DigitalOcean Holdings, Inc. (DOCN) FY 2024 MD&A

ITEM 7. 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 consolidated financial statements and related notes and other financial information included in Part II, Item 8. “Financial Statements and Supplementary Data” of this Annual Report on Form 10-K. 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. Actual results could differ materially from those discussed below. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Annual Report, particularly in Part I, Item 1A. “Risk Factors.” In addition, for more information regarding key factors affecting our performance, see “Key Factors Affecting Our Performance” below.

Overview

DigitalOcean is a leading cloud computing platform, offering simple, scalable and approachable on-demand infrastructure and platform services for developers at growing technology companies. Our platform simplifies cloud computing, enabling our customers to rapidly accelerate innovation and productivity. Our customers include growing technology companies across numerous industry verticals ranging from gaming to fintech to cybersecurity, among many others, and leverage our platform for a wide variety of use cases, such as building and hosting websites, developing new web and mobile applications, integrating AI into their businesses, and building AI products and applications, among many others. We believe that being simple, scalable and approachable are our key differentiators, driving a broad range of customers around the world whose needs are not being fully met by larger cloud providers to build and grow their businesses on our platform.

48

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) and Software-as-a-Service (SaaS), including our Managed Hosting, Managed Database, Managed Kubernetes and Marketplace offerings; and artificial intelligence and machine learning (AI/ML), including our GPU Droplets, Notebooks and GenAI Platform offerings. We continue to invest in our platform to further penetrate the growing markets in which we operate.

We generate revenue primarily from the usage of our cloud computing platform by our customers. We recognize revenue largely based on the customer utilization of our offerings. While our pricing is primarily consumption-based and the majority of our customers use our platform on a month-to-month basis, a growing number of customers are using our platform for larger workloads and some of these customers are opting to enter into committed contracts, committing to a minimum spend on our platform.

We serve a large number of customers that range in size from growing or scaled businesses that generate millions of dollars in revenue and serve millions of their own customers to individual developers testing or learning new technology for their own development. Thousands of new users come to DigitalOcean every month with some users intending only to utilize our platform for a discrete task, and other users are part of new or existing businesses that intend to operate their production and test workloads on our platform to support their business. Given the wide range of users and their associated spend, we classify customers based on their spend in a given month, which we have found to be a good proxy that distinguishes between casual users and substantial business customers.

Beginning in the fourth quarter of 2024, we redefined our customer categories to provide more insight into our Higher Spend Customers, which now include categories for Builders, Scalers and Scalers+ (collectively, our Higher Spend Customers), and we also changed our methodology for calculating customer count. While this has a de minimis impact on the specific customer count, we believe it provides a better representation of the customers on our platform during each reporting period. Our research and development, sales and marketing and customer support investments are primarily focused on these Higher Spend Customers, and we believe their performance is the best indicator of our future growth and performance. Previously, we had reported Scalers as a single category having a wide spend range, and we had also disclosed the number of Learners as part of our total customer count. See “Higher Spend Customers” below for a description of how we previously calculated customer count, definitions of our customer categories, our reasons for such changes, and our customer count calculated using our prior definition for each period presented.

Growing our Higher Spend Customers is a critical focus for us, and we have successfully increased the number of these customers and their percentage of our total revenue. Revenue from our Higher Spend Customers as a percentage of total revenue was 87% in 2024, 86% in 2023 and 85% in 2022. As of December 31, 2024, we had approximately 165,000 Higher Spend Customers using our platform to build, deploy and scale applications. The number of Higher Spend Customers increased from approximately 156,000 as of December 31, 2023 and 142,000 as of December 31, 2022.

Our average revenue per customer (ARPU, as further described in “ARPU” below), has increased from $82.76 in 2022 to $90.99 in 2023 and $100.71 in 2024. We had no material customer concentration as our top 25 customers made up approximately 8%, 7% and 10% of our revenue in the years ended December 31, 2024, 2023 and 2022, respectively.

Beginning in the fourth quarter of 2024, we changed our methodology for calculating our annual run-rate revenue (ARR). See “ARR” below for a description of how we previously calculated ARR and our ARR calculated using our prior definition for each period presented. ARR as of December 31, 2024 was $820 million, up from $723 million as of December 31, 2023 and $652 million as of December 31, 2022.

