DIGITALOCEAN HOLDINGS, INC. MANAGEMENT REPORT AND ANALYSIS OF FINANCIAL POSITION AND OPERATING RESULTS (Form 10-Q)

The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with our unaudited condensed
consolidated financial statements and related notes appearing elsewhere in this
Quarterly Report on Form 10-Q and our audited consolidated financial statements
and the related notes and the discussion under the heading "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in our
Annual Report on Form 10-K for the year ended December 31, 2021, filed with the
SEC on February 25, 2022. This discussion, particularly information with respect
to our future results of operations or financial condition, business strategy,
plans and objectives of management for future operations and the potential
impact that the ongoing COVID-19 pandemic may have on our business, 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.

Insight


DigitalOcean is a leading cloud computing platform offering on-demand
infrastructure and platform tools for developers, start-ups and small and
medium-sized businesses, or SMBs. We were founded with the guiding principle
that the transformative benefits of the cloud should be easy to leverage,
broadly accessible, reliable and affordable. Our platform simplifies cloud
computing, enabling our customers to rapidly accelerate innovation and increase
their productivity and agility. Individual and business customers, including
software engineers, researchers, data scientists, system administrators,
students and hobbyists, use our platform to build, deploy and scale software
applications. Our customers use our platform across numerous industry verticals
and for a wide range of use cases, such as web and mobile applications, website
hosting, e-commerce, media and gaming, personal web projects, and managed
services, among many others. We believe that our focus on simplicity, community,
open source and customer support are the four key differentiators of our
business, driving a broad range of customers around the world to build their
applications on our platform.

Improving the developer experience and increasing developer productivity are
core to our mission. Our developer cloud platform was designed with simplicity
in mind to ensure that software developers can spend less time managing their
infrastructure and more time turning their ideas into innovative applications to
grow their businesses. Simplicity guides how we design and enhance our
easy-to-use-interface, the core capabilities we offer our customers and our
approach to predictable and transparent pricing for our solutions. We offer
mission-critical infrastructure solutions across compute, storage and
networking, and we also enable developers to extend the native capabilities of
our cloud with fully managed application, container and database offerings. In
just minutes, developers can set up thousands of virtual machines, secure their
projects, enable performance monitoring and scale up and down as needed. Our
pricing is consumption-based and billed monthly in arrears, making it easy for
our customers to track usage on an ongoing basis and optimize their deployments.

We generate revenue from our customers’ use of our cloud computing platform, including but not limited to compute, storage, and networking services. We recognize revenue based on customers’ use of these resources. Our pricing is consumption-based and billed monthly in arrears, allowing our customers to easily track ongoing usage and optimize their deployments. The price of each of our products is available on our website.

                                       21

--------------------------------------------------------------------------------

We have historically generated almost all of our revenue from our efficient
self-service customer acquisition model, which we complement with a targeted
sales force focused on inside sales, outside sales and partnership opportunities
to drive revenue growth. Our model enables customers to get started on our
platform very quickly and without the need for assistance. We focus heavily on
enabling a self-service, low-friction model that makes it easy for users to try,
adopt and use our products. For the three months ended June 30, 2022 and 2021,
our sales and marketing expense was approximately 14% and 11% of our revenue,
respectively. The efficiency of our go-to-market model and our focus on the
needs of the individual and SMB markets have enabled us to drive organic growth
and establish a truly global customer base across a broad range of industries.

Our customers are spread across over 185 countries and approximately two-thirds
of our revenue has historically come from customers located outside the United
States. For the three months ended June 30, 2022, 38% of our revenue was
generated from North America, 29% from Europe, 23% from Asia and 10% from the
rest of the world. Revenue from customers paying more than $50 per month as a
percentage of total revenue grew from 82% in the quarter ended June 30, 2021 to
85% in the quarter ended June 30, 2022.

Our average revenue per customer, or ARPU, has increased significantly from
$58.07 in the quarter ended June 30, 2021 to $71.76 in the quarter ended
June 30, 2022. We had no material customer concentration as our top 25 customers
made up approximately 12% and 10% of our revenue in the three months ended June
30, 2022 and 2021, respectively. We have experienced strong and predictable
growth in recent periods. Our annual run-rate revenue, or ARR, as of June 30,
2022 was $544 million, up from $426 million as of June 30, 2021. ARR as of the
end of each month represents total revenue for that month multiplied by 12.

