DigitalOcean’s nice debut: There’s more where that came from, says CEO Spruill

Among Thursday’s upbeat earnings reports was DigitalOcean, the provider of cloud infrastructure that went public March 24th. The company’s first report as a public company saw revenue growth of twenty-nine percent, which is higher than the twenty-five percent achieved last year.

“The IPO event is a great event, but it really starts to sink in when you start showing results and start that regular conversation with investors,” says Yancey Spruill, chief executive of DigitalOcean, in a chat I had with him Friday afternoon by phone.

“Everything we do on the sales and marketing side is different: it’s digital, and so we know with tight precision how customers move through our sales funnel,” says Spruill.

“Everything we do on the sales and marketing side is different: it’s digital, and so we know with tight precision how customers move through our sales funnel,” says Spruill.

Spruill is a veteran of this newly public process, having been through it with SendGrid in 2017, and DigitalGlobe in 2009. He will spend the next four to six weeks in investor chats, he says, and at virtual banking conferences, the usual routine for most public company CEOs following a quarterly call.

Fortunately for him, “I love talking with investors,” he says.

What is different this time around, what is “incredibly unique,” he says, is that DigitalOcean has been thrust into the spotlight while it is still a work in progress.  

Spruill came to the nine-year-old company in August of 2019, in large part to lead the company to higher rates of growth. It’s typical to wait a couple years as changes are made by the new CEO. “The acceleration in this turnaround is happening as a public company, and that is not what they’re used to” he says of software investors.

The company, he tells me, is “getting so much better, and it’s still early in terms of growth acceleration.” The promise implicit in Spruill’s statement is that investors coming on board now will see rising rates of growth in quarters to come. 

Part of how that happens is beefing up the sales team in order to land larger accounts. DigitalOcean currently spends an amount equivalent to ten percent of revenue. That is only a third or a quarter of what some other companies spend, he notes. The company can afford over time to add to that spend to drive higher growth.

"SendGrid was mid-teens when we went public, and when we sold it, was high-teens,” in terms of its sales and marketing spending as a percentage of revenue, he recalls. “And Atlassian [the enterprise software company], the other sort of poster child that does this well, is at twenty percent.” 

“So we have a lot of room to run, and I’d love to be fifteen percent of revenue and growing ten percentage points faster if we could,” he says. “That’s a trade that’s worth it any day of the week, that’s a win-win.”

How does one get leverage from more spending? By running experiments through what is a mostly digital sales funnel, seeing what works.

“We have a very automated go-to-market, and even our folks that are selling, a lot of their leads come from digital tools,” he explains. “Everything we do on the sales and marketing side is different: it’s digital, and so we know with tight precision how customers move through our sales funnel.”

To understand the mechanics of that, it helps to understand DigitalOcean’s audience. The company bills itself as selling to the neglected class of developers in small and medium businesses, engineers that don’t have huge budgets and that have to put together Web sites for their employers. 

To that end, DigitalOcean has buckets of tutorials and other materials on its Web site that bring tens of thousands of developers to the company’s front door.

“There are thirty to forty million developers all over the world, in one hundred million small and medium businesses,” explains Spruill. “The only way to reach them is a digital-first, self-service form of go-to-market,” because they can’t be economically reached by more expensive forms of selling, such as a sales person who picks up the phone. 

“We can optimize the performance by changing a Web page design, changing the interaction with our customers, and confirm whether it works,” he says. 

The formula becomes, “Test, experiment, and confirm, and then go big, and you have winners,” he says. “That’s the power of this model.” That digital testing is “so much cheaper versus the traditional marketing model,” he maintains, “which is, spend lots of money on stuff such as billboards, ads, conferences — lots of things that are not really very easily measured in terms of the sales performance.”

DigitalOcean’s marketing team “can do an experiment today, get results, and take action a week from today,” he says. They are “very math-oriented, very metrics-based.” 

It can’t all be milk and honey, so what are investors concerned about coming out of this first report? The larger-than-normal capital spending of DigitalOcean, he says, at least relative to the typical software firm. That is investors’ primary bone of contention. “They ask if it’s a bug, or a feature,” he quips, the old programming joke. 

“We are more capital-intensive today than we ultimately will be, it’s getting better, but they struggle with it,” says Spruill of investors’ anxiety. 

“A software company is typically five percent, cap-ex as a percentage of revenue, and we are twenty-five percent.” 

That higher capital intensity is way down from forty-five percent a year ago, but it needs to come down further, and it will, he insists. It is another part of that work in progress. 

“It won’t be an issue, my prediction is, twelve months from now, they’ll see it coming down.”

DigitalOcean shares ended Friday at $42.30, down three percent for the week. The stock is about flat with its first-day price at IPO.

Return since IPO.

Return since IPO.

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