6 ms·

layoffs will continue until companies are much more efficient DO made a profit of a little over $250m in 2022, on revenue of $428.6m. That's a 60% margin. How

layoffs will continue until companies are much more efficient DO made a profit of a little over $250m in 2022, on revenue of $428.6m. That's a 60% margin. How much efficiency does a company need? EDIT: Correction.. those are the 2021 numbers. The latest numbers on the DO website for Q3 2022 state; "Gross profit of $97.6 million or 64% of revenue, an increase of 300 basis points year-over-year, and adjusted gross profit of $121.5 million or 80% of revenue." https://investors.digitalocean.com/news/news-details/2022/DigitalOcean-Announces-Third-Quarter-2022-Financial-Results/default.aspx https://investors.digitalocean.com/news/news-details/2022/Di...

fragmede 4y ago
divided across 1,000 employees, that's pretty low per employee. Nowhere near Google's $1,486,779 per employee, pre-layoff.
version_five 4y ago
That doesn't address the point in the comment you replied to. He is talking about returns. The question is what return they made on invested capital. It might still be very good, I have no idea, but it's not the same as margin.
- siwatanejo 4y ago
  Wait, doesn't the invested capital equal the revenue minus the profits? That is, the expenses.
  - unilynx 4y ago
    No, those have nothing to do with each other (except on the very long term..) As an extreme example, a SPAC that hasn't acquired anything yet has near-zero revenue, profit and expenses, but a lot of capital
  - deleted 4y ago
    [deleted]
- 411111111111111 4y ago
  At 60% margin your argument becomes pretty disingenuous. Sure, they're not the same but the quoted number is freely available and correlates with the returns.
- hn_throwaway_99 4y ago
  Thanks for posting this. I see so many comments that fundamentally misunderstand the relationship between rising interest rates and layoffs, e.g. "Many of these companies have very low debt and don't need to borrow right now, so why do they need to do layoffs?" Interest rates are the key parameter for calculating the present value of future cash flows, which is (theoretically) how companies are valued. When interest rates go up, those present values go way down, to the point where they're no longer competitive with risk-free investment options.
  - skrebbel 4y ago
    But why does that matter? Why does a wildly profitable company need to compete with “risk-free investment options”? Why do they need to be an investment option at all? Obviously I’m not understanding something very basic about finance here, but I don’t see how “profitable company is not more profitable than a loan would be” implies layoffs.
    - kijin 4y ago
      The only reason DigitalOcean exists is because people have invested money in it. But those people have every right to invest their money elsewhere if they see a more profitable option, such as U.S. treasury bonds. As a result, DigitalOcean needs to compete with loans, not just other cloud computing companies.
    - csomar 4y ago
      That's how the current economy works.
    - hn_throwaway_99 4y ago
      > Why does a wildly profitable company need to compete with “risk-free investment options”? The shareholders are the owners of the company. Their ownership stake is referred to as shareholder's equity, and the company's net income divided by this equity is called return on equity. Now, if you're a shareholder, and you've determined that your return on equity in this company is lower than, or not all that much better than, the risk-free rate of return, what is the rational thing to do (economics-wise)? Shut down the company and put all your money into Treasuries. Why would you leave your money in a company, that has all the risks associated with the ups and downs of business, when you can just park it in a risk-free option (though, of course, Congress in their grand stupidity is trying to change that "risk-free" designation at the moment, but I digress...)? I think often times when you wonder "why does the economy work like this?", it's really helpful to put yourself in the shoes of a company owner. What are their incentives and competing options?
- onlyrealcuzzo 4y ago
  The value of future earnings vs current earnings is all that matters. Nobody wants income. They want capital gains. Corporate profits are a necessary evil in the way to extracting out lower-taxed capital gains. When interest rates go up, the value of future profits goes down, and the value of current profits goes up. This means, if you're the CEO of DigitalOcean, and all you care about is the stock price... You fire people so you have more current earnings so your stock price goes down less, so 1) your pay goes down less, and 2) your shareholders are happier. That's pretty much it.
lokar 4y ago
Margin is sort of the wrong metric to the above argument. You need to consider revenue vs capital. DO has a negative roe
scarface74 4y ago
Any company can report a profit as long as they exclude actual expenses. > 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
sct202 4y ago
Gross profit is before a lot of people related expenses are taken out (R&D, sales and marketing, and other admin). Their net income was only $10m for the time frame you're quoting.
- maerF0x0 4y ago
  Its so crazy to put into perspective. After a whole year, what was their net productivity, with all that tech, all those people, all those degrees? about 25 single family homes.
  - colinjoy 4y ago
    That idea of productivity is odd to me. If I build a house for you and you build a house for me and we both compensate each other with the same $ amount for the work, is that a net productivity of 0? Two new houses got build.
    - maerF0x0 4y ago
      you're right in that regard. But I'm looking at it as net of the whole system inputs. You put in one house, I put in one house. There are no resultant houses for others to consume remaining. Another way to think about it might be manual farm labor. If an acre of food grows enough potatoes to feed 1.2 people (idk if that's true), and it takes 1 person to labor over. The acre is only producing enough food to have .2 people as non-farmers.
      - chilukrn 4y ago
        If there are only non-farmers, the farmland doesn't produce any food (discounting wild berries or whatever grows when farmland is wasted). The farm can simply produce for 1.2 people...
  - reisse 4y ago
    That's 25 single family homes for company owners only. Don't forget they also gave jobs and salaries for a thousand of people, and a product for the market to use.
codegeek 4y ago
Wow. If a company has to layoff with those numbers, that is insane. I guess the Venture Market demands that or it is just a ploy to get rid of low performers in general. I wonder.
mguerville 4y ago
Gross Profit isn't a helpful number as it doesn't account for any fixed costs like offices, wages, sales and marketing, etc. Operating profits is a better indicator (EBIT or EBITDA) and also much closer to the holy grail of Free Cash Flow that companies need to keep an eye on to make sure they make payroll and fulfill their interest payments obligation, among other things
- time_to_smile 4y ago
  Exactly. Parent's comment is only meaningful if you completely ignore paying workers which seems pretty relevant if you're going to be talking about layoffs. I've found a lot of tech workers (including myself) really need to learn how to read an earnings statement. Coursera has an excellent Intro to Financial account course [0] that I've found very helpful in understanding what's really happening at these places. 0. https://www.coursera.org/learn/wharton-accounting https://www.coursera.org/learn/wharton-accounting
  - senko 4y ago
    Also, Aswath Damodaran has (among loads of other teaching material) a crash course into accounting just enough to get by when reading financial statements: https://www.youtube.com/watch?v=Jbp3-AU9v_g&list=PLUkh9m2BorqmKaLrNBjKtFDhpdFdi8f7C https://www.youtube.com/watch?v=Jbp3-AU9v_g&list=PLUkh9m2Bor...
  - Moose_the_Goose 4y ago
    Yeah, I'm pretty thankful for my 4 year technical program for having us do a couple of business course. One which was accounting and the majority of the work was the teacher walking us through reading financial statements of public companies.
- DwnVoteHoneyPot 4y ago
  Last 12 months on Yahoo Finance is showing Digital Ocean's operating income at -$21M. Also, negative in 2019, 2020, 2021. It's either financially illiterate or completely disengenuous for commenters to cherry pick financials such as gross profit, which doesn't include salary expense, when we are talking about layoffs. Other commenters calling execs sociopaths when company is losing money, as if they can lose money forever.
themgt 4y ago
You can check their latest numbers at Yahoo Finance: https://finance.yahoo.com/quote/DOCN/financials?p=DOCN https://finance.yahoo.com/quote/DOCN/financials?p=DOCN A 60% margin, wow, can't do much better than that! What's their P/E ratio? Oh ...
onlypositive 4y ago
More than that. 60% margin on a growth business is dangerously low.
time_to_smile 4y ago
> That's a 60% margin. If you don't count salaries and operations. From the linked statement > Income from operations was $9.4 million and operating margin was 6%. Last quarter was DO first profitable quarter. If sales go down it's going to be hard to maintain that.