49

___________________

(*) Prior periods have been recast to reflect the effects of the change in definition of ARR. See “ARR” below for a description of how we previously calculated ARR and our ARR calculated using our prior definition for each period presented.

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. The efficiency of our go-to-market model and our focus on the needs of growing technology companies have enabled us to drive organic growth and establish a truly global customer base across a broad range of industries. We focus on customer acquisition, our self-service acquisition funnel, customer support and success, community education, inside sales, targeted outside sales, and partnership and channel development. For the years ended December 31, 2024, 2023 and 2022, our sales and marketing expense was approximately 9%, 9% and 14% of our revenue, respectively.

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 year ended December 31, 2024, 38% of our revenue was generated from North America, 28% from Europe, 23% from Asia and 11% from the rest of the world.

Key Factors Affecting Our Performance

Increasing Usage by Our Existing Customers

50

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, increasing our feature velocity and shaping our product roadmap around the needs of Higher Spend Customers, and introducing an account management function to provide more direct coverage of our top spending accounts. 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, in order to build trust with customers and encourage them to run more of their critical cloud workloads on our platform. We closely monitor our net dollar retention (NDR), which reflects our ability to retain and grow revenue from our existing customers. While NDR decreased from 101% in 2023 to 98% in 2024 as we lapped the effects of the 2022 price increases, we expect to increase our revenue in the future from existing customers through the introduction of new products and features tailored to our Higher Spend Customers through expanded customer outreach, and targeted services to support our customers in migrating additional workloads from other cloud providers to DigitalOcean.

Growing Our Base of Higher Spend Customers

We believe there is a substantial opportunity to further expand our customer base. We are investing in strategies that we believe will drive adoption by new Higher Spend Customers, including new marketing initiatives that further optimize our self-service revenue funnel to identify potential Higher Spend Customers, enhanced research and development to build our product roadmap around the needs of Higher Spend Customers, the creation of a new migration services team to support migration to our platform from other cloud providers, and a dedicated AI sales team with deep AI expertise to help prospective customers understand our offerings and the process to onboard onto our platform.

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 for our Higher Spend Customers. Our product strategy is anchored in addressing the needs of our Higher Spend Customers and other growing technology companies and on continuously innovating to meet those needs in a simple, scalable and approachable way. We have accelerated the pace of product innovation and made disciplined investments to expand our offerings for our IaaS and PaaS offerings, as well as our newer AI/ML offerings. In 2024, we released a number of new products and product features, including GPU Droplets, our GenAI platform, Autonomous on our Managed Hosting offering to automatically scale resources based on website traffic, and enhancements to our role-based access control functionality and Backups offering. The market opportunity for our services continues to expand and we expect to make additional investments to offer an enhanced and tailored suite of IaaS, PaaS/SaaS and AI/ML offerings that address the changing needs of our customers.

Driving Increased Adoption Through Our Community Ecosystem

We attract a large number of developers to our website and platform and we are committed to supporting and expanding this community of innovators and technologists by continuing to produce high-quality educational content and hosting developer-focused programs and events around the world. Supporting and educating the developer community is not only one of our values, but it also fosters brand loyalty, expands our customer base and drives increased adoption of our products.

Augmenting our Platform though Strategic Partnerships and Acquisitions

In addition to organic growth, we believe that strategic partnerships and acquisitions will allow us to accelerate our key platform, product and marketing initiatives. In recent years, we completed acquisitions of Paperspace, which launched our AI/ML offerings, and Cloudways, which added our Managed Hosting offering to our platform. In addition, we have entered into partnerships to augment our product offerings. For example, in 2024, we announced a partnership with Hugging Face, which allows customers to quickly and easily deploy the most popular third-party models on GPU Droplets and significantly simplifies the model deployment process for our customers. We intend to actively pursue both strategic partnerships and acquisitions 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.

Macroeconomic Conditions

Unfavorable conditions in the economy both in the United States and abroad, including conditions resulting from trade tension and/or the imposition of trade tariffs (including recent U.S. tariffs imposed or threatened to be imposed and any retaliatory actions taken by other countries), changes in gross domestic product growth, supply chain disruptions, inflationary pressures, interest rates, financial and credit market fluctuations, volatility in the capital markets, liquidity

51

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 year in which they were acquired with respect to the metrics disclosed.

