DigitalOcean Holdings Inc.

11/04/2024 | Press release | Distributed by Public on 11/04/2024 06:17

Quarterly Report for Quarter Ending September 30, 2024 (Form 10-Q)

docn-20240930
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 September 30, 2024
OR
☐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 York10013
(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 October 28, 2024, there were 92,282,286 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 September 30, 2024 and December 31, 2023
2
Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2024 and 2023
3
Condensed Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2024 and 2023
4
Condensed Consolidated Statements of Stockholders' Deficit for the Three and Nine Months Ended September 30, 2024 and 2023
5
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2024 and 2023
7
Notes to Condensed Consolidated Financial Statements
9
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
22
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
36
Item 4.
Controls and Procedures
36
PART II. OTHER INFORMATION
Item 1.
Legal Proceedings
38
Item 1A.
Risk Factors
38
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
38
Item 3.
Defaults Upon Senior Securities
38
Item 4.
Mine Safety Disclosures
38
Item 5.
Other Information
39
Item 6.
Exhibits
40
Signatures
41
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.
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 Part I, Item 1A. "Risk Factors" and elsewhere in our Annual Report on Form 10-K. 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. While we believe such available 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)
September 30, 2024 December 31, 2023
Current assets:
Cash and cash equivalents $ 439,872 $ 317,236
Marketable securities - 94,532
Accounts receivable, less allowance for credit losses of $5,664 and $5,848, respectively
68,936 62,186
Prepaid expenses and other current assets 43,198 29,040
Total current assets 552,006 502,994
Property and equipment, net 371,000 305,444
Restricted cash 1,747 1,747
Goodwill 348,674 348,322
Intangible assets, net 123,110 140,151
Operating lease right-of-use assets, net 121,430 155,201
Deferred tax assets 2,035 1,994
Other assets 6,476 5,114
Total assets $ 1,526,478 $ 1,460,967
Current liabilities:
Accounts payable $ 12,946 $ 3,957
Accrued other expenses 28,065 31,046
Deferred revenue 5,575 5,340
Operating lease liabilities, current 68,113 81,320
Other current liabilities 61,311 70,982
Total current liabilities 176,010 192,645
Deferred tax liabilities 3,518 3,533
Long-term debt 1,483,470 1,477,798
Operating lease liabilities, non-current 73,556 91,161
Other long-term liabilities 1,627 9,528
Total liabilities 1,738,181 1,774,665
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 September 30, 2024 and December 31, 2023)
- -
Common stock ($0.000025 par value per share; 750,000,000 shares authorized; 92,397,303 and 90,243,442 issued and outstanding as of September 30, 2024 and December 31, 2023, respectively)
2 2
Additional paid-in capital 65,701 30,989
Accumulated other comprehensive loss (398) (452)
Accumulated deficit (277,008) (344,237)
Total stockholders' deficit (211,703) (313,698)
Total liabilities and stockholders' deficit $ 1,526,478 $ 1,460,967
See accompanying notes to condensed consolidated financial statements
2
DIGITALOCEAN HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
2024 2023 2024 2023
Revenue $ 198,484 $ 177,062 $ 575,690 $ 512,010
Cost of revenue 79,043 70,329 226,826 209,562
Gross profit 119,441 106,733 348,864 302,448
Operating expenses:
Research and development 37,377 32,627 105,388 109,468
Sales and marketing 17,036 19,015 57,970 53,346
General and administrative 40,422 20,064 127,034 117,861
Restructuring and other charges - (441) - 20,862
Total operating expenses 94,835 71,265 290,392 301,537
Income from operations 24,606 35,468 58,472 911
Other income (expense):
Interest expense (2,262) (2,333) (6,887) (6,634)
Interest income and other income, net 7,297 3,979 17,120 18,967
Other income, net 5,035 1,646 10,233 12,333
Income before income taxes 29,641 37,114 68,705 13,244
Income tax benefit (expense) 3,308 (17,939) (2,479) (9,774)
Net income attributable to common stockholders $ 32,949 $ 19,175 $ 66,226 $ 3,470
Net income per share attributable to common stockholders
Basic $ 0.36 $ 0.22 $ 0.72 $ 0.04
Diluted $ 0.33 $ 0.20 $ 0.70 $ 0.04
Weighted-average shares used to compute net income per share attributable to common stockholders
Basic 92,145 87,667 91,413 90,769
Diluted 102,591 102,674 102,678 97,747
See accompanying notes to condensed consolidated financial statements
3
DIGITALOCEAN HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
(unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
2024 2023 2024 2023
Net income attributable to common stockholders $ 32,949 $ 19,175 $ 66,226 $ 3,470
Other comprehensive income (loss):
Foreign currency translation adjustments, net of taxes 179 (373) 42 (43)
Unrealized gain on marketable securities, net of taxes - 299 12 1,069
Other comprehensive income (loss) 179 (74) 54 1,026
Comprehensive income $ 33,128 $ 19,101 $ 66,280 $ 4,496
See accompanying notes to condensed consolidated financial statements
4
DIGITALOCEAN HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
(in thousands, except share amounts)
(unaudited)
Common Stock Additional Paid-In Capital Accumulated Other Compreh-ensive Loss Accumulated Deficit Total
Shares Amount
Balance at June 30, 2024 91,698,027 $ 2 $ 56,748 $ (577) $ (309,957) $ (253,784)
Issuance of common stock under equity incentive plan, net of taxes withheld 997,103 - (3,474) - - (3,474)
Issuance of common stock under employee stock purchase plan, net of taxes withheld - - - - - -
Repurchase and retirement of common stock including related costs (297,827) - (11,370) - - (11,370)
Stock-based compensation - - 23,797 - - 23,797
Other comprehensive income - - - 179 - 179
Net income attributable to common stockholders - - - - 32,949 32,949
Balance at September 30, 2024 92,397,303 $ 2 $ 65,701 $ (398) $ (277,008) $ (211,703)
Common Stock Additional Paid-In Capital Accumulated Other Compreh-ensive Loss Accumulated Deficit Total
Shares Amount
Balance at June 30, 2023 88,628,893 $ 2 $ - $ (948) $ (266,633) $ (267,579)
Issuance of common stock under equity incentive plan, net of taxes withheld 915,901 - (1,208) - - (1,208)
Issuance of common stock under employee stock purchase plan, net of taxes withheld - - - - - -
Repurchase and retirement of common stock including related costs (3,350,349) - 3,205 - (110,295) (107,090)
Stock-based compensation - - (1,997) - - (1,997)
Other comprehensive loss - - - (74) - (74)
Net income attributable to common stockholders - - - - 19,175 19,175
Balance at September 30, 2023 86,194,445 $ 2 $ - $ (1,022) $ (357,753) $ (358,773)
See accompanying notes to condensed consolidated financial statements
5
DIGITALOCEAN HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
(in thousands, except share amounts)
(unaudited)
Common Stock Additional Paid-In Capital Accumulated Other Comprehen-sive Loss Accumulated Deficit Total
Shares Amount
Balance at December 31, 2023 90,243,442 $ 2 $ 30,989 $ (452) $ (344,237) $ (313,698)
Issuance of common stock under equity incentive plan, net of taxes withheld 2,854,890 - (9,318) - - (9,318)
Issuance of common stock under employee stock purchase plan, net of taxes withheld 94,162 - 2,231 - - 2,231
Repurchase and retirement of common stock including related costs (795,191) - (28,080) - 1,003 (27,077)
Stock-based compensation - - 69,879 - - 69,879
Other comprehensive income - - - 54 - 54
Net income attributable to common stockholders - - - - 66,226 66,226
Balance at September 30, 2024 92,397,303 $ 2 $ 65,701 $ (398) $ (277,008) $ (211,703)
Common Stock Additional Paid-In Capital Accumulated Other Comprehen-sive Loss Accumulated Deficit Total
Shares Amount
Balance at December 31, 2022 96,732,507 $ 2 $ 263,957 $ (2,048) $ (214,342) $ 47,569
Issuance of common stock under equity incentive plan, net of taxes withheld 3,230,294 - (506) - - (506)
Issuance of common stock under employee stock purchase plan, net of taxes withheld 120,348 - 2,797 - - 2,797
Repurchase and retirement of common stock including related costs (13,888,704) - (332,817) - (146,881) (479,698)
Stock-based compensation - - 66,569 - - 66,569
Other comprehensive income - - - 1,026 - 1,026
Net income attributable to common stockholders - - - - 3,470 3,470
Balance at September 30, 2023 86,194,445 $ 2 $ - $ (1,022) $ (357,753) $ (358,773)
See accompanying notes to condensed consolidated financial statements
6
DIGITALOCEAN HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Nine Months Ended September 30,
2024 2023
Operating activities
Net income attributable to common stockholders $ 66,226 $ 3,470
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 100,825 87,085
Stock-based compensation 67,659 65,589
Provision for expected credit losses 12,018 11,416
Operating lease right-of-use assets and liabilities, net 2,861 5,783
Net accretion of discounts and amortization of premiums on investments 2,569 (2,262)
Non-cash interest expense 5,987 5,958
Loss on impairment of long-lived assets 356 1,140
Deferred income taxes - 561
Release of VAT reserve - (819)
Other (2,572) 484
Changes in operating assets and liabilities:
Accounts receivable (18,768) (16,777)
Prepaid expenses and other current assets (13,594) (7,569)
Accounts payable and accrued expenses 1,136 (15,870)
Deferred revenue 235 (561)
Other assets and liabilities (13,552) 16,798