Our larger customers paying more than $50 per month drive the great majority of
our revenue and are an important measure of our growth. We have a growing number
of these customers with higher spending levels and these larger customers are
expanding their business with us at a faster rate than our overall customer
base. We had approximately 105,000 customers paying more than $50 per month as
of June 30, 2022, up from approximately 91,000 as of June 30, 2021. Beginning
July 1, 2022, we implemented a price increase on our products. The impact will
be included in our results of operations for the third quarter of 2022.

Impact of the Russian-Ukrainian conflict


In February 2022, Russian military forces invaded Ukraine. In response,
Ukrainian military personnel and civilians are actively resisting the invasion
and a variety of responsive economic sanctions and export controls measures
aimed at Russia, Belarus, and certain regions of Ukraine have been imposed by
countries and governmental bodies around the world, including the United States
and the European Union. These measures prohibit or restrict dealings with
certain entities and individuals, including banks and financial institutions, in
the target countries and territories.

We are committed to conducting our activities in compliance with applicable
sanctions laws and regulations issued by countries in which we do business. We
do not currently have employees or direct operations in Russia, Belarus or
Ukraine, nor do we engage in activities with sanctioned parties; however,
certain of our customers conduct business in these countries and regions. Recent
sanction measures, including those targeting major Russian banks and financial
institutions and the removal of certain Russian banks from the SWIFT messaging
system, have impacted our ability to receive payments involving parties located
in Russia. Aggregate revenue from our customers with business activities in
Russia, Belarus and Ukraine was approximately 2.4% and 3.6% of our total revenue
for the three months ended June 30, 2022 and 2021, respectively. As the
situation continues to evolve, further sanctions actions may be forthcoming and
could continue to impact the revenues received from certain customers.

The full impact of the conflict on our business operations and financial
performance remains uncertain and will depend on future developments, including
the severity and duration of the conflict and its impact on our customers and
third-party providers, as well as regional and global economic conditions. We
will continue to monitor and assess the situation and pursue prudent decisions
for our team members, customers, and business.

                                       22

--------------------------------------------------------------------------------

Key business indicators


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.
                                                    Three Months Ended June 30,
                                                   2022                         2021

Customers paying more than $50 per month           105,355                    90,720
ARPU                                         $       71.76                   $ 58.07
ARR (in millions)                            $         544                   $   426
Net dollar retention rate                              112   %                   113  %


Customers

The number and growth of our larger customers is of particular importance to us
as these customers represent a significant majority of our revenue and revenue
growth, and they are more representative of the SMB customers that grow on our
platform and use multiple products. We define customers paying more than $50 per
month as customers having generated an invoice of greater than $50 for that
period.

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 in that period divided by the
number of customers determined as of the last day of that period. For a
quarterly or annual period, ARPU is determined as the weighted average monthly
ARPU over such three or 12-month period.

ARR


Given the renewable nature of our business, we view annual run-rate revenue as
an important indicator of our current progress towards meeting our revenue
targets and projected growth rate going forward. We calculate ARR at a point in
time by multiplying the latest monthly period's revenue by 12.

Net retention rate in dollars


Our ability to maintain long-term revenue growth and achieve profitability is
dependent on our ability to retain and grow revenue from our existing customers.
We have a history of retaining customers for multiple years and in many cases
increasing their spend with us over time. To help us measure our performance in
this area, we monitor our net dollar retention rate. We calculate net dollar
retention rate monthly by starting with the revenue from the cohort of all
customers during the corresponding month 12 months prior, or the Prior Period
Revenue. We then calculate the revenue from these same customers as of the
current month, or the Current Period Revenue, including any expansion and net of
any contraction or attrition from these customers over the last 12 months. The
calculation also includes revenue from customers that generated revenue before,
but not in, the corresponding month 12 months prior, but subsequently generated
revenue in the current month and are therefore reflected in the Current Period
Revenue. We include this group of re-engaged customers in this calculation
because our customers frequently use our platform for projects that stop and
start over time. We then divide the total Current Period Revenue by the total
Prior Period Revenue to arrive at the net dollar retention rate for the relevant
month. For 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 operating results

Revenue


We provide cloud computing services, including but not limited to compute,
storage and networking, to our customers. We recognize revenue based on the
customer utilization of these resources. Customer contracts are primarily
month-to-month and 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

                                       23

--------------------------------------------------------------------------------

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.