______________

(1)Customer count. As discussed above, beginning in the fourth quarter of 2024, we changed our methodology for calculating customer count as the average number of customers as of the last day of the month for each month in the most recent quarter. We classify our customers in separate categories based on the amount of their spend in a given month. Prior periods have been recast to reflect the effects of the changes. See “Higher Spend Customers” below for a description of how we previously calculated customer count, definitions of our customer categories, our reasons for such changes, and our customer count calculated using our prior definition for each period presented.

(2)Beginning in the first quarter of 2023, we redefined ARPU to exclude Testers. Prior years have been recast to conform to the new definition.

(3)As discussed above, beginning in the fourth quarter of 2024, we changed our methodology for calculating ARR to multiplying the sum of the revenue for the most recent quarter by four. Prior periods have been recast to reflect the effects of the changes. See “ARR” below for a description of how we previously calculated ARR and our ARR calculated using our prior definition for each period presented.

Higher Spend Customers

We refer to our Builders, Scalers and Scalers+ customers collectively as our Higher Spend Customers. We believe the total number of our Higher Spend Customers is an important indicator of the growth of our business and future revenue opportunity, and the trends relating to our Builders, Scalers 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 growing technology companies that scale on our platform and use multiple products. Beginning in the fourth quarter of 2024, we changed our methodology for calculating customer count as the average number of customers as of the last day of the month for each month in the most recent quarter. We changed our definition because we believe this method is a more accurate reflection of our results during such period as compared to our previously disclosed customer count for the last month of the period. Our modified definition is less susceptible to variability each month, and therefore is more reliable when comparing period-to-period results.

52

Customers are now classified in the following categories based on the amount of their spend in a given month and individual customers may fall within different categories within a reporting period:

•Builders: users that spend more than $50 and less than or equal to $500 in a month.

•Scalers: users that spend more than $500 and less than or equal to $8,333 in a month.

•Scalers+: users that spend more than $8,333 in a month.

Users that spend less than or equal to $50 in a month and have been on our platform for three months or less are considered “Testers.” Since the second quarter of 2022, we have not disclosed the number of Testers on our platform in our regular disclosures. 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. Users that spend less than or equal to $50 in a month and have been on our platform for more than three months are considered “Learners.” Learners, who have historically been included in our total customer count, are more casual users of our platform who may either grow into a more significant user over time, or remain a casual user for the entirety of their time on our platform. Accordingly, we do not consider Learners to be a good predictor of future growth. Therefore, beginning in the fourth quarter of 2024, we will no longer disclose the number of Learners in our customer count. Given their modest contribution to revenue and growth, we do not consider Testers or Learners, which together represented 13% of overall revenue for the year ended December 31, 2024, to be the focal point of our growth strategy. Customer count by category, as determined based on the customers’ spend in a given month, is as follows:

New customer classification and methodology:

Prior customer classification and methodology:

ARPU

We believe that our average revenue per customer, which we refer to as ARPU, is a strong indication of our ability to acquire 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, Scalers and Scalers+ in that period divided by the total number of Learner, Builder, Scaler and Scaler+ customers determined as of the last day of that month. For a quarterly or annual period, ARPU is determined as the weighted average monthly ARPU over such three or 12-month period.

53

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. Beginning in the fourth quarter of 2024, we changed our methodology for calculating ARR to multiplying the revenue for the most recent quarter by four. For our ARR calculations, we include the total revenue from all customers, including Testers, Learners, Builders, Scalers, and Scalers+. We changed our methodology for calculating ARR to conform with our other key business metrics, which are reviewed and calculated on a quarterly basis, to better reflect our longer term usage patterns and to reduce the volatility that could be introduced by using a single month that may contain more or less project based revenue than is indicative of a full year run-rate. Previously, we calculated ARR at a point in time by multiplying the revenue of the last month of the reported period by 12. Prior periods have been recast to conform to the new definition. ARR is as follows, in millions:

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 all customers, including Testers, Learners, Builders, Scalers and Scalers+ for our IaaS and PaaS/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 some of our customers 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 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) and Software-as-a-Service (SaaS), including our Managed Hosting, Managed Database, Managed Kubernetes and Marketplace offerings; and artificial intelligence and machine learning (AI/ML), including our GPU Droplets, Notebooks and GenAI Platform offerings. We continue to invest in our platform to further penetrate the growing markets in which we operate.