Net cash provided by operating activities 211,386 154,426
Investing activities
Capital expenditures - property and equipment (132,886) (67,077)
Capital expenditures - internal-use software development (6,492) (4,075)
Cash paid for acquisition of businesses, net of cash acquired - (99,340)
Cash paid for asset acquisitions - (2,500)
Purchase of marketable securities - (352,313)
Maturities of marketable securities 91,675 773,335
Purchased interest on marketable securities - (151)
Proceeds from interest on marketable securities - 151
Proceeds from sale of equipment 42 236
Net cash (used in) provided by investing activities (47,661) 248,266
Financing activities
Proceeds related to the issuance of common stock under equity incentive plan 11,890 15,358
Proceeds from the issuance of common stock under employee stock purchase plan 2,231 2,797
Principal repayments of finance leases (4,097) (947)
Employee payroll taxes paid related to net settlement of equity awards (21,166) (15,594)
Repurchase and retirement of common stock including related costs (29,878) (474,950)
Net cash used in financing activities (41,020) (473,336)
Effect of exchange rate changes on cash, cash equivalents, and restricted cash (69) (55)
Increase (decrease) in cash, cash equivalents and restricted cash 122,636 (70,699)
See accompanying notes to condensed consolidated financial statements
7
DIGITALOCEAN HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Nine Months Ended September 30,
2024 2023
Cash, cash equivalents and restricted cash - beginning of period 318,983 151,807
Cash, cash equivalents and restricted cash - end of period $ 441,619 $ 81,108
Supplemental disclosures of cash flow information:
Cash paid for interest $ 824 $ 595
Cash paid for taxes, net of refunds 13,442 2,034
Operating cash flows paid for operating leases 64,397 51,038
Non-cash investing and financing activities:
Capitalized stock-based compensation $ 2,221 $ 980
Property and equipment received but not yet paid, included in Accounts payable and Accrued other expenses 9,395 15,804
Operating right-of-use assets obtained in exchange for operating lease liabilities 27,717 65,828
Finance right-of-use assets obtained in exchange for finance lease liabilities 88 11,958
See accompanying notes to condensed consolidated financial statements
8
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 growing digital-native businesses. 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"), including Droplet virtual machines, storage and networking offerings; Platform-as-a-Service ("PaaS"), including Managed Database and Managed Kubernetes offerings; Software-as-a-Service ("SaaS"), including Managed Hosting and Marketplace offerings; and artificial intelligence and machine learning ("AI/ML"), including Machines, Notebooks and Deployments offerings.
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 September 30, 2024, results of operations for the three and nine months ended September 30, 2024 and 2023, cash flows for the nine months ended September 30, 2024 and 2023, and stockholders' deficit for the three and nine months ended September 30, 2024 and 2023.
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 including estimation of the probability of performance vesting conditions, the incremental borrowing rate used to determine lease liabilities, valuation allowances against deferred tax assets, fair value of financial instruments, 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.
Restricted Cash
The following table reconciles cash, cash equivalents and restricted cash per the Condensed Consolidated Statements of Cash Flows:
September 30,
2024 2023
Cash and cash equivalents $ 439,872 $ 79,361
Restricted cash(1)
1,747 1,747
Total cash, cash equivalents and restricted cash $ 441,619 $ 81,108
___________________
(1)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
9
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 accounts receivable and related 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, 2023 $ 5,848
Provision for expected credit losses 12,018
Write-offs and other (12,202)
Balance as of September 30, 2024 $ 5,664
Deferred Revenue
Deferred revenue was $5,575 and $5,340 as of September 30, 2024 and December 31, 2023, respectively. Revenue recognized during the three months ended September 30, 2024 and 2023 was $441 and $624, respectively, and $3,375 and $3,424 during the nine months ended September 30, 2024 and 2023, respectively, which was included in each deferred revenue balance at the beginning of each respective period.
The Company has performance obligations associated with commitments in customer contracts for future services that have not yet been recognized in our condensed consolidated financial statements. While our customer agreements typically do not contractually bind customers to a specific usage or term, we have a limited number of contracts with original terms that exceed a one year commitment period and require the customer to spend a minimum amount over that term. As of September 30, 2024, we expect revenue of approximately $10,053 to be recognized in future periods from remaining performance obligations for contracts that exceed a one year commitment. The weighted-average remaining life of these contracts is 1.9 years. The amount and timing of revenue recognition is largely driven by customer usage.
Segment Information
The Company's chief operating decision maker, the chief executive officer ("CEO"), 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 Nine Months Ended
September 30, September 30,
2024 2023 2024 2023
North America 39 % 37 % 38 % 38 %
Europe 28 29 29 29
Asia 23 24 23 23
Other 10 10 10 10
Total 100 % 100 % 100 % 100 %
Revenue derived from customers in the United States was 33% and 32% of total revenue for the three and nine months ended September 30, 2024, respectively, and 30% of total revenue for the three and nine months ended September 30, 2023.
10
Long-lived assets include property and equipment and leases. The geographic locations of the Company's long-lived assets, net, based on physical location of the assets, is as follows:
September 30, 2024 December 31, 2023
United States $ 256,291 $ 233,557
Singapore 31,284 43,425
Germany
51,753 62,224
Netherlands
69,690 46,170
Other
83,412 75,269
Total $ 492,430 $ 460,645
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 September 30, 2024 and December 31, 2023. Additionally, no customer accounted for 10% or more of total revenue during the three and nine months ended September 30, 2024 and 2023.
Recent Accounting Pronouncements - Pending Adoption
In December 2023, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2023-09, Income Taxes (Topic 740)-Improvements to Income Tax Disclosures ("ASU 2023-09"). ASU 2023-09 requires that an entity disclose specific categories in the effective tax rate reconciliation as well as provide additional information for reconciling items that meet a quantitative threshold. Further, ASU 2023-09 requires certain disclosures of state versus federal income tax expense and taxes paid. The amendments in ASU 2023-09 are required to be adopted for fiscal years beginning after December 15, 2024. Early adoption is permitted for annual financial statements that have not yet been issued. The amendments should be applied on a prospective basis although retrospective application is permitted. The Company is currently evaluating the impact of adoption on its financial disclosures.
In November 2023, the FASB issued ASU No. 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures ("ASU 2023-07"). ASU 2023-07 expands public entities' segment disclosures by requiring disclosure of significant segment expenses that are regularly provided to the chief operating decision maker and included within each reported measure of segment profit or loss, an amount and description of its composition for other segment items, and interim disclosures of a reportable segment's profit or loss and assets. ASU 2023-07 is effective for fiscal years beginning after December 15, 2023 and for interim periods within fiscal years beginning after December 15, 2024, with early application permitted. The Company is currently evaluating the impact of adopting ASU 2023-07 on its consolidated financial statements and disclosures.
Note 3. Acquisitions, Goodwill and Intangible Assets
Paperspace Co.
On July 5, 2023 (the "Paperspace Acquisition Date"), the Company consummated a business combination acquiring 100% of Paperspace Co. ("Paperspace") for total cash consideration of $100,399. Included in the consideration paid was a contribution of $11,100 to an escrow account held by a third party on the Paperspace Acquisition Date to support certain post-closing indemnification obligations. During the three months ended September 30, 2024, the indemnification period expired and the remaining indemnity escrow fund was distributed to the participating Paperspace stockholders in accordance with the acquisition agreement.
This acquisition has been accounted for as a business combination and the results of Paperspace's operations have been included in the accompanying condensed consolidated financial statements since the Paperspace Acquisition Date. The acquisition and integration of Paperspace's advanced technology into the Company's platform will extend the
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Company's offerings, enabling customers to more easily test, develop and deploy artificial intelligence and machine learning ("AI/ML") applications, and augment and enhance existing AI/ML applications.
