Cloud computing customers of all stripes are looking for ways to save money. DigitalOcean (DOCN 0.80%), a small developer-focused cloud computing platform, is not immune to this trend. While DigitalOcean's revenue jumped 36% year over year in the fourth quarter, the company guided for approximately 23% growth in 2023.
Adjusting the timeline
DigitalOcean had set a goal of hitting $1 billion in annual revenue by 2024, along with a free cash flow margin of at least 20%. The company is pushing back the first part of that goal while pulling in the second half. Given the tough economic environment, which is out of the company's control, DigitalOcean now expects to reach its $1 billion revenue target by 2025.
There's little the company can do to speed this up, so instead it's focusing on bringing costs down and accelerating its free cash flow generation. DigitalOcean now expects to reach a free cash flow margin of 20% this year.
Part of the plan involves layoffs, which are becoming common across the tech industry. DigitalOcean announced along with its earnings report that it would reduce its workforce by about 11%. The company also plans to shift some positions "across a broader geographical footprint," likely in an effort to reduce salaries. This plan is expected to save around $60 million annually once it's complete.
At the same time DigitalOcean is laying off employees, the company is pouring cash into share buybacks. After spending $600 million on share buybacks in 2022, the company has authorized a fresh $500 million to be used for the same purpose this year. Notably, it has disclosed that it expects to use as much as 125% of its free cash flow in 2024 to repurchase shares.
Making progress
Even as DigitalOcean started to face headwinds in 2022 as customers began to pull back, the company greatly improved its profitability. Free cash flow more than tripled to $77.8 million for the full year, or about 13.5% of revenue. Based on its revenue guidance, the company should generate roughly $140 million in free cash flow this year if it reaches its 20% free cash flow margin target.
DigitalOcean's frugalness was a big reason for this surging free cash flow. The company's customer acquisition strategy is largely based on word of mouth and helpful content drawing in potential customers. DigitalOcean spent just 14% of revenue on sales and marketing last year, a small fraction of what some tech companies spend.
The company will tighten up spending further this year as it copes with a more sluggish growth rate, even as it invests in initiatives aimed at accelerating growth in the long run. Storage is one significant opportunity. Storage services account for just 10% of DigitalOcean's revenue, and the company thinks it can double that percentage. The recent acquisition of backup tool SnapShooter should help the cause.
With small and medium-sized businesses spending around $98 billion on cloud infrastructure annually, DigitalOcean has a massive long-term opportunity. But for now, with those small businesses searching for ways to reduce their own costs, DigitalOcean must shift its focus to profitability and efficiency as it rides out the storm.