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.

Cost of Revenue

Cost of revenue consists primarily of fees related to operating our data center facilities, personnel costs of our employees providing customer support or operating our facilities, and partnership expenses. Cost of revenue includes depreciation of our data center equipment and amortization of acquired technology and capitalized internal-use software development costs. Data center facility fees include data center rental fees, power costs, maintenance fees, network, bandwidth and ancillary equipment. Personnel costs include salaries, bonuses, benefits, and stock-based compensation.

54

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, professional services, software, 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 and marketing and customer success employees, including salaries, bonuses, benefits, commissions and stock-based compensation. Sales and marketing expenses also include costs for marketing programs, advertising, amortization of acquired customer relationships and professional services. 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 payment processing fees, provision for expected credit losses, professional services, software, business insurance, depreciation and amortization expenses, rent and facilities costs, 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 in 2023.

Other Income, net

Other income, net consists primarily of interest income on our money market funds, amortization of deferred financing fees on our convertible notes, and gains or losses on foreign currency exchange.

Income Tax Expense

Income tax expense 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.

Prior Period Reclassification

55

As indicated in Note 2 in our consolidated financial statements, beginning in the fourth quarter of 2024, we reclassified personnel costs including salaries, bonuses, benefits, and stock-based compensation related to our customer support employees, and certain other costs from sales and marketing and research and development to cost of revenue in order to better reflect the cost of supporting our growing customer base, and to improve comparability with peers. We have reclassified $8.0 million and $3.4 million from sales and marketing and research and development, respectively, to cost of revenue for the year ended December 31, 2023. We believe this refined methodology better reflects the nature of the costs and financial performance of the Company as it operates.

As a result, the Consolidated Statements of Operations have been recast for prior periods presented to reflect the effects of the changes in cost of revenue, gross profit, sales and marketing, research and development and total operating expenses. There was no change in income from operations, net income attributable to common stockholders or net income per share attributable to common stockholders for the year ended December 31, 2023 as a result of these reclassifications. The Consolidated Balance Sheets, Consolidated Statements of Comprehensive Income, Consolidated Statements of Changes in Stockholders’ Equity, and the Consolidated Statements of Cash Flows were not affected by changes in the presentation of these costs.

Results of Operations

The following table sets forth our results of operations for the periods presented:

___________________

(1)Amounts for the year ended December 31, 2023 have been recast to conform with current period presentation. Refer to Note 2. Summary of Significant Accounting Policies, Prior Period Reclassification, in Item 8. in the consolidated financial statements for further details.

56

(2)Includes stock-based compensation as follows:

___________________

(1)Amounts for the year ended December 31, 2023 have been recast to conform with current period presentation. Refer to Note 2. Summary of Significant Accounting Policies, Prior Period Reclassification, in Item 8. in the consolidated financial statements for further details.

(2)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 year ended December 31, 2023.

The following table sets forth our results of operations as a percentage of revenue for the periods presented:

___________________

(1)Amounts for the year ended December 31, 2023 have been recast to conform with current period presentation. Refer to Note 2. Summary of Significant Accounting Policies, Prior Period Reclassification, in Item 8. in the consolidated financial statements for further details.

(2)May not foot due to rounding.

A discussion regarding our financial condition and results of operations for the year ended December 31, 2024 compared to the year ended December 31, 2023 is presented below. A discussion regarding our financial condition and results of operations for the year ended December 31, 2023 compared to the year ended December 31, 2022 can be found under Part II, Item 7. “Management's Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2023, filed with the SEC on February 21, 2024, which is available on the SEC’s website at www.sec.gov.

57

Comparison of the Years Ended December 31, 2024 and 2023

Revenue

Revenue increased $87.7 million, or 13%, for the year ended December 31, 2024 compared to the year ended December 31, 2023. The increase in revenue was primarily driven by a 11% increase in ARPU to $100.71 from $90.99; and a 15% increase in revenue from Higher Spend Customers. The increase in ARPU was primarily driven by continued adoption of our products by our existing customers leading to higher average usage of our platform.