During the nine months ended September 30, 2024, goodwill increased $352 due to measurement period adjustments for the business combination. The following table sets forth the final allocation of the purchase price and summarizes the fair values of the assets acquired and liabilities assumed at the Paperspace Acquisition Date:
Amount
Fair value of consideration transferred
Cash consideration $ 100,399
Recognized amounts of identifiable assets acquired and liabilities assumed
Tangible assets acquired:
Cash and cash equivalents $ 1,376
Accounts receivable 1,042
Prepaid expenses and other current assets 4
Property and equipment, net 4,515
Operating right-of-use asset, net 4,398
Finance lease right-of-use asset, net 11,958
Other assets
367
Intangible assets 37,690
Liabilities assumed:
Accounts payable and accrued expenses (1,608)
Deferred revenue (105)
Operating lease liabilities, current (1,475)
Operating lease liabilities, non-current (2,923)
Finance lease liabilities, current (5,707)
Finance lease liabilities, non-current (6,251)
Deferred tax liabilities (1,074)
Total identifiable net assets acquired 42,207
Goodwill recorded in acquisition 58,192
Total purchase price allocation $ 100,399
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:
Estimated Fair Value
Weighted Average Useful Life
(In years)
Trademark/Trade Name $ 300 1
Developed Technology 24,120 5
Customer Relationships 13,270 5
Total intangible assets $ 37,690
Paperspace's assets and liabilities were measured at estimated fair values on July 5, 2023. 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 management in the valuation of these assets and liabilities.
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The goodwill is attributable primarily to the integration of Paperspace's advanced technology into the Company's platform which will extend the Company's offerings, resulting in incremental revenue from new and existing customers, and to a lesser extent 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.
Unaudited Pro Forma Financial Information
The unaudited pro forma information below summarizes the combined results of the Company and Paperspace as if the Company's acquisition of Paperspace closed on January 1, 2022 but does not necessarily reflect the combined actual results of operations of the Company and Paperspace 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 Paperspace, including additional amortization of acquired assets and the timing of nonrecurring acquisition and integration related costs, and other adjustments the Company believes are reasonable for the pro forma presentation. If Paperspace had been acquired on January 1, 2022, it would not have had a material impact to revenue for the three and nine months ended September 30, 2023.
Three Months Ended September 30, 2023 Nine Months Ended September 30, 2023
Net income (loss)
$ 17,708 $ (7,500)
Contingent Compensation for Acquisitions
Contingent compensation represents compensation for post-combination services because the payments are contingent on continuing employment of the Paperspace founders, Cloudways seller, and Snapshooter Limited founder at each payment date. Contingent compensation costs related to payments due to certain Paperspace founders for $10,120, of which $5,060 was earned and paid on July 5, 2024, and $5,060 was earned during the three months ended September 30, 2024.
Contingent compensation costs related to payments due to a Cloudways seller for $38,830, of which $16,851 was earned and paid on September 1, 2023, $7,326 was earned and paid on March 1, 2024 and $7,326 was earned and paid on September 1, 2024. On October 30, 2024, the Cloudways seller resigned from the Company. In recognition of the Cloudways seller's service, the Company has agreed to make the remaining payment of $7,326 following the resignation date.
Contingent compensation costs related to payments due to a SnapShooter Limited founder for $1,000 was earned and paid on January 4, 2024.
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 December 31, 2023. The Company did not hold marketable securities as of September 30, 2024, as they were reallocated at maturity to cash and money market funds during the three months ended March 31, 2024.
December 31, 2023
Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value
U.S. treasury securities $ 69,456 $ 6 $ (6) $ 69,456
Commercial paper 25,088 - (12) 25,076
Total Marketable securities $ 94,544 $ 6 $ (18) $ 94,532
Interest income from investments was $4,991 and $5,007 for the three months ended September 30, 2024 and 2023, respectively, and $15,393 and $19,071 for the nine months ended September 30, 2024 and 2023, respectively.
Note 5. Fair Value Measurements
The fair value of our financial assets measured on a recurring basis is as follows:
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September 30, 2024
Level I Level II Total
Cash and cash equivalents:
Cash $ 65,195 $ - $ 65,195
Money market funds 374,677 - 374,677
Total Cash and cash equivalents $ 439,872 $ - $ 439,872
December 31, 2023
Level I Level II Total
Cash and cash equivalents:
Cash $ 54,871 $ - $ 54,871
Money market funds 262,365 - 262,365
Total Cash and cash equivalents $ 317,236 $ - $ 317,236
Marketable securities:
U.S. treasury securities $ 69,456 $ - $ 69,456
Commercial paper - 25,076 25,076
Total Marketable securities $ 69,456 $ 25,076 $ 94,532
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 investments 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 September 30, 2024 and December 31, 2023.
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:
September 30, 2024 December 31, 2023
Carrying Value Fair Value Carrying Value Fair Value
Convertible Notes $ 1,483,470 $ 1,335,000 $ 1,477,798 $ 1,235,625
The carrying value of the Convertible Notes as of September 30, 2024 and December 31, 2023 was net of unamortized debt issuance costs of $16,530 and $22,202, 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 classifies the fair value to be a Level 2 valuation within the fair value measurement hierarchy due to the limited trading activity.
Note 6. Balance Sheet Details
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Property and equipment, net
Property and equipment, net consisted of the following:
September 30, 2024 December 31, 2023
Computers and equipment $ 764,120 $ 657,505
Furniture and fixtures 1,511 1,511
Leasehold improvements 6,973 6,820
Internal-use software 92,537 84,279
Equipment under finance leases 12,297 11,938
Property and equipment, gross $ 877,438 $ 762,053
Less: accumulated depreciation $ (432,524) $ (387,083)
Less: accumulated amortization (73,914) (69,526)
Property and equipment, net $ 371,000 $ 305,444
Depreciation expense on property and equipment was $28,675 and $22,912 for the three months ended September 30, 2024 and 2023, respectively, and $79,294 and $66,956 for the nine months ended September 30, 2024 and 2023, respectively.
The Company capitalized costs related to the development of computer software for internal use of $8,713 and $5,070 for the nine months ended September 30, 2024 and 2023, respectively, which is included in internal-use software costs within Property and equipment, net. Amortization expense related to internal-use software was $1,563 and $1,991 for the three months ended September 30, 2024 and 2023, respectively, and $4,490 and $6,898 for the nine months ended September 30, 2024 and 2023, respectively.
Prepaid expenses and other current assets
Prepaid expenses and other current assets consisted of the following:
September 30, 2024 December 31, 2023
Prepaid expenses $ 18,769 $ 15,065
VAT and sales tax receivable 19,381 12,607
Other current assets 5,048 1,368
Total prepaid expenses and other current assets
$ 43,198 $ 29,040
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
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(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 September 30, 2024, 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 September 30, 2024, 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 $128 for the three months ended September 30, 2024 and 2023, and $381 and $379 for the nine months ended September 30, 2024 and 2023, respectively.
Amortization of deferred financing fees was $105 for the three months ended September 30, 2024 and 2023, and $315 for the nine months ended September 30, 2024 and 2023.
Convertible Notes
In November 2021, the Company issued $1,500,000aggregate 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. Amortization of deferred financing fees for the three months ended September 30, 2024 and 2023 was $1,893 and $1,883, respectively, and $5,672 and $5,643 for the nine months ended September 30, 2024 and 2023, respectively.
During the three months ended September 30, 2024, none of the circumstances allowing holders to convert the Convertible Notes were met.
Note 8. Commitments and Contingencies
Purchase Commitments
As of September 30, 2024, 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, 2023.
Leases
As of September 30, 2024, the Company had $167,301 of estimated undiscounted fixed payment obligations for leases of co-location space at data center facilities and, to a lesser extent, office space, that have not yet commenced and were not included on the Condensed Consolidated Balance Sheets. These leases are expected to commence between October 2024 and August 2025, and have a weighted average lease term of 6 years.
Letters of Credit
In conjunction with the execution of certain office space operating leases, a letter of credit in the amount of $1,747 was issued and outstanding as of September 30, 2024 and December 31, 2023. 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, since January 1, 2023, the deposit held is the minimum threshold required until the lease expiration.
Legal Proceedings
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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
Share Buyback Program
On February 20, 2024, the Company's Board of Directors approved the repurchase of up to an aggregate of $140,000 of its common stock ("2024 Share Buyback Program"). Pursuant to the 2024 Share Buyback Program, repurchases of the Company's common stock will be made at prevailing market prices through open market purchases or in negotiated transactions off the market. The repurchase program is authorized through fiscal year 2025; however, the Company is not obligated to acquire any particular amount of common stock and the program may be extended, modified, suspended or discontinued at any time at the Company's discretion.
