DigitalOcean Pursues U.S. IPO Plan

Summary

• DigitalOcean Holdings has filed to raise $100 million in an IPO, although the final figure may differ.
• The firm provides self-serve platform-as-a-service infrastructure to small and mid-sized businesses worldwide.
• DOCN has grown revenue impressively and is making progress toward operating breakeven.
• Looking for more investing ideas like this one? Get them exclusively at IPO Edge. Get started today »

Quick Take

DigitalOcean Holdings (NYSE:DOCN) has filed to raise $100 million in an IPO of its common stock, according to an S-1 registration statement.

The firm provides a self-serve cloud computing platform for small and mid-sized businesses worldwide.

DOCN has grown impressively and is well-positioned in a growing industry segment.

I’ll provide an update when we learn more about the IPO from management.

Company & Technology

New York, NY-based DigitalOcean was founded to develop an IT infrastructure platform that enables SMBs to acquire, configure and deploy their applications on its cloud-based SaaS subscription-based system.

Management is headed by Chief Executive Officer Yancey Spruill, who has been with the firm since 2019 and was previously COO and CFO of SendGrid.

Below is a brief overview video of a comparison of DigitalOcean with AWS:

Source: linuxhint

The company’s primary offerings include:

• Compute

• Managed Databases

• Developer Tools

• Storage

• Networking

DigitalOcean has received at least $273 million from investors including AI Droplet Holdings, Andreessen Horowitz, IA Ventures, and others.

Customer Acquisition

The firm acquires SMB customers primarily through online marketing efforts, funneling prospects to its self-serve service offerings.

DOCN had more than 570,000 customers from over 185 countries and 34,000 developer tutorials as of December 31, 2020.

Sales and Marketing expenses as a percentage of total revenue have dropped as revenues have increased, as the figures below indicate:

Sales and Marketing	Expenses vs. Revenue
Period	Percentage
2020	10.5%
2019	12.3%

Click to enlarge

Source: Company registration statement

The Sales and Marketing efficiency rate, defined as how many dollars of additional new revenue are generated by each dollar of Sales and Marketing spend, was 1.9x in the most recent reporting period.

The company’s Average Revenue per Customer grew by 18.3% in 2020 versus 2019, as the table shows below:

Average Revenue Per Customer
Period	ARPC	Variance
2020	$555.68	18.3%
2019	$469.54

Click to enlarge

Source: Company registration statement

DOCN’s net dollar revenue retention rate has been relatively stable at or around 100%, increasing slightly to 103% in 2020. A figure of 100% or greater is considered good as it indicates the firm is producing at least the same amount of revenue from its cohort of customers from year to year.

Market & Competition

According to a 2021 market research report, the global market for platform-as-a-service services was an estimated $6.9 billion in 2020 and is forecast to reach $19.2 billion by 2026.

This represents a forecast very strong CAGR of 18.5% from 2021 to 2026.

The main drivers for this expected growth are a continued transition from on-premises IT infrastructure to cloud-based systems as small to large businesses seek improvements in their information system capabilities.

Also, as customers need to integrate a greater number of services, they are looking for service simplification and vendor consolidation whenever possible.

Major competitive or other industry participants include:

• Amazon (AMZN) [AWS]

• Microsoft (MSFT)

• Google (GOOG)

• IBM (IBM)

• Oracle (ORCL)

• OVH

• Vultr

• Heroku

• Linode

Financial Performance

DigitalOcean’s recent financial results can be summarized as follows:

• Strong growth in topline revenue

• Growing gross profit and gross margin

• Reduced operating losses

• Increased cash flow from operations

Below are relevant financial results derived from the firm’s registration statement:

Total Revenue
Period	Total Revenue	% Variance vs. Prior
2020	$ 318,380,000	24.9%
2019	$ 254,823,000
Gross Profit (Loss)
Period	Gross Profit (Loss)	% Variance vs. Prior
2020	$ 172,848,000	30.4%
2019	$ 132,564,000
Gross Margin
Period	Gross Margin
2020	54.29%
2019	52.02%
Operating Profit (Loss)
Period	Operating Profit (Loss)	Operating Margin
2020	$ (15,791,000)	-5.0%
2019	$ (29,905,000)	-11.7%
Net Income (Loss)
Period	Net Income (Loss)
2020	$ (43,568,000)
2019	$ (40,390,000)
Cash Flow From Operations
Period	Cash Flow From Operations
2020	$ 58,115,000
2019	$ 39,902,000
(Glossary Of Terms)

Click to enlarge

Source: Company registration statement

As of December 31, 2020, DigitalOcean had $100.3 million in cash and $329.3 million in total liabilities.

Free cash flow during the twelve months ended December 31, 2020, was negative ($52.3 million).

IPO Details

DigitalOcean intends to raise $100 million in gross proceeds from an IPO of its common stock, although the final figure may be higher.

No existing shareholders have indicated an interest to purchase shares at the IPO price.

Management says it will use the net proceeds from the IPO as follows:

The principal purposes of this offering are to create a public market for our common stock, facilitate our future access to the capital markets and increase our capitalization and financial flexibility. As of the date of this prospectus, we cannot specify with certainty all of the particular uses for the net proceeds to us from this offering. However, we currently intend to use the net proceeds we receive from this offering for general corporate purposes, including working capital, operating expenses and capital expenditures. We may also use a portion of the net proceeds to acquire complementary businesses, services or technologies.

Management’s presentation of the company roadshow is not available.

Listed bookrunners of the IPO are Morgan Stanley, Goldman Sachs, J.P. Morgan, BofA Securities, Barclays, KeyBanc Capital Markets, Canaccord Genuity, JMP Securities, and Stifel.

Commentary

DigitalOcean is seeking to go public to fund its growth initiatives and for general corporate purposes.

The firm’s financials indicate strong topline revenue growth and progress made toward operations breakeven.

Sales and Marketing expenses as a percentage of total revenue have dropped as revenues have increased; its Sales and Marketing efficiency rate was 1.7x in 2020 and its average revenue per customer increased. All three signals show a healthy company in a growth phase.

The market opportunity for providing a self-serve platform-as-a-service to small and mid-sized businesses is expected to grow at a very strong rate of growth in the years ahead, so the firm has strong industry growth dynamics in its favor over the medium term.

J.P. Morgan is the lead left underwriter and IPOs led by the firm over the last 12-month period have generated an average return of 72.4% since their IPO. This is a top-tier performance for all major underwriters during the period.

The primary risk to the company’s outlook is increasing competition as competitors move down the stack from large enterprises to the middle market and smaller businesses as they seek growth.

Additionally, I would have liked to see a higher net dollar retention rate showing higher revenues from the same cohort of customers, something in the range of 110% - 115% would have been more impressive.

When we learn more details about the IPO, I’ll provide a final opinion.

Expected IPO Pricing Date: To be announced.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.