Cost of Revenue

Cost of revenue increased $19.3 million, or 7%, for the year ended December 31, 2024 compared to the year ended December 31, 2023. The change is primarily due to increases of $11.6 million in depreciation and amortization due to our continued investment in AI/ML offerings and infrastructure, as well as acquired finance leases and acquired developed technology, $6.5 million in fixed and variable operating leases relating to co-location facilities, $3.4 million in third-party license fees, $2.8 million in costs related to our revenue share programs and $1.8 million in personnel costs, partially offset by decreases of $3.9 million in ancillary equipment and $2.5 million in bandwidth expenses. Gross profit increased to 60% for the year ended December 31, 2024 from 57% for the year ended December 31, 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

Research and development expenses increased $5.6 million, or 4%, for the year ended December 31, 2024 compared to the year ended December 31, 2023. The change is primarily due to increases of $2.9 million in professional services costs and $1.5 million in personnel costs, mainly driven by increased headcount, and $1.3 million in other operating costs.

Sales and marketing expenses increased $6.5 million, or 10%, for the year ended December 31, 2024 compared to the year ended December 31, 2023. The change is primarily due to increases of $4.3 million in advertising expenses, $1.6 million in professional services costs, $1.5 million in other operating costs and $1.4 million in amortization of acquired intangibles assets, partially offset by a $2.2 million decrease in personnel costs largely due to the reversal of stock-based compensation from forfeited RSUs.

General and administrative expenses decreased $1.9 million, or 1%, for the year ended December 31, 2024 compared to the year ended December 31, 2023. The change is primarily due to decreases of $32.7 million in personnel costs, primarily from reduced acquisition-related deferred compensation as well as reversal of stock-based compensation

58

from forfeited RSUs, and $2.6 million in professional services costs, partially offset by increases of $31.3 million reversal of stock-based compensation attributed to our former CEO’s forfeited MRSUs and $1.5 million in payment processing costs due to revenue growth.

There were $20.9 million in Restructuring and other charges during the year ended December 31, 2023 and no such charges during the year ended December 31, 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 in 2023.

Other Income, net

Other income, net decreased $8.2 million, or 55%, for the year ended December 31, 2024 compared to the year ended December 31, 2023, primarily due to decreases of $3.9 million in interest income from marketable securities as they were reallocated at maturity to cash and money market funds in 2024 and $3.9 million in foreign currency fluctuations from our operations.

Income Tax Expense

Income tax expense increased $5.8 million, or 79%, for the year ended December 31, 2024 compared to the year ended December 31, 2023, primarily as a result of increased revenue, the capitalization of R&D expenses under Section 174, adjustments related to stock-based compensation for tax purposes, and additional reserves for uncertain tax positions recorded 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 other core product offerings. From time to time, we may also use excess cash and/or debt 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 in Note. 8. Debt in Item 8. in the consolidated financial statements) 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.

We have historically repurchased our common stock pursuant to repurchase programs approved by our Board of Directors. 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 year ended December 31, 2024, we repurchased and retired 1,511,909 shares of common stock for an aggregate purchase price of $57.4 million. The program will expire on December 31, 2025.

As of December 31, 2024, we had $88.8 million of estimated undiscounted fixed payment obligations for leases of co-location space at data center facilities that have not yet commenced and were not included on the Consolidated Balance Sheets. These leases are expected to commence between January 2025 and August 2025, and have a weighted average lease term of 6.2 years.

As of December 31, 2024, we had $428.4 million in cash and cash equivalents. Our cash and cash equivalents primarily consist of cash and money market funds.

59

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 (as defined in Note. 8. Debt in Item 8. in the consolidated financial statements), 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.

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

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, software licensing fees, and taxes.

Net cash provided by operating activities was $282.7 million, $234.9 million and $195.2 million for the years ended December 31, 2024, 2023 and 2022, 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, cash bonuses and taxes.