During the three months ended September 30, 2024, the Company repurchased and retired 297,827 shares of common stock pursuant to the 2024 Share Buyback Program for an aggregate purchase price of $11,370. During the nine months ended September 30, 2024, the Company repurchased and retired 795,191 shares of common stock for an aggregate purchase price of $29,553. 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. Accrued costs related to share repurchases were $2,411 and $4,885 as of September 30, 2024 and December 31, 2023, respectively, as reported as Other current liabilities in the Condensed Consolidated Balance Sheets. As of September 30, 2024, the dollar value of shares that remained available to be repurchased by the Company under the 2024 Share Buyback Program was $110,447.
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.
Stock Options
Stock options granted have a maximum term of ten years from the grant date, are exercisable upon vesting and typically vest over a period of four years. Stock option activity for the nine months ended September 30, 2024 was as follows:
Number of Options Outstanding Weighted-Average Exercise Price
(Per share) 		Weighted-Average Remaining Life
(In years) 		Aggregate Intrinsic Value
(In thousands)
Outstanding at January 1, 2024 3,289,019 $ 9.43 4.17 $ 89,671
Exercised (1,696,804) 7.03
Forfeited or cancelled (32,987) 16.30
Outstanding at September 30, 2024 1,559,228 $ 11.86 5.40 $ 44,484
Vested and exercisable at September 30, 2024 1,526,692 11.72 5.38 43,777
Vested and unvested expected to vest at September 30, 2024 1,558,803 $ 11.86 5.40 $ 44,475
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 nine months ended September 30, 2024 and 2023 was $47,392 and $64,463, respectively.
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No options were granted during the nine months ended September 30, 2024. The aggregate estimated fair value of stock options granted to participants that vested during the nine months ended September 30, 2024 and 2023 was $5,201 and $10,284, respectively.
As of September 30, 2024, there was $470 of unrecognized stock-based compensation, net of estimated forfeitures, related to outstanding stock options granted that is expected to be recognized over a weighted-average period of 0.21 years.
RSUs
RSUs granted typically vest over four years. RSU activity for the nine months ended September 30, 2024 was as follows:
Shares Weighted-Average Grant Date Fair Value
(Per share)
Unvested balance at January 1, 2024 6,308,499 $ 36.07
Granted 2,983,779 37.09
Vested (1,641,401) 37.38
Forfeited or cancelled (1,889,799) 36.02
Unvested balance at September 30, 2024 5,761,078 36.23
Vested and expected to vest at September 30, 2024 4,833,171 $ 36.17
As of September 30, 2024, there was $161,773 of unrecognized stock-based compensation, net of estimated forfeitures, related to outstanding RSUs granted that is expected to be recognized over a weighted-average period of 2.86 years.
PRSUs
The Company has issued PRSUs which vest based on the achievement of each award's established performance targets. PRSU activity for the nine months ended September 30, 2024 was as follows:
Shares Weighted-Average Grant Date Fair Value
(Per share)
Unvested balance at January 1, 2024 537,715 $ 35.25
Granted 168,944 36.48
Vested (96,469) 51.25
Forfeited or cancelled (98,833) 31.75
Adjusted by performance factor (305,948) 31.75
Unvested balance at September 30, 2024 205,409 $ 35.64
At the end of each reporting period, the Company adjusts 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 is 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 is recognized using the accelerated attribution method.
LTIP PRSUs
The Company grants Long Term Incentive Plan ("LTIP") PRSUs to certain executives of the Company typically during the first half of each fiscal year. A percentage of the LTIP PRSUs becomes eligible to vest based on the Company's financial performance level at the end of each fiscal year. 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 Compensation Committee's approval of the level of achievement against the approved performance targets.
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Assuming the minimum performance level is achieved, one-third of the aggregate number of the achieved 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 8 equal quarterly installments subject, in each case, to the individual's continuous service through the applicable vesting date.
On March 1, 2023, the Company granted an LTIP PRSU award (the "2023 LTIP PRSU"). The financial performance level under the PRSUs was the percentage equal to the sum of the revenue growth percentage and profitability percentage, which on February 21, 2024, was determined to be achieved at 38.5% of the target amount. This resulted in a performance factor reduction of 305,948 shares from the original maximum shares achievable of 378,882, excluding forfeitures.
On April 11, 2024, the Company granted an LTIP PRSU award (the "2024 LTIP PRSU"). The financial performance level under the PRSUs can be attained based on the achievement of certain revenue and adjusted free cash flow margin targets. Under the 2024 LTIP PRSU, 75% of the award can be achieved based on the revenue targets and 25% of the award can be achieved based on the adjusted free cash flow margin targets. The target shares granted under the 2024 LTIP PRSU was 84,472. The actual number of shares that are received under the 2024 LTIP PRSU may be higher or lower than the target shares based on the actual financial metrics achieved relative to the target financial metrics for fiscal year 2024.
As of September 30, 2024, there was $2,211 of unrecognized stock-based compensation related to LTIP PRSUs that is expected to be recognized over a weighted-average period of 2.27 years.
MRSUs
On February 12, 2024, Padmanabhan Srinivasan joined the Company in the role of CEO. As part of his compensation package, Mr. Srinivasan received an MRSU with an estimated grant date fair value of approximately $8 million, which vests upon the satisfaction of certain service conditions and the achievement of certain Company stock price goals during a five-year performance period, as described below. A cumulative percentage of the MRSU target is earned based on the achievement of stock price goals, measured based on the average of the Company's closing stock price over a consecutive 60 trading day period during the performance period as set forth in the table below:
Tranche Company Stock Price Target Total Payout
1 $65.00
25% of Target MRSUs
2 $100.00
50% of Target MRSUs
3 $135.00
100% of Target MRSUs
4 $170.00
150% of Target MRSUs
The target number of achievable shares is 193,178 and the maximum number of achievable shares is 289,767. There will be no pro-rata or straight-line interpolation vesting for achievement of a stock price target between the stock price targets, except in the event of a qualifying termination.
If the stock price targets are achieved during the first three years following the grant date (the "First Performance Period"), 50% of the eligible MRSUs will vest on the third anniversary of the grant date and the remaining 50% of the eligible MRSUs will vest on the fifth anniversary of the grant date. Each tranche of MRSUs whose stock price target was not achieved during the First Performance Period that is subsequently achieved during the period between the third anniversary of the grant date and fifth anniversary of the grant date will vest on the fifth anniversary of the grant date.
The unvested balance of 3,000,000 shares related to the former CEO's MRSU were forfeited and canceled during the first quarter of 2024. There was no unrecognized stock-based compensation related to the former CEO's MRSU award.
As of September 30, 2024, there was $6,651 of unrecognized stock-based compensation related to the current CEO's MRSU award that is expected to be recognized over a weighted-average period of 4.42 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
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purchase date. After the end of an offering period, a new offering automatically begins on the date that immediately follows the conclusion of the preceding offering.
2023 Offering
A new offering period commenced on November 21, 2023, and consists of two purchase periods, the first of which had a purchase date of May 20, 2024 and the second will have a purchase date of November 20, 2024 (the "2023 Offering"). In connection with the purchase period that ended on May 20, 2024, there were 94,162 shares of common stock, net of shares withheld for taxes, purchased by employees at a price of $24.15.
The Company recorded stock-based compensation associated with the ESPP of $474 and $689 during the three months ended September 30, 2024 and 2023, respectively, and $1,317 and $1,909 for the nine months ended September 30, 2024 and 2023, respectively. As of September 30, 2024, $1,642 has been withheld on behalf of employees for the second purchase of the 2023 Offering.
Stock-Based Compensation
Stock-based compensation is included in the Condensed Consolidated Statements of Operations as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
2024 2023 2024 2023
Cost of revenue $ 506 $ 497 $ 1,583 $ 1,350
Research and development 10,828 9,502 29,099 35,280
Sales and marketing 2,063 4,701 9,105 11,759
General and administrative (1)
9,552 (17,071) 27,872 13,263
Restructuring and other charges - - - 3,937
Total $ 22,949 $ (2,371) $ 67,659 $ 65,589
(1) Amount includes $31.3 million of recognized stock-based compensation related to our former CEO's MRSUs that was estimated to be forfeited and therefore reversed for the three and nine months ended September 30, 2023.