Revenue cost


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

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

Operating Expenses

Research and development costs


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, advertising and professional service fees. We expect
sales and marketing expenses to continue to increase in absolute dollars as we
enhance our product offerings and implement new marketing strategies.

General and administrative expenses


General and administrative expenses consist primarily of personnel costs of our
human resources, legal, finance, and other administrative functions including
salaries, bonuses, benefits, and stock-based compensation. General and
administrative expenses also include bad debt expense, software, payment
processing fees, business insurance, depreciation and amortization expenses,
rent and facilities costs, loss on sublease, and other administrative costs. We
expect to incur significant additional legal, accounting and other expenses to
support our operations as a public company, including costs associated with our
compliance with the Sarbanes-Oxley Act. We also expect general and
administrative expenses to increase in absolute dollars as we continue to grow
our business.

Other (Income) Expense

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

Income tax expense (benefits)


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

                                       24
--------------------------------------------------------------------------------

Operating results


The following table sets forth our results of operations for the periods
presented:
                                                 Three Months Ended                       Six Months Ended
                                                      June 30,                                June 30,
                                              2022                2021                2022                2021

                                                                       (in thousands)
Revenue                                   $  133,882          $  103,810          $  261,209          $  197,471
Cost of revenue(1)                            47,246              43,145              94,003              82,689
Gross profit                                  86,636              60,665             167,206             114,782
Operating expenses:
Research and development(1)                   36,956              27,121              74,197              49,523
Sales and marketing(1)                        18,219              11,812              37,263              22,233
General and administrative(1)                 38,838              24,362              76,262              42,402
Total operating expenses                      94,013              63,295             187,722             114,158

(Loss) income from operations                 (7,377)             (2,630)            (20,516)                624
Other (income) expense                           (17)                 30               1,629               5,627
Loss before income taxes                      (7,360)             (2,660)            (22,145)             (5,003)
Income tax (benefit) expense                  (1,169)               (473)              2,169                 523
Net loss attributable to common
stockholders                              $   (6,191)         $   (2,187)         $  (24,314)         $   (5,526)


___________________

(1) Includes stock-based compensation as follows:

                                 Three Months Ended            Six Months Ended
                                      June 30,                     June 30,
                                 2022           2021          2022          2021

                                                 (in thousands)
Cost of revenue              $      481      $    405      $    913      $    601
Research and development         10,661         5,059        20,381         7,695
Sales and marketing               3,851         1,902         7,197         3,039
General and administrative       13,190         4,835        25,673         7,490
Total                        $   28,183      $ 12,201      $ 54,164      $ 18,825


                                       25
--------------------------------------------------------------------------------

The following table shows our results of operations as a percentage of sales for the periods presented:

                                                  Three Months Ended                             Six Months Ended
                                                       June 30,                                      June 30,
                                              2022                   2021                   2022                   2021
Revenue                                           100  %                 100  %                 100  %                 100  %
Cost of revenue                                    35                     42                     36                     42
Gross profit                                       65                     58                     64                     58
Operating expenses:
Research and development                           28                     26                     28                     25
Sales and marketing                                14                     11                     14                     11
General and administrative                         29                     23                     29                     21
Total operating expenses                           71                     60                     71                     57

(Loss) income from operations                      (6)                    (2)                    (7)                     1
Other (income) expense                              -                      -                      1                      3
Loss before income taxes                           (6)                    (2)                    (8)                    (2)
Income tax (benefit) expense                       (1)                     -                      1                      -
Net loss attributable to common
stockholders                                       (5) %                  (2) %                  (9) %                  (2) %


Comparison of the three months ended June 30, 2022 and 2021

Revenue
                  Three Months Ended June 30,
                      2022                  2021         $ Change      % Change

                                (in thousands)
Revenue     $      133,882               $ 103,810      $ 30,072           29  %


Revenue increased $30.1 million, or 29%, for the three months ended June 30,
2022 compared to the three months ended June 30, 2021, primarily due to a 24%
increase in ARPU to $71.76 from $58.07 and an increase of 16% in the number of
customers who spend more than $50 per month. The increase in ARPU was primarily
driven by continued adoption of our products by our customers leading to higher
average usage on our platform.