Investing Activities

Net cash used in investing activities was $94.8 million for the year ended December 31, 2024 compared to $401.2 million provided by investing activities for the year ended December 31, 2023. The increase in cash used in investing activities was primarily driven by a $535.6 million reallocation of our marketable securities portfolio to cash equivalents and an increase of $61.7 million in cash payments for capital expenditures, partially offset by $99.0 million decline in cash paid for acquisition of businesses, net of cash acquired, and a $2.5 million decrease in cash activity for asset acquisitions.

Net cash provided by investing activities was $401.2 million for the year ended December 31, 2023 compared to $1.1 billion used in investing activities for the year ended December 31, 2022. The increase in cash provided by investing activities was primarily driven by a $1.3 billion net activity in our marketable securities portfolio and a $206.1 million decline in cash paid for acquisition of businesses, net of cash acquired. Capital expenditures increased $9.5 million, primarily due to $16.5 million related to our AI/ML offerings resulting from the Paperspace acquisition partially offset by a $7.0 million decrease related to legacy product offerings.

Financing Activities

Net cash used in financing activities of $76.4 million and $468.9 million for the years ended December 31, 2024 and 2023, respectively, was primarily due to the repurchase and retirement of our common stock for $59.8 million and $488.5 million, respectively.

Net cash used in financing activities of $468.9 million and $610.4 million for the years ended December 31, 2023 and 2022, respectively, was primarily due to the repurchase and retirement of our common stock for $488.5 million and $600.0 million, respectively.

Contractual Obligations and Commitments

We have various contractual obligations and commitments, such as long-term leases, purchase commitments and long-term debt, that are disclosed in the footnotes to the consolidated financial statements. See Note 8. Debt; Note 9. Leases; and Note 10. Commitments and Contingencies to our consolidated financial statements included in Part II, Item 8. “Financial Statements and Supplementary Data” of this Annual Report on Form 10-K for further information regarding these commitments.

60

Critical Accounting Policies and Estimates

Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States. The preparation of these 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.

We believe that the following accounting policies involve a greater degree of judgment and complexity in the preparation of our consolidated financial statements. We have other significant accounting policies that are more fully described in Note 2, Summary of Significant Accounting Policies, to the consolidated financial statements in Part II, Item 8. “Financial Statements and Supplementary Data” of this Annual Report on Form 10-K. Both our critical and significant accounting policies are important to an understanding of the consolidated financial statements.

Revenue Recognition

We recognize revenue in accordance with FASB Accounting Standards Codification (ASC) Topic 606, Revenue from Contracts with Customers (ASC 606).

We account for revenue using the following steps:

1. Identify the contract with a customer

We consider the terms and conditions of the contract and our customary business practices in identifying our contracts under ASC 606. We determine we have a contract with a customer when the customer agrees to the terms of service, we can identify each party’s rights regarding the services to be transferred, we can identify the payment terms for the services, we have determined the customer has the ability and intent to pay and the contract has commercial substance. We apply judgment in determining the customer’s ability and intent to pay, which is based on a variety of factors, including the customer’s historical payment experience or, in the case of a new customer, we apply security checks and validate their payment method.

2. Identify the performance obligations in the contract

Our performance obligation is to provide our cloud-based infrastructure for customers to use at the customers’ election. The availability of services is free of charge, and therefore we have no performance obligation until the customer elects to use the services.

3. Determine the transaction price

The transaction price is calculated based on the customer’s usage for the month at an hourly rate that is published on the Company’s website. None of our contracts contain a significant financing component.

4. Allocate the transaction price to performance obligations in the contract

The transaction price is calculated based on actual monthly usage and pricing that is published on the Company’s website. This is considered a single performance obligation, and thus the entire transaction price is allocated to the single performance obligation.

5. Recognize revenue when or as we satisfy a performance obligation

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) and Software-as-a-Service (SaaS), including our Managed Hosting, Managed Database, Managed Kubernetes and Marketplace offerings; and artificial intelligence and machine learning (AI/ML), including our GPU Droplets, Notebooks and GenAI Platform offerings. We recognize revenue largely based on the customer utilization of these resources. 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.

Our global cloud platform is supported by various third parties. We considered the principal versus agent guidance in ASC 606 and concluded that we are the principal for all services provided to our customers.

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

61

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.

Timing of revenue recognition may differ from the timing of invoicing to customers. We record a receivable when revenue is recognized prior to invoicing. Any payments received in advance of billing are a contract liability, which is recorded as Deferred revenue within Total current liabilities on the Consolidated Balance Sheets.

