses, payment processing fees, bandwidth and connectivity, server maintenance and software licensing fees.

Net cash provided by operating activities was $36.2 million and $30.4 million for the three months ended March 31, 2023 and 2022, respectively, for which the increases in each year were primarily driven by an increase in cash collections from higher revenues, higher interest income and a lower cash bonus, partially offset by higher lease payments and restructuring costs.

Investing Activities

Net cash provided by investing activities was $108.0 million for the three months ended March 31, 2023 compared to $1.1 billion used in investing activities for the three months ended March 31, 2022. The change was driven by our initial investment into the available-for-sale securities portfolio in the first quarter of 2022, partially offset by portfolio maturities of $331.6 million in the first quarter of 2023.

Financing Activities

Net cash used in financing activities of $264.2 million for the three months ended March 31, 2023 was primarily due to the repurchase and retirement of our common stock for $265.9 million.

Net cash used in financing activities of $157.9 million for the three months ended March 31, 2022 was primarily due to the repurchase and retirement of our common stock for $150.0 million.

Contractual Obligations and Commitments

There have been no material changes to our obligations under our operating leases and purchase commitments as compared to those disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022.

Critical Accounting Policies and Estimates

Our condensed consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States. The preparation of these condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs and expenses, and related disclosures. On an ongoing basis, we evaluate our estimates and assumptions. Our actual results may differ from these estimates under different assumptions or conditions.

There have been no material changes to our critical accounting policies as compared to those disclosed in the Annual Report on Form 10-K for the fiscal year ended December 31, 2022.

Recently Adopted Accounting Pronouncements

There were no accounting pronouncements recently issued that had or are expected to have a material impact on our consolidated financial statements. For a list of our new and recently adopted accounting pronouncements, see Note 2, Summary of Significant Accounting Policies, in our Notes to consolidated financial statements included in “Part II, Item 8. Financial Statements and Supplementary Data” included in the Form 10-K.

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 EBITDA and adjusted EBITDA margin; (ii) non-GAAP net income and non-GAAP diluted net income per share; and (iii) adjusted free cash flow and adjusted 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, adjusted free cash flow is not a substitute for cash provided by operating activities. Additionally, the utility of adjusted 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 below.

Adjusted EBITDA and Adjusted EBITDA Margin

We define adjusted EBITDA as net loss attributable to common stockholders, adjusted to exclude depreciation and amortization, stock-based compensation, interest expense, acquisition related compensation, acquisition and integration related costs, income tax expense, loss on extinguishment of debt, restructuring and other charges, restructuring related salary continuation charges, impairment of long-lived assets and other income. We define adjusted EBITDA margin as adjusted EBITDA as a percentage of revenue. We believe that adjusted EBITDA, when taken together with our GAAP financial results, provides meaningful supplemental information regarding our operating performance and facilitates internal comparisons of our historical operating performance on a more consistent basis by excluding certain items that may not be indicative of our business, results of operations or outlook. In particular, we believe that the use of adjusted EBITDA is helpful to our investors as it is a measure used by management in assessing the health of our business, determining incentive compensation, evaluating our operating performance, and for internal planning and forecasting purposes.

Our calculation of adjusted EBITDA and adjusted EBITDA margin may differ from the calculations of adjusted EBITDA and adjusted EBITDA margin by other companies and therefore comparability may be limited. Because of these limitations, when evaluating our performance, you should consider adjusted EBITDA and adjusted EBITDA margin alongside other financial performance measures, including our net loss attributable to common stockholders and other GAAP results.