fragmede 4y ago

divided across 1,000 employees, that's pretty low per employee. Nowhere near Google's $1,486,779 per employee, pre-layoff.

version_five 4y ago

That doesn't address the point in the comment you replied to. He is talking about returns. The question is what return they made on invested capital. It might still be very good, I have no idea, but it's not the same as margin.

siwatanejo 4y ago
Wait, doesn't the invested capital equal the revenue minus the profits? That is, the expenses.
- unilynx 4y ago
  No, those have nothing to do with each other (except on the very long term..) As an extreme example, a SPAC that hasn't acquired anything yet has near-zero revenue, profit and expenses, but a lot of capital
- deleted 4y ago
  [deleted]
411111111111111 4y ago
At 60% margin your argument becomes pretty disingenuous. Sure, they're not the same but the quoted number is freely available and correlates with the returns.
hn_throwaway_99 4y ago
Thanks for posting this. I see so many comments that fundamentally misunderstand the relationship between rising interest rates and layoffs, e.g. "Many of these companies have very low debt and don't need to borrow right now, so why do they need to do layoffs?" Interest rates are the key parameter for calculating the present value of future cash flows, which is (theoretically) how companies are valued. When interest rates go up, those present values go way down, to the point where they're no longer competitive with risk-free investment options.
- skrebbel 4y ago
  But why does that matter? Why does a wildly profitable company need to compete with “risk-free investment options”? Why do they need to be an investment option at all? Obviously I’m not understanding something very basic about finance here, but I don’t see how “profitable company is not more profitable than a loan would be” implies layoffs.
  - kijin 4y ago
    The only reason DigitalOcean exists is because people have invested money in it. But those people have every right to invest their money elsewhere if they see a more profitable option, such as U.S. treasury bonds. As a result, DigitalOcean needs to compete with loans, not just other cloud computing companies.
  - csomar 4y ago
    That's how the current economy works.
  - hn_throwaway_99 4y ago
    > Why does a wildly profitable company need to compete with “risk-free investment options”? The shareholders are the owners of the company. Their ownership stake is referred to as shareholder's equity, and the company's net income divided by this equity is called return on equity. Now, if you're a shareholder, and you've determined that your return on equity in this company is lower than, or not all that much better than, the risk-free rate of return, what is the rational thing to do (economics-wise)? Shut down the company and put all your money into Treasuries. Why would you leave your money in a company, that has all the risks associated with the ups and downs of business, when you can just park it in a risk-free option (though, of course, Congress in their grand stupidity is trying to change that "risk-free" designation at the moment, but I digress...)? I think often times when you wonder "why does the economy work like this?", it's really helpful to put yourself in the shoes of a company owner. What are their incentives and competing options?
onlyrealcuzzo 4y ago
The value of future earnings vs current earnings is all that matters. Nobody wants income. They want capital gains. Corporate profits are a necessary evil in the way to extracting out lower-taxed capital gains. When interest rates go up, the value of future profits goes down, and the value of current profits goes up. This means, if you're the CEO of DigitalOcean, and all you care about is the stock price... You fire people so you have more current earnings so your stock price goes down less, so 1) your pay goes down less, and 2) your shareholders are happier. That's pretty much it.