Cost of Revenue
                         Three Months Ended June 30,
                             2022                   2021        $ Change      % Change

                                      (in thousands)
Cost of revenue   $       47,246                 $ 43,145      $  4,101           10  %


Cost of revenue increased $4.1 million, or 10%, for the three months ended June
30, 2022 compared to the three months ended June 30, 2021, primarily due to
higher depreciation and co-location costs of our network equipment to support
the growth in our business, as well as costs associated with our revenue share
programs. Gross profit increased to 65% for the three months ended June 30, 2022
from 58% for the three months ended June 30, 2021, primarily due to a decline in
depreciation as a percentage of revenue and lowering our colocation costs
through a negotiated rate reduction as well as maintenance savings from a
primary network supplier.

                                       26

--------------------------------------------------------------------------------
Operating Expenses
                                    Three Months Ended June 30,
                                        2022                   2021        $ Change      % Change

                                                 (in thousands)
Research and development     $       36,956                 $ 27,121      $  9,835           36  %
Sales and marketing                  18,219                   11,812         6,407           54  %
General and administrative           38,838                   24,362        14,476           59  %
Total operating expenses     $       94,013                 $ 63,295      $ 30,718           49  %


Research and development expenses increased $9.8 million, or 36%, for the three
months ended June 30, 2022 compared to the three months ended June 30, 2021,
primarily due to higher personnel costs and stock-based compensation.

Sales and marketing expenses increased $6.4 millionor 54%, for the three months ended June 30, 2022 compared to the three months ended June 30, 2021mainly due to higher personnel costs and stock-based compensation, and higher advertising costs.


General and administrative expenses increased $14.5 million, or 59%, for the
three months ended June 30, 2022 compared to the three months ended June 30,
2021, primarily due to higher personnel costs and stock-based compensation, and
increases in bad debt expense, software licensing fees, professional service
fees and a loss on sublease.

Other (Income) Expense
                                    Three Months Ended June 30,
                                          2022                     2021      $ Change       % Change

                                                  (in thousands)
Other (income) expense     $           (17)                       $ 30      $     (47)        (157) %

Other (income) expenses decreased by 157% for the quarter ended June 30, 2022
compared to the three months ended June 30, 2021primarily due to interest income and the increase in our marketable securities, partially offset by the amortization expense of our convertible notes.

Income Tax Benefit
                             Three Months Ended June 30,
                                  2022                    2021       $ Change       % Change

                                           (in thousands)
Income tax benefit   $         (1,169)                  $ (473)     $    (696)         147  %


Income tax benefit increased $0.7 million, or 147%, for the three months ended
June 30, 2022 compared to the three months ended June 30, 2021, primarily due to
income taxes related to international jurisdictions in which we conduct
business.

Comparison of the six months ended June 30, 2022 and 2021

Revenue
                  Six Months Ended June 30,
                     2022                 2021         $ Change      % Change

                               (in thousands)
Revenue     $      261,209             $ 197,471      $ 63,738           32  %


Revenue increased $63.7 million, or 32%, for the six months ended June 30, 2022
compared to the six months ended June 30, 2021, primarily due to a 26% increase
in ARPU to $70.33 from $55.90 and an increase of 16% in the number of customers
who spend more than $50 per month. The increase in ARPU was primarily driven by
continued adoption of our products by our customers leading to higher average
usage on our platform.

