DigitalOcean Cuts Outlook, Plans to Restate Some Results

DigitalOcean (ticker: DOCN), which provides cloud-computing services to small businesses, disclosed in a Securities and Exchange Commission filing this afternoon that in preparing its June quarter financial statements, the company discovered “certain errors” in the March quarter results.

In particular, the company said the errors involved accounting for the tax reporting for capitalized research expenses. The company said accrued taxes were overstated by about $18 million; the result is that reported non-GAAP earnings per share in the March quarter were understated. DigitalOcean said it would file an amended quarterly earnings report with the SEC that will include the company’s “disclosure of an identified material weakness and that our disclosure controls and procedures were not effective as of March 31.”

The company said the material weakness also existed at year-end 2022, and added that its auditor’s opinion from Ernst & Young for the full year will be revised to include “an adverse opinion that internal control over financial reporting was ineffective and will be reissued.”

For the June quarter, DigitalOcean posted revenue of $170 million, up 27%, and within the company’s guidance range of $169.5 million to $170.5 million. Adjusted Ebitda, or earnings before interest, taxes, depreciation, and amortization were $72 million, a margin of 43%, which was well above the guidance range of 37% to 38%. The company said that due to the tax-reporting issue, it can’t provide a final number for earnings per share, but added that the total should be above the guidance range of 40 cents to 41 cents.

For the third quarter, DigitalOcean sees revenue of $172.4 million to $174 million, short of the Street consensus forest at $170 million, with adjusted Ebtida margin falling back to the 38%-to-39% range. For the full year, the company now expects revenue to range from $680 million to $685 million, down from a previous forecast for $700 million to $720 million. But the company is maintaining its forecast for adjusted Ebitda margin of 38% to 39%, and adjusted free-cash-flow margin of 21% to 22%. The company had previously forecast full-year non-GAAP earnings per share of $1.70 to $1.73, and now says it will update the earnings-per-share outlook once it completes the correction of the tax expense reporting errors.

DigitalOcean CEO Yancy Spruill said in an interview with Barron’s that the company had “a good quarter,” with “a ton of progress” made on cost controls. But he also said that some customers are still slowing spending growth, reflecting softness in their own businesses.

Spruill adds that while thinks that recent softening trends are bottoming, but adds that he is “not going to call the bottom.” Digital Ocean, like larger players in the cloud business, has a consumption-based model—and with smaller customers, adjustments to spending happen quickly. “If a customer’s business slows, their spending corrects immediately,” he says.

Digital Ocean shares have rallied about 88% for the year to date.

Write to Eric J. Savitz at [email protected]