lokar 4y ago

Margin is sort of the wrong metric to the above argument. You need to consider revenue vs capital. DO has a negative roe

scarface74 4y ago

Any company can report a profit as long as they exclude actual expenses. > 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

sct202 4y ago

Gross profit is before a lot of people related expenses are taken out (R&D, sales and marketing, and other admin). Their net income was only $10m for the time frame you're quoting.

maerF0x0 4y ago
Its so crazy to put into perspective. After a whole year, what was their net productivity, with all that tech, all those people, all those degrees? about 25 single family homes.
- colinjoy 4y ago
  That idea of productivity is odd to me. If I build a house for you and you build a house for me and we both compensate each other with the same $ amount for the work, is that a net productivity of 0? Two new houses got build.
  - maerF0x0 4y ago
    you're right in that regard. But I'm looking at it as net of the whole system inputs. You put in one house, I put in one house. There are no resultant houses for others to consume remaining. Another way to think about it might be manual farm labor. If an acre of food grows enough potatoes to feed 1.2 people (idk if that's true), and it takes 1 person to labor over. The acre is only producing enough food to have .2 people as non-farmers.
    - chilukrn 4y ago
      If there are only non-farmers, the farmland doesn't produce any food (discounting wild berries or whatever grows when farmland is wasted). The farm can simply produce for 1.2 people...
- reisse 4y ago
  That's 25 single family homes for company owners only. Don't forget they also gave jobs and salaries for a thousand of people, and a product for the market to use.

codegeek 4y ago

Wow. If a company has to layoff with those numbers, that is insane. I guess the Venture Market demands that or it is just a ploy to get rid of low performers in general. I wonder.

mguerville 4y ago

Gross Profit isn't a helpful number as it doesn't account for any fixed costs like offices, wages, sales and marketing, etc. Operating profits is a better indicator (EBIT or EBITDA) and also much closer to the holy grail of Free Cash Flow that companies need to keep an eye on to make sure they make payroll and fulfill their interest payments obligation, among other things

time_to_smile 4y ago
Exactly. Parent's comment is only meaningful if you completely ignore paying workers which seems pretty relevant if you're going to be talking about layoffs. I've found a lot of tech workers (including myself) really need to learn how to read an earnings statement. Coursera has an excellent Intro to Financial account course [0] that I've found very helpful in understanding what's really happening at these places. 0. https://www.coursera.org/learn/wharton-accounting https://www.coursera.org/learn/wharton-accounting
- senko 4y ago
  Also, Aswath Damodaran has (among loads of other teaching material) a crash course into accounting just enough to get by when reading financial statements: https://www.youtube.com/watch?v=Jbp3-AU9v_g&list=PLUkh9m2BorqmKaLrNBjKtFDhpdFdi8f7C https://www.youtube.com/watch?v=Jbp3-AU9v_g&list=PLUkh9m2Bor...
- Moose_the_Goose 4y ago
  Yeah, I'm pretty thankful for my 4 year technical program for having us do a couple of business course. One which was accounting and the majority of the work was the teacher walking us through reading financial statements of public companies.
DwnVoteHoneyPot 4y ago
Last 12 months on Yahoo Finance is showing Digital Ocean's operating income at -$21M. Also, negative in 2019, 2020, 2021. It's either financially illiterate or completely disengenuous for commenters to cherry pick financials such as gross profit, which doesn't include salary expense, when we are talking about layoffs. Other commenters calling execs sociopaths when company is losing money, as if they can lose money forever.

themgt 4y ago

You can check their latest numbers at Yahoo Finance: https://finance.yahoo.com/quote/DOCN/financials?p=DOCN https://finance.yahoo.com/quote/DOCN/financials?p=DOCN A 60% margin, wow, can't do much better than that! What's their P/E ratio? Oh ...

onlypositive 4y ago

More than that. 60% margin on a growth business is dangerously low.

time_to_smile 4y ago

> That's a 60% margin. If you don't count salaries and operations. From the linked statement > Income from operations was $9.4 million and operating margin was 6%. Last quarter was DO first profitable quarter. If sales go down it's going to be hard to maintain that.