                                       27
--------------------------------------------------------------------------------
Cost of Revenue
                        Six Months Ended June 30,
                            2022                 2021        $ Change      % Change

                                     (in thousands)
Cost of revenue   $      94,003               $ 82,689      $ 11,314           14  %


Cost of revenue increased $11.3 million, or 14%, for the six months ended June
30, 2022 compared to the six months ended June 30, 2021, primarily due to higher
co-location costs and depreciation of our network equipment to support the
growth in our business, as well as costs associated with our revenue share
programs. Gross profit increased to 64% for the six months ended June 30, 2022
from 58% for the six months ended June 30, 2021, primarily due to a decline in
depreciation as a percentage of revenue and lowering our colocation costs
through a negotiated rate reduction as well as maintenance savings from a
primary network supplier.

Operating Expenses
                                   Six Months Ended June 30,
                                      2022                 2021         $ Change      % Change

                                                (in thousands)
Research and development     $       74,197             $  49,523      $ 24,674           50  %
Sales and marketing                  37,263                22,233        15,030           68  %
General and administrative           76,262                42,402        33,860           80  %
Total operating expenses     $      187,722             $ 114,158      $ 73,564           64  %

R&D spending increased $24.7 millionor 50%, for the six months ended June 30, 2022 compared to the half-year ended June 30, 2021mainly due to higher personnel costs and stock-based compensation.


Sales and marketing expenses increased $15.0 million, or 68%, for the six months
ended June 30, 2022 compared to the six months ended June 30, 2021, primarily
due to higher personnel costs and stock-based compensation, and increases in
advertising costs.

General and administrative expenses increased $33.9 millionor 80%, for the six months ended June 30, 2022 compared to the half-year ended June 30, 2021primarily due to higher personnel costs and stock-based compensation, and higher bad debts, insurance and software license fees, professional services fees and cash losses -lease.

Other (Income) Expense
                                  Six Months Ended June 30,
                                      2022                 2021        $ Change      % Change

                                              (in thousands)
Other (income) expense     $       1,629                 $ 5,627      $ (3,998)         (71) %


Other (income) expense decreased $4.0 million, or 71%, for the six months ended
June 30, 2022 compared to the six months ended June 30, 2021, primarily due to
lower interest expense due to the payoff of the term loan and notes payable in
the first quarter of 2021 and interest income from our marketable securities for
the current period, partially offset by a loss on extinguishment of debt in the
prior period.

Income Tax Expense
                             Six Months Ended June 30,
                                  2022                   2021       $ Change      % Change

                                          (in thousands)
Income tax expense   $          2,169                   $ 523      $  1,646          315  %


Income tax expense increased $1.6 million, or 315%, for the six months ended
June 30, 2022 compared to the six months ended June 30, 2021, primarily due to
income taxes related to international jurisdictions in which we conduct
business.

                                       28

--------------------------------------------------------------------------------

Cash and capital resources


We have funded our operations since inception primarily with cash flow generated
by operations, private offerings of our securities, borrowings under our
existing credit facility and capital expenditure financings. In March 2021, we
consummated our IPO of 16.5 million shares of our common stock at an offering
price of $47.00 per share resulting in aggregate net proceeds to us of
$723.0 million after deducting the underwriting discounts and commissions and
offering expenses payable by us.

In November 2021we issued $1.50 billion aggregate principal amount of our convertible notes under a private placement. The Convertible Notes will mature on
December 1, 2026unless previously converted, redeemed or redeemed.


In February 2022, we began our common stock buyback program whereby our Board of
Directors authorized to repurchase up to an aggregate of $300.0 million of our
common stock throughout fiscal year 2022 ("Previous Program"). As of May 16,
2022, we repurchased the shares representing the entire amount available under
the Previous Program. On May 23, 2022, our Board of Directors approved a new
stock repurchase program authorizing the repurchase of up to an additional
$300.0 million of our common stock throughout fiscal year 2022 (the "Current
Program"). As of June 30, 2022, we repurchased and retired 12.5 million shares
of common stock at an average price of $43.83 per share for an aggregate
purchase price of $550.0 million.

In March 2022, we entered into a third amended and restated credit facility to
increase our borrowing capacity from $150.0 million to $250.0 million. As of
June 30, 2022, we had not drawn on the credit facility.