Note 11. Net Income per Share Attributable to Common Stockholders
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The following table presents the calculation of basic and diluted net income per share:
Three Months Ended Nine Months Ended
September 30, September 30,
(In thousands, except per share amounts) 2024 2023 2024 2023
Basic net income per share:
Numerator:
Net income attributable to common stockholders $ 32,949 $ 19,175 $ 66,226 $ 3,470
Denominator:
Weighted average shares used to compute net income per share 92,145 87,667 91,413 90,769
Basic net income per share attributable to common stockholders $ 0.36 $ 0.22 $ 0.72 $ 0.04
Diluted net income per share:
Numerator:
Net income attributable to common stockholders
$ 32,949 $ 19,175 $ 66,226 $ 3,470
Interest expense on dilutive convertible notes, net of tax 1,244 1,563 5,879 -
Net income used in diluted calculation $ 34,193 $ 20,738 $ 72,105 $ 3,470
Denominator:
Number of shares used in basic calculation 92,145 87,667 91,413 90,769
Weighted-average effect of dilutive securities:
Stock Options
1,165 5,892 1,552 6,424
RSUs
805 555 1,230 466
PRSUs
73 157 80 88
Convertible Notes 8,403 8,403 8,403 -
Number of shares used in diluted calculation
102,591 102,674 102,678 97,747
Diluted net income per share attributable to common stockholders
$ 0.33 $ 0.20 $ 0.70 $ 0.04
Potentially dilutive securities that were not included in the diluted per share calculations because they would be anti-dilutive were as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
(In thousands) 2024 2023 2024 2023
Stock Options 2 14 3 26
RSUs 2,519 594 2,666 1,245
PRSUs - - - 11
Convertible Notes - - - 8,403
Total 2,521 608 2,669 9,685
Note 12. Income Taxes
The computation of the provision for, or benefit from, income taxes for an interim period is determined using an estimated annual effective tax rate, adjusted for discrete items, if any. Each quarter, the Company updates the estimated annual effective tax rate and records a year-to-date adjustment to the tax provision as necessary.
For the three and nine months ended September 30, 2024, the Company recorded a tax benefit of $3,308 and a tax expense of $2,479, respectively. The effective tax rate for the three and nine months ended September 30, 2024 was (11.2)% and 3.6%, respectively. The effective tax rate differs from the statutory rate primarily as a result of having a full valuation allowance in the U.S. and the mix of income in the foreign jurisdictions in which the Company conducts business, and excess tax benefits from stock-based compensation and utilization of research and development credits.
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For the three and nine months ended September 30, 2023, the Company recorded a tax expense of $17,939 and $9,774, respectively. The effective tax rate for the three and nine months ended September 30, 2023, was 48.3% and 73.8%, respectively. The effective tax rate differs from the statutory rate primarily as a result of being able to benefit from current year losses in the U.S., despite maintaining a valuation allowance against the remaining U.S. deferred tax assets, as well as the mix of income in foreign jurisdictions.
The Organization for Economic Co-operation and Development Pillar Two guidelines published to date include transition and safe harbor rules around the implementation of the Pillar Two global minimum tax of 15%. Based on current enacted legislation effective in 2024, the Company is currently below the threshold of Pillar Two tax. The Company is monitoring developments and evaluating the impacts these new rules will have on its future income tax provision and effective income tax rate.
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 considered together 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, 2023. This discussion, particularly information with respect to our outlook, key trends and uncertainties, our plans and strategy for our business, and our performance and future success, 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. Actual results could differ materially from those discussed below.
Overview
DigitalOcean is a leading cloud computing platform offering on-demand infrastructure and platform tools for startups and growing digital-native businesses. 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 or equal to $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 September 30, 2024, we had approximately 638,000 Learners, Builders and Scalers using our platform to build, deploy and scale applications. We view 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, managed services, and, most recently, artificial intelligence and machine learning (AI/ML) applications, 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.
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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; Software-as-a-Service (SaaS), including our Managed Hosting and Marketplace offerings; and AI/ML, including our Machines, Notebooks and Deployments offerings. Our cloud platform was designed with simplicity in mind to ensure that startups and growing digital-native businesses can spend less time managing their infrastructure and more time building innovative applications that drive business growth. Improving the developer experience and increasing productivity are core to our mission. 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. We recognize revenue based on the customer utilization of our offerings. Our pricing is primarily 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 a highly efficient self-service customer acquisition model, which we complement with a sales force focused on inside sales, targeted 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 each of the three months ended September 30, 2024 and 2023, our sales and marketing expense was approximately 9% and 11% of our revenue, respectively. The efficiency of our go-to-market model and our focus on the needs of startups and growing digital-native businesses 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 approximately 190 countries and around two-thirds of our revenue has historically come from customers located outside the United States. For the three months ended September 30, 2024, 39% of our revenue was generated from North America, 28% 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 customer counts for Testers), or ARPU, has increased from $92.06 in the three months ended September 30, 2023 to $102.51 in the three months ended September 30, 2024. We had no material customer concentration as our top 25 customers made up approximately 9% and 7% of our revenue in the three months ended September 30, 2024 and 2023, respectively. Our annual run-rate revenue, or ARR, as of September 30, 2024 was $798 million, up from $713 million as of September 30, 2023. ARR as of the end of each month represents total revenue for that month multiplied by 12.
Growing our Builders and Scalers is a critical focus for us, and we have successfully increased the number of these customers and their percentage of our total revenue. We had approximately 18,000 Scalers as of September 30, 2024, up from approximately 16,000 as of September 30, 2023. We had approximately 145,000 Builders as of September 30, 2024, up from approximately 138,000 as of September 30, 2023. Revenue from Builders and Scalers increased 7% and 19%, respectively, for the three months ended September 30, 2024 from the three months ended September 30, 2023. Revenue from Builders and Scalers as a percentage of total revenue was 88% in the three months ended September 30, 2024 and 86% in the three months ended September 30, 2023.
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 businesses 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 existing customer base represents a significant opportunity for further sales expansion through increased usage of our platform and adoption of additional product offerings. 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 are focusing our sales and support teams to prevent customer churn by ensuring that our products and services provide a high level of value. Our goal is 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.
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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 Builders and Scalers, including new marketing initiatives that further optimize our self-service revenue funnel to help customers expand their usage and partnership initiatives to identify potential Builders and Scalers. In addition, our Cloudways and Paperspace acquisitions added a significant number of Builders and Scalers as these offerings provide premium managed services and high value AI/ML offerings, respectively.
Investing in Our Platform and Product Offerings
We have a history of, and will continue to invest significantly in, delivering innovative products, features and functionality targeted at our core customer base. The market opportunity for our core IaaS services of compute, storage and networking continues to expand and we are making targeted investments to expand our IaaS revenue. Beyond IaaS, we continue to see large growth opportunities in the PaaS, SaaS and AI/ML markets and, accordingly, we have expanded our portfolio of products and offerings over the last few years. In addition, we may pursue both strategic partnerships and acquisitions, such as our acquisitions of Cloudways and Paperspace, 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.
Macroeconomic Conditions
Unfavorable conditions in the economy both in the United States and abroad, including conditions resulting from changes in gross domestic product growth, supply chain disruptions, inflationary pressures, 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, political instability and transitions of power in regions where we operate, natural catastrophes, outbreaks of contagious diseases, warfare and terrorist attacks on the United States, Europe or elsewhere, including military actions affecting Russia, Ukraine, the Middle East or elsewhere, could cause a decrease in business investments in information technology and negatively affect the growth of our business and our results of operations.
While our business model provides some resilience against these factors, we will continue to monitor the direct and indirect impacts of these or similar circumstances on our business and our results of operations, and will take appropriate measures, as necessary, to minimize potential risk exposure.
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 acquisitions beginning in the period in which they were acquired with respect to the metrics disclosed.
Three Months Ended September 30,
2024 2023
Learners(1)
474,342 478,730
Builders(1)
145,412 137,959
Scalers(1)
17,892 16,305
ARPU $ 102.51 $ 92.06
ARR (in millions) $ 798 $ 713
Net dollar retention rate 97 % 96 %
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(1)Customer count
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 startup and growing digital-native business 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 from 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 the reported 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 recurring 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 revenue of the last month of the reported period 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 customers, including Testers, Learners, Builders and Scalers, for our IaaS, PaaS and SaaS offerings 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 customers, including Testers, Learners, Builders and Scalers, for our IaaS, PaaS and SaaS offerings. 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 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; Software-as-a-Service (SaaS), including our Managed Hosting and Marketplace offerings; and AI/ML, including our Machines, Notebooks and Deployments 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.
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Cost of Revenue
Cost of revenue consists primarily of fees related to operating in third-party co-location space at data center facilities, personnel expenses for those directly supporting our co-location facilities and non-personnel costs, including amortization of acquired technology, 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 the 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 increase in absolute dollars as we enhance our product offerings and implement new marketing and sales 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, acquisition related compensation, and other administrative costs. General and administrative expenses may 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. The restructuring plan was substantially completed by the end of the third quarter of 2023.
Other Income, net
Other income, net consists primarily of accretion/amortization of premium/discounts and interest income from our marketable securities, amortization of deferred financing fees on our convertible notes, loss on extinguishment of debt, and gains or losses on foreign currency exchange.
