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Digital Ocean customers back away from blockchains

Junior cloud growing nicely, but calls out customers' easing ardor for distributed ledgers

Junior cloud Digital Ocean has reported a marked dip in customers using its IaaS services to run blockchains.

Speaking on the company's Q2 2022 earnings call, CEO Yancey Spruill warned investors that "key growth drivers in our business are being somewhat offset by macro weakness, which has resulted in a reduced expansion spend rate on our platform, particularly in Europe and Asia and principally for customers operating in the blockchain vertical."

Spruill added that the dip in blockchain was not related to cryptocurrency, but other uses of the technology. He offered no explanation for why customers had cooled on the distributed ledger tech.

The CEO warned of "a very uncertain outlook in terms of blockchain, which in Q2 represented about 5 percent of revenue."

"That vertical is under extreme pressure," Spruill observed, and therefore represents a weak point for Digital Ocean.

The company sees strength in its other products. Spruill said he sees "tailwinds of net new customer attracted to the platform working well, new product with serverless working well, pricing working well, and being offset by weakness in the macro principally in Europe and in Asia" – and of course that blockchain slowdown.

The company reported year-on year revenue growth of 29 percent, with $133.9 million coming through the door in Q2. Non-GAAP net income was $23.4 million, but the company reported a $7.4 million loss.

Customers spending more than $50 a month rose to 105,400 – a reflection of Digital Ocean's target market of developers and small businesses. Average revenue per user reached $71.76, up 24 percent year-on-year from Q2 2021's figure of $58.07.

If those numbers seem tiny – a single Azure or EC2 instance could cost the same for a few hours of operation – Digital Ocean doesn't mind. The company positions itself as a cloud with modest and predictable costs, in contrast to the complexity of its larger rivals.

CFO Bill Sorensen said 85 percent of revenue comes from customers who spend $50 or more a month, and that Digital Ocean sees those customers' spend growing.

"As we've added more managed services like managed databases, managed Kubernetes, serverless, it's extending the wallet share we can capture from a customer than we could three to five years ago when we were just basic compute, basic network bandwidth and basic storage," he explained.

Sorensen also revealed the company has used its substantial global footprint to negotiate better deals from datacenter operators.

"As a cloud platform with customers in 185 countries, we're a valued partner to datacenter operators," he said. "To that end we have been working with our co-location partners to match our pricing to the scope of our relationship and our future growth trajectory, which has led to rate savings."

That vertical is under extreme pressure

"We've pursued a similar strategy with all of our suppliers – not only to server manufacturers, but all ancillary equipment as well – and the maintenance suppliers for our vast network. In each of these areas, we've achieved savings and we see the opportunity for additional savings in the future."

Sorensen added that Digital Ocean has purchased over $100 million of hardware in each of the past three years, and is using that purchasing muscle to further pressure the prices it pays for kit.

Execs predicted 30 percent revenue growth for Q3, despite ongoing challenges such as the cooling global economy, the impact of Russia's illegal invasion of Ukraine, and that blockchain bust. ®

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