The following table presents a reconciliation of net loss attributable to common stockholders, the most directly comparable financial measure stated in accordance with GAAP, to adjusted EBITDA for each of the periods presented:


	Three Months Ended
	March 31,
(In thousands)	2023			2022
GAAP Net loss attributable to common stockholders	$	(34,937)		$	(18,568)

Adjustments:
Depreciation and amortization	28,913			23,933
Stock-based compensation	27,594			25,981
Interest expense	2,189			2,059
Acquisition related compensation	7,601			—
Acquisition and integration related costs	1,301			(46)
Income tax expense	7,608			3,338
Loss on extinguishment of debt	—			407
Restructuring and other charges	20,869			—
Restructuring related salary continuation charges	1,907			—
Impairment of long-lived assets	553			908


Other expense(1)	(7,394)			(820)
Adjusted EBITDA	$	56,204		$	37,192
As a percentage of revenue:

Adjusted EBITDA margin	34		%	29		%

___________________

(1)Other income (expense), net primarily consists of interest and accretion income from our marketable securities.

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

We define non-GAAP net income as Net loss attributable to common stockholders, excluding stock-based compensation, acquisition related compensation, amortization of acquired intangibles, acquisition and integration related costs, loss on extinguishment of debt, impairment of long-lived assets, restructuring and other charges, restructuring related salary continuation charges, 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 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.

The following table presents a reconciliation of Net loss attributable to common stockholders, the most directly comparable financial measure stated in accordance with GAAP, to Non-GAAP Net income for each of the periods presented:


	Three Months Ended
	March 31,
(In thousands)	2023		2022
GAAP Net loss attributable to common stockholders	$	(34,937)	$	(18,568)
Stock-based compensation	27,594		25,981
Acquisition related compensation	7,601		—
Amortization of acquired intangibles	3,790		462
Acquisition and integration related costs	1,301		(46)

Loss on extinguishment of debt	—		407
Impairment of long-lived assets	553		908
Restructuring and other charges	20,869		—
Restructuring related salary continuation charges	1,907		—

Income tax effects of non-GAAP adjustments(1)	36		309
Non-GAAP net income	$	28,714	$	9,453
Deferred financing fees(2)	1,879		1,868
Non-GAAP net income used in computing Non-GAAP diluted net income per share(2)	$	30,593	$	11,321
Weighted-average shares used to compute Non-GAAP diluted net income per share	111,224		126,555
Non-GAAP diluted net income per share	$	0.28	$	0.09

___________________

(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)Non-GAAP net income has been adjusted for the dilutive impact of deferred financing fees related to the Convertible Notes.

Adjusted Free Cash Flow and Adjusted Free Cash Flow Margin

Adjusted 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 excluding restructuring related costs, restructuring related salary charges, and acquisition and integration related costs. Adjusted free cash flow margin is calculated as adjusted free cash flow divided by total revenue.

We believe that adjusted free cash flow and adjusted 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 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 adjusted free cash flow and adjusted 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. One limitation of adjusted free cash flow and adjusted free cash flow margin is that they do not reflect our future contractual commitments. Additionally, adjusted free cash flow does not represent the total increase or decrease in our cash balance for a given period.

The following table presents our cash flows for the periods presented and a reconciliation of adjusted free cash flow and adjusted free cash flow margin to Net cash provided by operating activities the most directly comparable financial

measure calculated in accordance with GAAP:


	Three Months Ended
	March 31,
(In thousands)		2023			2022
GAAP Net cash provided by operating activities		$	36,215		$	30,401
Adjustments:
Capital expenditures - property and equipment		(23,314)			(23,045)
Capital expenditures - internal-use software development		(1,794)			(2,276)

Restructuring related costs		11,261			—
Restructuring related salary continuation charges		1,907			—
Acquisition and integration related costs		1,468			97
Adjusted free cash flow		$	25,743		$	5,177
As a percentage of revenue:
GAAP Net cash provided by operating activities		22		%	24		%
Adjusted free cash flow margin		16		%	4		%

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have been no material changes in market risk from the information provided in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

We maintain “disclosure controls and procedures,” as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Exchange Act that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.

Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of March 31, 2023. Based on the evaluation of our disclosure controls and procedures as of March 31, 2023, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.