Income Tax (Expense) Benefit
Income tax (expense) benefit is attributable to the mix of income in the 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. We regularly assess all available evidence, including cumulative historic losses and forecasted earnings. Given our current earnings and anticipated future earnings, we believe that there is a reasonable possibility that sufficient positive evidence may become available in a future period to reach a conclusion that the U.S. valuation allowance will no longer be needed. Release of all, or a portion of, the valuation allowance would result in the recognition of U.S. federal and state deferred tax assets and a corresponding decrease to income tax expense in the period the release is recorded.
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Results of Operations
The following table sets forth our results of operations for the periods presented:
Three Months Ended Nine Months Ended
September 30, September 30,
2024 2023 2024 2023
(in thousands)
Revenue $ 198,484 $ 177,062 $ 575,690 $ 512,010
Cost of revenue(1)
79,043 70,329 226,826 209,562
Gross profit 119,441 106,733 348,864 302,448
Operating expenses:
Research and development(1)
37,377 32,627 105,388 109,468
Sales and marketing(1)
17,036 19,015 57,970 53,346
General and administrative(1)
40,422 20,064 127,034 117,861
Restructuring and other charges(1)
- (441) - 20,862
Total operating expenses 94,835 71,265 290,392 301,537
Income from operations 24,606 35,468 58,472 911
Other income, net 5,035 1,646 10,233 12,333
Income before income taxes 29,641 37,114 68,705 13,244
Income tax benefit (expense) 3,308 (17,939) (2,479) (9,774)
Net income attributable to common stockholders $ 32,949 $ 19,175 $ 66,226 $ 3,470
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(1) Includes stock-based compensation as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
2024 2023 2024 2023
(in thousands)
Cost of revenue $ 506 $ 497 $ 1,583 $ 1,350
Research and development 10,828 9,502 29,099 35,280
Sales and marketing 2,063 4,701 9,105 11,759
General and administrative(1)
9,552 (17,071) 27,872 13,263
Restructuring and other charges - - - 3,937
Total stock-based compensation $ 22,949 $ (2,371) $ 67,659 $ 65,589
(1) Amount includes $31.3 million of recognized stock-based compensation related to our former CEO's MRSUs that was estimated to be forfeited and therefore reversed for the three and nine months ended September 30, 2023.
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The following table sets forth our results of operations as a percentage of revenue for the periods presented:
Three Months Ended Nine Months Ended
September 30, September 30,
2024 2023 2024 2023
Revenue 100 % 100 % 100 % 100 %
Cost of revenue 40 40 39 41
Gross profit 60 60 61 59
Operating expenses:
Research and development 19 18 18 21
Sales and marketing 9 11 10 10
General and administrative 20 11 22 23
Restructuring and other charges - - - 4
Total operating expenses*
48 40 50 59
Income from operations 12 20 10 -
Other income, net 3 1 2 2
Income before income taxes 15 21 12 3
Income tax benefit (expense) 2 (10) - (2)
Net income attributable to common stockholders*
17 % 11 % 12 % 1 %
*May not foot due to rounding
Comparison of the Three Months Ended September 30, 2024 and 2023
Revenue
Three Months Ended September 30,
2024 2023 $ Change % Change
(in thousands)
Revenue $ 198,484 $ 177,062 $ 21,422 12 %
Revenue increased $21.4 million, or 12%, for the three months ended September 30, 2024 compared to the three months ended September 30, 2023. The increase was primarily driven by a 11% increase in ARPU to $102.51 from $92.06, and a 15% increase in revenue from Builders and Scalers. 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 September 30,
2024 2023 $ Change % Change
(in thousands)
Cost of revenue $ 79,043 $ 70,329 $ 8,714 12 %
Cost of revenue increased $8.7 million, or 12%, for the three months ended September 30, 2024 compared to the three months ended September 30, 2023. The increase is primarily due to increases of $5.4 million in depreciation and amortization due to our continued investment in AI/ML offerings and infrastructure, $1.9 million in co-location costs and $1.1 million in third-party license fees. Gross profit remained consistent at 60% for the three months ended September 30, 2024 and 2023, primarily due to decreases in co-location costs and bandwidth expenses as a percentage of revenue as a result of our ongoing cost optimization efforts, offset entirely by our continued investment in AI/ML offerings.
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Operating Expenses
Three Months Ended September 30,
2024 2023 $ Change % Change
(in thousands)
Research and development $ 37,377 $ 32,627 $ 4,750 15 %
Sales and marketing 17,036 19,015 (1,979) (10 %)
General and administrative 40,422 20,064 20,358 101 %
Restructuring and other charges - (441) 441 (100 %)
Total operating expenses $ 94,835 $ 71,265 $ 23,570 33 %
Research and development expenses increased $4.8 million, or 15%, for the three months ended September 30, 2024 compared to the three months ended September 30, 2023. The increase is primarily due to increases of $6.0 million in personnel costs and $0.3 million in professional services costs, partially offset by higher capitalized internal-use software development costs of $1.8 million.
Sales and marketing expenses decreased $2.0 million, or 10%, for the three months ended September 30, 2024 compared to the three months ended September 30, 2023. The decrease is primarily due to a $2.8 million decrease in personnel costs, largely due to the reversal of stock-based compensation from forfeited RSUs, partially offset by a $0.6 million increase in advertising expenses.
General and administrative expenses increased $20.4 million, or 101%, for the three months ended September 30, 2024 compared to the three months ended September 30, 2023. The increase is primarily due to a $31.3 million reversal of stock-based compensation attributed to our former CEO's forfeited MRSUs during the three months ended September 30, 2023 and a $2.0 million increase in other operating costs, partially offset by decreases of $8.7 million in personnel costs and $4.4 million in professional service costs.
There were $0.4 million in Restructuring and other charges during the three months ended September 30, 2023 and no such charges during the three months ended September 30, 2024. These charges were 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 in February 2023, which was substantially completed by the third quarter of 2023.
Other Income, net
Three Months Ended September 30,
2024 2023 $ Change % Change
(in thousands)
Other income, net $ 5,035 $ 1,646 $ 3,389 206 %
Other income, net increased $3.4 million, or 206%, for the three months ended September 30, 2024 compared to the three months ended September 30, 2023, primarily due to gains from foreign currency fluctuations from our operations.
Income Tax Benefit (Expense)
Three Months Ended September 30,
2024 2023 $ Change % Change
(in thousands)
Income tax benefit (expense) $ 3,308 $ (17,939) $ 21,247 (118 %)
Income tax benefit increased $21.2 million, or 118%, for the three months ended September 30, 2024 compared to the three months ended September 30, 2023, primarily as a result of lower pretax income for the three months ended September 30, 2024 compared to the three months ended September 30, 2023, due to higher excess tax benefit taken from stock-based compensation and utilization of research and development credits in 2024 compared to 2023.
Comparison of the Nine Months Ended September 30, 2024 and 2023
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Revenue
Nine Months Ended September 30,
2024 2023 $ Change % Change
(in thousands)
Revenue $ 575,690 $ 512,010 $ 63,680 12 %
Revenue increased $63.7 million, or 12%, for the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023. The increase in revenue was primarily driven by a 10% increase in ARPU to $99.02 from $90.43; and a 14% increase in revenue from Builders and Scalers. The increase in ARPU was primarily driven by continued adoption of our products by our customers leading to higher average usage of our platform.
Cost of Revenue
Nine Months Ended September 30,
2024 2023 $ Change % Change
(in thousands)
Cost of revenue $ 226,826 $ 209,562 $ 17,264 8 %
Cost of revenue increased $17.3 million, or 8%, for the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023. The increase is primarily due to increases of $13.2 million in depreciation and amortization from acquired finance leases and acquired developed technology, as well as our continued investment in AI/ML offerings and infrastructure, $3.0 million in co-location costs, $2.2 million in third-party license fees and $2.0 million in partnership costs, partially offset by decreases of $2.3 million in bandwidth expenses and $1.0 million in ancillary equipment. Gross profit increased to 61% for the nine months ended September 30, 2024 from 59% for the nine months ended September 30, 2023, primarily due to decreases in co-location costs, ancillary equipment and bandwidth expenses as a percentage of revenue as a result of our ongoing cost optimization efforts, offset by our continued investment in AI/ML offerings.
Operating Expenses
Nine Months Ended September 30,
2024 2023 $ Change % Change
(in thousands)
Research and development $ 105,388 $ 109,468 $ (4,080) (4 %)
Sales and marketing 57,970 53,346 4,624 9 %
General and administrative 127,034 117,861 9,173 8 %
Restructuring and other charges - 20,862 (20,862) (100 %)
Total operating expenses $ 290,392 $ 301,537 $ (11,145) (4 %)
Research and development expenses decreased $4.1 million, or 4%, for the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023. The decrease is primarily due to $4.5 million of higher capitalized internal-use software development costs and a $0.4 million decrease in personnel costs, partially offset by a $1.2 million increase in professional services costs.