As of June 30, 2022, we had $72.2 million in cash and cash equivalents and
$1.1 billion in marketable securities. Our cash and cash equivalents primarily
consist of money market funds and commercial paper. Our marketable securities
consist of U.S. treasury securities, commercial debt securities, and commercial
paper.

We believe our existing cash and cash equivalents, marketable securities, cash
flow from operations, and availability under our credit facility will be
sufficient to support working capital and capital expenditure requirements and
our outstanding contractual commitments for at least the next 12 months.

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

                                                                 Six Months Ended June 30,
(In thousands)                                                  2022                    2021
Net cash provided by operating activities                 $       75,652          $      60,197
Net cash used in investing activities                         (1,159,184)               (49,668)
Net cash (used in) provided by financing activities             (557,782)               466,378
(Decrease) increase in cash, cash equivalents and             (1,641,313)               476,907
restricted cash


Operating Activities

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

Net cash provided by operating activities was $75.7 million and $60.2 million
for the six months ended June 30, 2022 and 2021, respectively, for which the
increases in each year were primarily driven by an increase in cash collections
from higher revenues, partially offset by an increase in cash expenses for
personnel related costs.

Investing activities


Net cash used in investing activities was $1.2 billion for the six months ended
June 30, 2022 compared to $49.7 million for the six months ended June 30, 2021.
The increase was driven by our investment in available-for-sale marketable
securities of $1.3 billion and purchase of intangible assets of $4.9 million,
partially offset by maturities of available-for-sale marketable securities of
$159.9 million.

Financing Activities

Net cash used in financing activities of $557.8 million for the six months ended
June 30, 2022 was primarily due to the repurchase and retirement of our common
stock for $550.0 million.

                                       29
--------------------------------------------------------------------------------

Net cash provided by financing activities of $466.4 million for the six months
ended June 30, 2021 was primarily due to net proceeds from our IPO of
$723.0 million, partially offset by repayments on the credit facility and notes
payable of $263.2 million.

Contractual obligations and commitments

There have been no material changes in our obligations under our operating leases and purchase commitments from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2021.

Significant 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 in our critical accounting policies from those disclosed in the Annual Report on Form 10-K for the year ended December 31, 2021.

Recently Adopted Accounting Pronouncements

See Note 2, Summary of Significant Accounting Policies, in our Notes to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for a discussion of recent accounting pronouncements.

Emerging Growth Company Status


We are an emerging growth company, as defined under the JOBS Act. The JOBS Act
provides that an emerging growth company may take advantage of the extended
transition period provided in Section 7(a)(2)(B) of the Securities Act for
complying with new or revised accounting standards. Therefore, an emerging
growth company can delay the adoption of certain accounting standards until
those standards would otherwise apply to private companies. We have elected to
use the extended transition period under the JOBS Act until the earlier of the
date we (1) are no longer an emerging growth company or (2) affirmatively and
irrevocably opt out of the extended transition period provided in the JOBS Act.
As a result, our financial statements may not be comparable to companies that
comply with new or revised accounting pronouncements as of public company
effective dates.

Non-GAAP Financial Measures


To supplement our consolidated financial statements, which are prepared and
presented in accordance with generally accepted accounting principles in the
United States, or GAAP, we provide investors with non-GAAP financial measures
including: (i) adjusted gross profit and adjusted gross margin; (ii) non-GAAP
income from operations and non-GAAP operating margin; (iii) non-GAAP net income
and non-GAAP diluted net income per share; and (iv) free cash flow and free cash
flow margin. These measures are presented for supplemental informational
purposes only, have limitations as analytical tools and should not be considered
in isolation or as a substitute for financial information presented in
accordance with GAAP. In particular, free cash flow is not a substitute for cash
used in operating activities. Additionally, the utility of free cash flow as a
measure of our financial performance and liquidity is further limited as it does
not represent the total increase or decrease in our cash balance for a given
period. Our calculations of each of these measures may differ from the
calculations of measures with the same or similar titles by other companies and
therefore comparability may be limited. Because of these limitations, when
evaluating our performance, you should consider each of these non-GAAP financial
measures alongside other financial performance measures, including the most
directly comparable financial measure calculated in accordance with GAAP and our
other GAAP results. A reconciliation of each of our non-GAAP financial measures
to the most directly comparable financial measure calculated in accordance with
GAAP is set forth below.