Changes in Internal Control Over Financial Reporting

There was no change in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the period covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Inherent Limitations on Effectiveness of Controls

Our management, including our Chief Executive Officer and Chief Financial Officer, believes that our disclosure controls and procedures and internal control over financial reporting are designed to provide reasonable assurance of achieving their objectives and are effective at the reasonable assurance level. However, our management does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of the controls. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

From time to time, we are involved in various legal proceedings arising from the normal course of business activities. We are not presently a party to any litigation the outcome of which, if determined adversely to us, would in our estimation, have a material adverse effect on our business, operating results, cash flows or financial condition. Defending such proceedings is costly and can impose a significant burden on management and employees. The results of any current or future litigation cannot be predicted with certainty, and regardless of the outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources and other factors.

ITEM 1A. RISK FACTORS

Please refer to Item 1A—Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2022 for a description of certain material risks and uncertainties to which our business, financial condition and results of operations are subject. There have been no material changes to the risk factors discussed in our Annual Report on Form 10-K for the year ended December 31, 2022.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

The following table provides information with respect to repurchases of shares of common stock by the Company during the three months ended March 31, 2023:


Period	Total Number of Shares Purchased	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Program(1)	Approximate Dollar Value (in thousands) of Shares that May Yet Be Purchased Under the Program(1)
January 1-31, 2023	—	$	—	—	$	500,000
February 1-28, 2023	1,311,933	33.51		1,311,933	456,035
March 1-31, 2023	6,448,040	34.42		6,448,040	234,099
Total	7,759,973	$	34.27	7,759,973

(1)On February 14, 2023, the Company’s Board of Directors approved the repurchase of up to an aggregate of $500.0 million of the Company’s common stock (the “2023 Share Buyback Program”). Pursuant to the 2023 Share Buyback Program, repurchases of the Company’s common stock 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 SEC and other applicable legal requirements. The 2023 Share Buyback Program is authorized throughout fiscal year 2023 and will expire on December 31, 2023; however, the Company is not obligated to acquire any particular amount of common stock and the 2023 Share Buyback Program may be extended, modified, suspended or discontinued at any time at the Company’s discretion.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

Not applicable.

ITEM 6. EXHIBITS

Incorporated by Reference

Exhibit No.

Exhibit Description

Form

File No.

Exhibit

Filing Date

Filed Herewith

31.1

Certification of Yancey Spruill, Chief Executive Officer, pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2

Certification of W. Matthew Steinfort, Chief Financial Officer, pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1*

Certifications of Yancey Spruill, Chief Executive Officer, and W. Matthew Steinfort, Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS

Inline XBRL Instance Document

101.SCH

Inline XBRL Taxonomy Extensions Schema

101.CAL

Inline XBRL Taxonomy Extension Calculation Linkbase

101.DEF

Inline XBRL Taxonomy Extension Definition Linkbase

101.LAB

Inline XBRL Taxonomy Extension Label Linkbase

101.PRE

Inline XBRL Taxonomy Extension Presentation Linkbase

104

Cover Page Interactive File (formatted as Inline XBRL and contained in Exhibit 101)

___________________

* Furnished herewith and not deemed to be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of that section, nor shall it be deemed incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date hereof, regardless of any general incorporation language in such filing.

The agreements and other documents filed as exhibits to this report are not intended to provide factual information or other disclosure other than with respect to the terms of the agreements or other documents themselves, and you should not rely on them for that purpose. In particular, any representations and warranties made by us in these agreements or other documents were made solely within the specific context of the relevant agreement or document and may not describe the actual state of affairs as of the date they were made or at any other time.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

DigitalOcean Holdings, Inc.

Date:

May 9, 2023

By:

/s/ Yancey Spruill

Yancey Spruill

Chief Executive Officer

(Principal Executive Officer)

Date:

May 9, 2023

By:

/s/ W. Matthew Steinfort

W. Matthew Steinfort

Chief Financial Officer

(Principal Financial Officer)