Sales and marketing expenses increased $4.6 million, or 9%, for the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023. The increase is primarily due to increases of $3.7 million in advertising expenses, $1.4 million in amortization of acquired intangibles assets and $0.8 million in other operating costs, offset by a $1.3 million decrease in personnel costs largely due to the reversal of stock-based compensation from forfeited RSUs.
General and administrative expenses increased $9.2 million, or 8%, for the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023. The increase is primarily due to a $31.3 million reversal of stock-based compensation attributed to our former CEO's forfeited MRSUs during the nine months ended September 30, 2024 , an increase of $2.0 million in other operating costs and an increase of $1.1 million in payment processing costs due to revenue growth, partially offset by decreases of $22.6 million in personnel costs and $3.4 million in professional services costs.
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There were $20.9 million in Restructuring and other charges during the nine months ended September 30, 2023 and no such charges during the nine months ended September 30, 2024. The 2023 charges were 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 in February 2023, which was substantially completed by the third quarter of 2023.
Other Income, net
Nine Months Ended September 30,
2024 2023 $ Change % Change
(in thousands)
Other income, net $ 10,233 $ 12,333 $ (2,100) (17 %)
Other income, net decreased $2.1 million, or 17%, for the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023, primarily due to a decrease in interest income from marketable securities as they were reallocated at maturity to cash and money market funds during the three months ended March 31, 2024, offset by gains from foreign currency fluctuations from our operations.
Income Tax Expense
Nine Months Ended September 30,
2024 2023 $ Change % Change
(in thousands)
Income tax expense
$ (2,479) $ (9,774) $ 7,295 (75 %)
Income tax expense decreased $7.3 million, or 75%, for the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023, primarily as a result of higher excess tax benefit from stock-based compensation and utilization of research and development credits taken in 2024.
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 and co-location costs, and capital expenditures, including our investments in AI/ML and core product offerings. From time to time, we may also use excess cash for share repurchases and investments in marketable securities and cash equivalents.
We believe our existing cash and cash equivalents, cash flow from operations and availability under our Credit Facility (as defined below) will be sufficient to support working capital and capital expenditure requirements and our outstanding contractual commitments for at least the next 12 months and in the long term.
In February 2024, our Board of Directors approved an additional repurchase program of up to an aggregate of $140 million of our common stock through fiscal year 2025. For the nine months ended September 30, 2024, we repurchased and retired 795,191 shares of common stock for an aggregate purchase price of $29.6 million. The program will expire on December 31, 2025.
As of September 30, 2024, we had $167.3 million of estimated undiscounted fixed payment obligations for leases of co-location space at data center facilities and, to a lesser extent, office space, that have not yet commenced and were not included on the Condensed Consolidated Balance Sheets. These leases are expected to commence between October 2024 and August 2025, and have a weighted average lease term of 6 years.
As of September 30, 2024, we had $439.9 million in cash and cash equivalents. Our cash and cash equivalents primarily consist of cash and money market funds.
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.
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The following table summarizes our cash flows for the periods presented:
Nine Months Ended September 30,
(In thousands)
2024 2023
Net cash provided by operating activities $ 211,386 $ 154,426
Net cash (used in) provided by investing activities (47,661) 248,266
Net cash used in financing activities (41,020) (473,336)
Increase (decrease) in cash, cash equivalents and restricted cash 122,636 (70,699)
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, co-location costs, payment processing fees, bandwidth and connectivity, server maintenance and software licensing fees.
Net cash provided by operating activities was $211.4 million and $154.4 million for the nine months ended September 30, 2024 and 2023, respectively. The increase was primarily driven by an increase in cash collections from higher revenues. These increases were partially offset by payments for leases, acquisition related compensation and cash bonuses.
Investing Activities
Net cash used in investing activities was $47.7 million for the nine months ended September 30, 2024 compared to $248.3 million for the nine months ended September 30, 2023. The decrease in cash provided by investing activities was primarily driven by a $329.2 million reallocation of our marketable securities portfolio to cash equivalents and an increase of $65.8 million in cash payments for capital expenditures, partially offset by a $2.5 million decrease in cash activity for asset acquisitions.
Financing Activities
Net cash used in financing activities of $41.0 million and $473.3 million for the nine months ended September 30, 2024 and 2023, respectively, was primarily due to the repurchase and retirement of our common stock for $29.9 million and $475.0 million, respectively.
Contractual Obligations and Commitments
Except as disclosed in Note 8. Commitments and Contingencies in our condensed consolidated financial statements, 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, 2023.
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, 2023.
Recently Adopted Accounting Pronouncements
For information on recently issued accounting pronouncements, see Note 2, Summary of Significant Accounting Policies, in our Notes to condensed consolidated financial statements included in Part I, Item 1. "Financial Statements and Supplementary Data" included in this Form 10-Q.
Non-GAAP Financial Measures
To supplement our condensed 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 and (ii) non-GAAP net income and non-
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GAAP diluted net income per share. 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. 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 income 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, restructuring and other charges, restructuring related charges, impairment of long-lived assets, and other income, net. 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, 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 income attributable to common stockholders and other GAAP results.
The following table presents a reconciliation of Net income 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 Nine Months Ended
September 30, September 30,
(In thousands) 2024 2023 2024 2023
GAAP Net income attributable to common stockholders $ 32,949 $ 19,175 $ 66,226 $ 3,470
Adjustments:
Depreciation and amortization 35,810 30,554 100,825 87,085
Stock-based compensation(1)
22,949 28,731 67,512 92,754
Interest expense 2,262 2,333 6,887 6,634
Acquisition related compensation 3,193 7,995 11,439 22,576
Acquisition and integration related costs - 2,366 - 5,113
Income tax expense (3,308) 17,939 2,479 9,774
Restructuring and other charges(1)
- (441) - 20,862
Restructuring related charges(1)(2)
162 (29,484) 4,025 (26,757)
Impairment of long-lived assets - 587 356 1,140
Other income, net(3)
(7,297) (3,979) (17,120) (18,967)
Adjusted EBITDA $ 86,720 $ 75,776 $ 242,629 $ 203,684
As a percentage of revenue:
Net income margin 17 % 11 % 12 % 1 %
Adjusted EBITDA margin 44 % 43 % 42 % 40 %
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(1)For the nine months ended September 30, 2024, non-GAAP stock-based compensation excludes $0.1 million as it is presented in Restructuring related charges. There were no reclassifications of stock-based compensation for the three months ended September 30, 2024. For the three and nine months ended September 30, 2023, non-GAAP stock-based compensation excludes $31.3 million, reversal related to the former CEO's forfeited MRSU award that is reported in Restructuring related charges.
(2)For the three and nine months ended September 30, 2024, primarily consists of executive reorganization charges. For the three and nine months ended September 30, 2023, primarily consists of the $31.3 million reversal of stock-based compensation related to the former CEO's forfeited MRSU award, partially offset by salary continuation charges, executive reorganization charges including severance, CEO search firm fees, and other legal and professional service costs.
(3)For the three and nine months ended September 30, 2024 and 2023, primarily consists of interest and accretion income from our cash and cash equivalents and marketable securities.
Non-GAAP Net Income and Non-GAAP Diluted Net Income Per Share
We define non-GAAP net income as net income attributable to common stockholders, excluding stock-based compensation, acquisition related compensation, amortization of acquired intangibles, acquisition and integration related costs, restructuring and other charges, restructuring related charges, impairment of long-lived assets, 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 diluted shares outstanding, which includes the potentially dilutive effect of our stock options, RSUs, PRSUs, and Convertible Notes.