                                       30
--------------------------------------------------------------------------------

Adjusted gross profit and adjusted gross margin


We believe adjusted gross profit and adjusted gross margin, when taken together
with our GAAP financial results, provides a meaningful assessment of our
performance, and is useful for the preparation of our annual operating budget
and quarterly forecasts.

We define adjusted gross profit as gross profit exclusive of stock-based
compensation, amortization of capitalized internal-use software development
costs and depreciation of our data center equipment included within Cost of
revenue. We exclude stock-based compensation, which is a non-cash item, because
we do not consider it indicative of our core operating performance. We exclude
depreciation and amortization, which primarily relates to our investments in our
data center servers that are long lived assets with an economic life of five
years, because it may not reflect our current or future cash spending levels to
support our business. While we intend to spend a significant amount on capital
expenditures on an absolute basis in the coming years, our capital expenditures
as a percentage of revenue has declined significantly and will continue to
decline. We define adjusted gross margin as a percentage of adjusted gross
profit to revenue.

The following table presents a reconciliation of gross profit, the most directly
comparable financial measure stated in accordance with GAAP, to adjusted gross
profit for each of the periods presented:

                                     Three Months Ended               Six Months Ended
                                          June 30,                        June 30,
(In thousands)                       2022           2021            2022            2021
Gross profit                     $  86,636       $ 60,665       $ 167,206       $ 114,782
Adjustments:
Depreciation and amortization       22,574         20,042          44,836          39,266
Stock-based compensation               481            405             913             601
Adjusted gross profit            $ 109,691       $ 81,112       $ 212,955       $ 154,649
Gross margin                            65  %          58  %           64  %           58  %
Adjusted gross margin                   82  %          78  %           82  %           78  %

Non-GAAP Operating Income and Non-GAAP Operating Margin


We define non-GAAP income from operations as (Loss) income from operations,
excluding stock-based compensation, amortization of acquired intangibles,
acquisition related costs, loss on sublease, asset impairment, restructuring and
severance, and other unusual or non-recurring transactions as they occur. We
define non-GAAP operating margin as non-GAAP income from operations as a
percentage of revenue. We use non-GAAP income from operations to understand and
evaluate our core operating performance and trends and to develop short-term and
long-term operating plans. We believe that non-GAAP income from operations
facilitates comparison of our operating performance on a consistent basis
between periods, and when viewed in combination with our results prepared in
accordance with GAAP, helps provide a broader picture of factors and trends
affecting our results of operations.

The following table presents a reconciliation of (Loss) income from operations,
the most directly comparable financial measure stated in accordance with GAAP,
to Non-GAAP income from operations for each of the periods presented:

                                       31

--------------------------------------------------------------------------------
                                           Three Months Ended             Six Months Ended
                                                June 30,                      June 30,
(In thousands)                            2022           2021            2022           2021
(Loss) income from operations          $ (7,377)      $ (2,630)      $ (20,516)      $    624
Adjustments:
Stock-based compensation                 28,183         12,201          54,164         18,825
Amortization of acquired intangibles        564             76           1,026            152
Acquisition related costs                   214              -             168              -
Loss on sublease                            683              -           1,471              -
Asset impairment                              -              -             120              -

Non-GAAP income from operations        $ 22,267       $  9,647       $  36,433       $ 19,601
Operating margin                             (6) %          (3) %           (8) %           -  %
Non-GAAP operating margin                    17  %           9  %           14  %          10  %

Non-GAAP Net Earnings and Non-GAAP Diluted Earnings per Share


We define non-GAAP net income (loss) as Net loss attributable to common
stockholders, excluding stock-based compensation, amortization of acquired
intangibles, acquisition related costs, release of VAT reserve, loss on
sublease, loss on extinguishment of debt, asset impairment, restructuring and
severance expense, revaluation of warrants, and other unusual or non-recurring
transactions as they occur. We define non-GAAP diluted net income per share as
non-GAAP net income divided by the weighted-average shares including the
dilutive effects of our convertible preferred stock, warrants, stock options,
RSUs, PRSUs and Convertible Notes.