Business Combinations

We apply the provisions of ASC 805, Business Combinations (ASC 805), in accounting for our acquisitions. ASC 805 requires that we evaluate whether a transaction pertains to an acquisition of assets or to an acquisition of a business. A business is defined as an integrated set of assets and activities that is capable of being conducted and managed for the purpose of providing a return to investors. Asset acquisitions are accounted for by allocating the cost of the acquisition to the individual assets and liabilities assumed on a relative fair value basis; whereas the acquisition of a business requires us to recognize separately from goodwill the assets acquired and the liabilities assumed at the acquisition date fair values. Goodwill as of the acquisition date represents the excess purchase price over the fair value of identifiable net assets acquired in a business combination. While we use our best estimates and assumptions to accurately value assets acquired and liabilities assumed at the acquisition date as well as any contingent consideration, where applicable, our estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, which may be up to one year from the business acquisition date, we record adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill. Upon the conclusion of a business acquisition’s measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to our consolidated statements of operations.

Accounting for business combinations requires us to make significant estimates and assumptions, especially at the acquisition date, to determine the fair value of assets acquired and liabilities assumed, including the selection of valuation methodologies, estimates of future revenue and cash flows and discount rates in determining the fair value of intangible assets. Although we believe that the assumptions and estimates we have made in the past have been reasonable and appropriate, they are based in part on historical experience and information obtained from the management of the acquired companies and are inherently uncertain. Unanticipated events and circumstances may occur that may affect the accuracy or validity of such assumptions, estimates or actual results.

In addition, uncertain tax positions and tax related valuation allowances assumed in a business combination are initially estimated as of the acquisition date. We reevaluate these items quarterly based upon facts and circumstances that existed as of the acquisition date with any adjustments to our preliminary estimates being recorded to goodwill if identified within the measurement period. Subsequent to the measurement period or our final determination of the tax allowance’s or contingency’s estimated value, whichever comes first, changes to these uncertain tax positions and tax related valuation allowances will affect our provision for income taxes in our consolidated statement of operations and could have a material impact on our results of operations and financial position.

Recently Adopted Accounting Pronouncements

See Note 2, Summary of Significant Accounting Policies, to the consolidated financial statements in Part II, Item 8. “Financial Statements and Supplementary Data” of this Annual Report on Form 10-K for information about recent accounting pronouncements.

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 EBITDA and adjusted EBITDA margin and (ii) non-GAAP net income and non-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

62

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, loss on extinguishment of debt, restructuring and other charges, restructuring related charges, impairment of certain long-lived assets, and interest income 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:

___________________

(1)For the year ended December 31, 2024, non-GAAP stock-based compensation excludes $0.1 million as it is presented in Restructuring related charges. For the year ended December 31, 2023, non-GAAP stock-based compensation excludes the $31.3 million reversal related to the former CEO’s forfeited MRSU award that is reported in Restructuring related charges, as well as $3.9 million that is reported in Restructuring and other charges, in the table above.

(2)For the year ended December 31, 2024, primarily consists of executive reorganization charges. For the year ended December 31, 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.

63

(3)For the years ended December 31, 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, loss on extinguishment of debt, restructuring and other charges, restructuring related charges, impairment of certain 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 (loss) 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:

64

*may not foot due to rounding

______________

(1)For the year ended December 31, 2024, non-GAAP stock-based compensation excludes $0.1 million as it is presented in Restructuring related charges. For the year ended December 31, 2023, non-GAAP stock-based compensation excludes the $31.3 million reversal related to the former CEO’s forfeited MRSU award that is reported in Restructuring related charges, as well as $3.9 million that is reported in Restructuring and other charges, in the table above.

(2)For the year ended December 31, 2024, primarily consists of executive reorganization charges. For the year ended December 31, 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.

65

(3) For the years ended December 31, 2024 and 2023, we used a tax rate of 16% and 17%, respectively, which we believe is a reasonable estimate of our long-term effective tax rate applicable to non-GAAP pre-tax income for 2024 and 2023, respectively.

(4) Consists of non-cash interest expense for amortization of deferred financing fees related to the Convertible Notes.