We believe non-GAAP diluted 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 income 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:
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Three Months Ended Nine Months Ended
September 30, September 30,
(In thousands, except per share amounts) 2024 2023 2024 2023
GAAP Net income attributable to common stockholders $ 32,949 $ 19,175 $ 66,226 $ 3,470
Stock-based compensation(1)
22,949 28,731 67,512 92,754
Acquisition related compensation 3,193 7,995 11,439 22,576
Amortization of acquired intangible assets 5,571 5,651 17,041 13,231
Acquisition and integration related costs - 2,366 - 5,113
Restructuring and other charges(1)
- (441) - 20,862
Restructuring related charges(1)(2)
162 (29,484) 4,025 (26,757)
Impairment of long-lived assets - 587 356 1,140
Non-GAAP income tax adjustment(3)
(13,150) 9,011 (24,573) (14,393)
Non-GAAP Net income $ 51,674 $ 43,591 $ 142,026 $ 117,996
Non-cash charges related to convertible notes(4)
$ 1,590 $ 1,563 $ 4,764 $ 4,684
Non-GAAP Net income used to compute net income per share, diluted $ 53,264 $ 45,154 $ 146,790 $ 122,680
GAAP Net income per share attributable to common stockholders, diluted $ 0.33 $ 0.20 $ 0.70 $ 0.04
Stock-based compensation(1)
0.22 0.27 0.66 0.87
Acquisition related compensation 0.03 0.07 0.11 0.21
Amortization of acquired intangible assets 0.05 0.05 0.16 0.12
Acquisition and integration related costs - 0.02 - 0.05
Restructuring and other charges(1)
- - - 0.20
Restructuring related charges(1)(2)
- (0.28) 0.03 (0.25)
Impairment of long-lived assets - - - 0.01
Non-cash charges related to convertible notes(4)
0.02 0.02 0.04 0.04
Non-GAAP income tax adjustment(3)
(0.13) 0.09 (0.27) (0.13)
Non-GAAP Net income per share, diluted*
$ 0.52 $ 0.44 $ 1.43 $ 1.16
GAAP Weighted-average shares used to compute net income per share, diluted 102,591 102,674 102,678 97,747
Weighted-average dilutive effect of potentially dilutive securities - - - 8,403
Non-GAAP Weighted-average shares used to compute net income per share, diluted 102,591 102,674 102,678 106,150
*May not foot due to rounding
______________
(1)For the nine months ended September 30, 2024, non-GAAP stock-based compensation excludes $0.1 million as it is presented in Restructuring related charges. There were no reclassifications of stock-based compensation for the three months ended September 30, 2024. For the three and nine months ended September 30, 2023, non-GAAP stock-based compensation excludes $31.3 million, reversal related to the former CEO's forfeited MRSU award that is reported in Restructuring related charges.
(2)For the three and nine months ended September 30, 2024, primarily consists of executive reorganization charges. For the three and nine months ended September 30, 2023, primarily consists of the $31.3 million reversal of stock-
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based compensation related to the former CEO's forfeited MRSU award, partially offset by salary continuation charges, executive reorganization charges including severance, CEO search firm fees, and other legal and professional service costs.
(3)For the three and nine months ended September 30, 2024, we used a tax rate of 16%, which we believe is a reasonable estimate of our long-term effective tax rate applicable to non-GAAP pre-tax income for 2024. For the three and nine months ended September 30, 2023, we used a tax rate of 17%, which we believe was a reasonable estimate of our long-term effective tax rate applicable to non-GAAP pre-tax income for 2023.
(4)Consists of non-cash interest expense for amortization of deferred financing fees related to the Convertible Notes.
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, 2023.
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 Chief Executive Officer and our Chief Financial Officer, 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 September 30, 2024. Based on that evaluation, our Chief Executive Officer and our Chief Financial Officer, concluded that, as of September 30, 2024, our disclosure controls and procedures were not effective due to the material weakness in our internal control over financial reporting described below.
Material Weakness in Internal Control over Financial Reporting
As previously disclosed, we identified a material weakness in our internal control over financial reporting that continued to exist as of September 30, 2024. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of a company's annual or interim financial statements will not be prevented or detected on a timely basis. We did not design and maintain effective controls over the accounting for income taxes. Specifically, we did not have the appropriate skills and level of experience to assess complicated tax matters. Additionally, we did not properly identify, risk assess, design and maintain effective controls related to the income tax provision, including controls related to the evaluation of tax deductions and the impact on our tax provision. This material weakness resulted in immaterial errors to the income tax expense, deferred taxes, accrued tax liabilities and income tax disclosures which were adjusted in the Company's revised consolidated financial statements for the year ended December 31, 2022. The material weakness also resulted in material errors to the income tax expense, deferred taxes and accrued tax liabilities which were adjusted in the Company's restated condensed consolidated financial statements for the three months ended March 31, 2023. This material weakness could result in a misstatement of the aforementioned account balances or disclosures that would result in a material misstatement to the annual or interim financial statements that would not be prevented or detected.
Remediation Plan with Respect to Material Weakness
As of September 30, 2024, all remediation efforts planned to address the material weakness have been designed and implemented by management. The controls and procedures we have implemented are subject to ongoing testing to measure their effectiveness over a sustained period of financial reporting cycles. The remediation measures we have taken include:
a.In March 2023, we hired a VP of Tax with over 25 years of tax leadership experience.
b.In the second quarter of 2023, we supplemented our tax resources through the use of a third-party tax advisor and we continue utilizing the third-party tax advisor.
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c.In the first and second quarters of 2024, we augmented our team with additional tax personnel who have the appropriate knowledge, training and experience to analyze, record and disclose tax accounting matters timely and accurately, and to design and maintain appropriate accounting policies, procedures and controls over income taxes, commensurate with our financial reporting requirements.
d.Since the beginning of 2024, we have trained process owners on and evaluated our newly implemented controls to address the identification, accounting, reporting and review of complex tax transactions and concluded the controls were designed effectively.
We have executed our remediation plan for the material weakness and continue to report the status of the remediation plan to the Audit Committee on a regular basis.
We have made substantial progress remediating the material weakness, and we believe our remediation plan will be sufficient to remediate the identified material weakness. However, the completion of these remediation measures requires evaluation of effectiveness of internal control over a sustained period of financial reporting prior to reaching a determination that the material weakness has been fully remediated. As we continue to validate and test our internal control over financial reporting, we may determine that additional actions to be taken for the implementation of the remediation plan are necessary or appropriate.
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 quarter ended September 30, 2024 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 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.
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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 can be 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 Part I, Item 1A. "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2023 for a description of certain significant 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, 2023, except as set forth below.
If we fail to effectively onboard and integrate new members of our executive leadership team and senior management, our business and future growth prospects could be harmed.
Our success largely depends on our ability to effectively onboard and integrate new members of our executive leadership team and senior management. In 2024, we hired a new Chief Executive Officer, Chief Product and Technology Officer, Chief Ecosystem and Growth Officer and Chief Revenue Officer, in addition to other new members of senior management. The ability of these new members of leadership and senior management to understand our business, operations, and strategic plans will be critical to the Company and our management's ability to make informed decisions about our strategic direction and operations. Leadership transitions can be inherently difficult to manage, particularly when there is more than one transition occurring within the leadership and senior management teams in a short period of time. Ensuring that new executives and management gain detailed knowledge of our operations may take time and resources. An inadequate onboarding process or transition may cause disruption to our business due to, among other things, diverting management's attention away from the Company's financial and operational goals or causing a deterioration in morale.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(c) Issuer Purchases of Equity Securities
The following table provides information with respect to repurchases of shares of common stock by the Company during the three months ended September 30, 2024:
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)
July 1-31, 2024 - $0.00 - $ 121,817
August 1-31, 2024 133,096 $36.60 133,096 $ 116,946
September 1-30, 2024 164,731 $39.45 164,731 $ 110,447
Total 297,827 $38.18 297,827
(1)On February 20, 2024, the Company's Board of Directors approved the repurchase of up to an aggregate of $140 million of the Company's common stock (the "2024 Share Buyback Program"). Pursuant to the 2024 Share Buyback Program, repurchases of the Company's common stock will be made at prevailing market prices through open market purchases or in negotiated transactions off the market. The repurchase program is authorized through fiscal year 2025; however, the Company is not obligated to acquire any particular amount of common stock and the 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.
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ITEM 5. OTHER INFORMATION
Trading Arrangements
On August 13, 2024, Bratin Saha, the Company's Chief Product and Technology Officer, adopted a trading plan intended to satisfy the affirmative defense conditions of Rule 10b5-1(c) under the Exchange Act (the "Saha 10b5-1 Plan"). The Saha 10b5-1 Plan contemplates the sale of up to 166,104 shares of the Company's common stock between November 18, 2024 and June 17, 2025.
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ITEM 6. EXHIBITS
Incorporated by Reference
Exhibit No. Exhibit Description Form File No. Exhibit Filing Date Filed Herewith
31.1
Certification of Padmanabhan Srinivasan, 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.
X
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.
X
32.1*
Certifications of Padmanabhan Srinivasan, 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.
X
101.INS Inline XBRL Instance Document X
101.SCH Inline XBRL Taxonomy Extensions Schema X
101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase X
101.DEF Inline XBRL Taxonomy Extension Definition Linkbase X
101.LAB Inline XBRL Taxonomy Extension Label Linkbase X
101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase X
104 Cover Page Interactive File (formatted as Inline XBRL and contained in Exhibit 101) X
___________________
* 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.
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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: November 4, 2024 By: /s/ Padmanabhan Srinivasan
Padmanabhan Srinivasan
Chief Executive Officer
(Principal Executive Officer)
Date: November 4, 2024 By: /s/ W. Matthew Steinfort
W. Matthew Steinfort
Chief Financial Officer
(Principal Financial Officer)
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