We believe non-GAAP net income per share provides our management and investors
consistency and comparability with our past financial performance and
facilitates period-to-period comparisons of operations, as this metric generally
eliminates the effects of unusual or non-recurring items from period to period
for reasons unrelated to overall operating performance.

The following table provides a reconciliation of net loss attributable to common shareholders, the most directly comparable financial measure established in accordance with GAAP, to non-GAAP net earnings for each of the periods presented:


                                                  Three Months Ended                       Six Months Ended
                                                       June 30,                                June 30,
(In thousands)                                 2022                2021                2022                2021
GAAP Net loss attributable to common
stockholders                              $    (6,191)         $   (2,187)         $  (24,314)         $   (5,526)
Stock-based compensation                       28,183              12,201              54,164              18,825
Amortization of acquired intangible
assets                                            564                  76               1,026                 152
Acquisition related costs                         214                   -                 168                   -

Loss on sublease                                  683                   -               1,471                   -
Loss on extinguishment of debt                      -                   -                 407               3,435
Asset impairment                                    -                   -                 120                   -

Revaluation of warrants                             -                   -                   -                (556)
Income tax effects of non-GAAP
adjustments(1)                                    (27)                (26)                282                 109
Non-GAAP net income(2)                    $    23,426          $   10,064          $   33,324          $   16,439
Non-GAAP diluted net income per share(2)  $      0.20          $     0.08          $     0.27          $     0.15
Weighted-average shares used to compute
Non-GAAP diluted net income per share         119,855             118,778             123,231             111,241


___________________

                                       32
--------------------------------------------------------------------------------

(1)The income tax effects of non-GAAP adjustments are calculated based on the
applicable statutory tax rate for the relevant jurisdiction, except for those
items which are non-taxable or subject to valuation allowances for which the tax
expense (benefit) was calculated at 0%. The tax benefit for amortization is
calculated in a similar manner as the tax effects of the non-GAAP adjustments.

(2) Amounts are attributable to holders of ordinary and convertible preferred shares, treated as a single class of shares.

Free Cash Flow and Free Cash Flow Margin


Free cash flow is a non-GAAP financial measure that we define as Net cash
provided by operating activities less purchases of property and equipment,
capitalized internal-use software costs and purchase of intangible assets. Free
cash flow margin is calculated as free cash flow divided by total revenue. We
believe that free cash flow and free cash flow margin are useful indicators of
liquidity that provide information to management and investors about the amount
of cash generated from our core operations that, after the purchases of property
and equipment, can be used for strategic initiatives, including investing in our
business and selectively pursuing acquisitions and strategic investments. We
further believe that historical and future trends in free cash flow and free
cash flow margin, even if negative, provide useful information about the amount
of Net cash provided by operating activities that is available (or not
available) to be used for strategic initiatives. For example, if free cash flow
is negative, we may need to access cash reserves or other sources of capital to
invest in strategic initiatives. One limitation of free cash flow and free cash
flow margin is that they do not reflect our future contractual commitments.
Additionally, free cash flow does not represent the total increase or decrease
in our cash balance for a given period.

The following table sets forth our cash flow for the periods presented and a reconciliation of free cash flow and free cash flow margin to net cash provided by operating activities, the most directly comparable financial measure calculated in accordance with GAAP:

                                                                    Six Months Ended
                                                                        June 30,
(In thousands)                                                                2022                  2021
Net cash provided by operating activities                                $     75,652          $     60,197
Adjustments:
Capital expenditures - property and equipment                                 (48,041)              (47,036)
Capital expenditures - internal-use software development                       (4,330)               (2,713)
Purchase of intangible assets                                                  (4,915)                    -
Free cash flow                                                           $     18,366          $     10,448
As a percentage of revenue:
Net cash provided by operating activities                                          29  %                 30  %

Free cash flow margin                                                               7  %                  5  %

© Edgar Online, source Previews

Comments are closed.