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Tell HN: DigitalOcean is doing layoffs

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Re: Tell HN: DigitalOcean is doing layoffs

#251

Post by hn_throwaway_99 »

skrebbel wrote: post #159
hn_throwaway_99 wrote: post #107

Earlier quoted context omitted.

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…

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.

> 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?

Re: Tell HN: DigitalOcean is doing layoffs

#252

Post by skrebbel »

hn_throwaway_99 wrote: post #251
skrebbel wrote: post #159

Earlier quoted context omitted.

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.

> 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…

Really appreciate the hand-holding here.

One thing I don’t fully get yet, is that you say that if the DO return on equity is lower than that of a government loan, the shareholders should just dissolve the company. How is dissolving the company going to get them their money out? They’ll get only a tiny sliver of their original investment back, right?

Re: Tell HN: DigitalOcean is doing layoffs

#253

Post by mardifoufs »

quags wrote: post #243
DwnVoteHoneyPot wrote: post #165

Earlier quoted context omitted.

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 fo…

Can anyone enlighten me on this because cloudflare seems to report similar high margins with no profits. What are these high margin numbers both DO and CF report? They both report high margins but then do not make any money. Are these margins excluding most expenses - because that makes no sense. Companies have expenses and that affects the bottom line. If digital ocean had real margins of 60% they would show a profi…

It's because they are growing massively, meaning they invest a lot of those margins in capital expenses. At least that's true for CF, not sure about DO

Re: Tell HN: DigitalOcean is doing layoffs

#254

Post by Taurenking »

kmshultz wrote: post #204
der-erlkonig wrote: post #48

Hearing that a lot of Community teams were let go, including the teams responsible for tutorials. Seems obvious DigitalOcean doesn't care about developers anymore. But this has been obvious for a while now. I guess their value "Our Community is bigger than just us" only matters when profits are up. Pour one out for DigitalOcean. It's the end of an era.

There is a newer portal within the DO Docs site (not the Community site) for similar tutorials: https://docs.digitalocean.com/developer-center/ The content is created by Developer Advocates rather than Technical Writers and Editors. I am not sure if this team was impacted in the layoffs, but I suspect not, as this portal is a very new effort. It's only been around for a matter of weeks. Time will tell whether develop…

[dead]

Re: Tell HN: DigitalOcean is doing layoffs

#256

Post by reisse »

roncesvalles wrote: post #248
reisse wrote: post #142

Earlier quoted context omitted.

> I can understand it if you have brought on a lot of fat and you want to lean out your team and need an excuse but outside of that rather narrow situation This doesn't really seem to be a rather narrow situation. The tech companies were hiring like crazy for the past two years. Quick googling shows that DigitalOcean increased headcount by 31% last year. And contrary to the popular opinion here, for me this does soun…

Stating that these companies hired a lot last year as an explanation for doing layoffs this year sounds like a total non-sequitur to me. Nobody gets hired to just sit around and do nothing. They were hired because there was work to do. Have tech companies now decided that they're just... not going to do that work anymore?

In every good company there is always more work to do than workers, sometimes significantly so. Technical debt, features that may or may not be useful, features that are useful but deprioritized in favor of even more useful stuff.

So yes, they're just going to put some things in the backlog again, it's totally normal.

Re: Tell HN: DigitalOcean is doing layoffs

#257

Post by smugma »

reisse wrote: post #242
smugma wrote: post #228

Earlier quoted context omitted.

In contrast, FAANGM’s have had an average of <2 CEO’s in the past 20+ years.

Yes, on the scale of FAANG, the "I won't be in this position after a year" attitude shifts from C-level down to upper and middle management. I think it's because when you're a CEO of any of top-10 S&P500 companies, there is no next position for you to take, you're already at the very top of your personal career pyramid. And I honestly think that in any of them, neither mass hirings nor layoffs are initiated by CEOs.…

At least at Apple, Amazon, and Google, most execs have been there 10+ years.

One of the challenges is people often think “where’s my growth going to be if my Senior Director/VP isn’t going anywhere for 5 years?”

Re: Tell HN: DigitalOcean is doing layoffs

#258

Post by creamyhorror »

skrebbel wrote: post #252
hn_throwaway_99 wrote: post #251

Earlier quoted context omitted.

> 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…

Really appreciate the hand-holding here. One thing I don’t fully get yet, is that you say that if the DO return on equity is lower than that of a government loan, the shareholders should just dissolve the company. How is dissolving the company going to get them their money out? They’ll get only a tiny sliver of their original investment back, right?

They're not quite right. They won't dissolve the company.

What happens is that market participants sell their holdings of the company's stock (since they want to free it up to buy bonds with higher returns), causing the stock price to fall. Eventually the price theoretically reaches an equilibrium level where it's worth what it should be relative to the risk-free interest rate (with a risk premium factored in).

Whichever participants were still holding company stock will have seen the value of their holdings shrink as a result of this price fall.

So what do company executives do? They cut costs (staff and investments for the future) to improve their operating profit, which directly equates to justifying a higher stock price - thus lessening the fall in the stock's price. They're being compared to peers/competitors, too.

What if they don't do this? Shareholders (often big funds) won't be happy (because their own portfolio value will fall and they might lose bonuses or get fired), and some will call for the CEO to be replaced by someone who will do the job.

That's the magic circle of life on Wall Street.

Re: Tell HN: DigitalOcean is doing layoffs

#259

Post by quags »

mardifoufs wrote: post #253
quags wrote: post #243

Earlier quoted context omitted.

Can anyone enlighten me on this because cloudflare seems to report similar high margins with no profits. What are these high margin numbers both DO and CF report? They both report high margins but then do not make any money. Are these margins excluding most expenses - because that makes no sense. Companies have expenses and that affects the bottom line. If digital ocean had real margins of 60% they would show a profi…

It's because they are growing massively, meaning they invest a lot of those margins in capital expenses. At least that's true for CF, not sure about DO

Ok I get it, still seems a bit dumb. DO for example still needs to replace failed components (ssd drives which have the highest failure rate can expect 1 - 3% failure rate per year on the low end), pay datacenter fees, likely power increases in the dc fees built in, replace servers on a 5 - 7 year scale (3 - 5 is better), and networking equipment generally on a 7 - 10 year level. Even if the growth is zero, these don't go away they just are not spending as much because they don't need to add so many new systems for their growth.

Re: Tell HN: DigitalOcean is doing layoffs

#260

Post by MuffinFlavored »

colinmorelli wrote: post #225
jpgvm wrote: post #218

Earlier quoted context omitted.

My point is that market expectations are fickle, over-hiring, layoffs etc are all symptoms of paying too much attention to the market in the short term rather than focusing on long term ROE.

I really struggle with this perspective for a pretty simple reason: "Market expectations" are predictions of the future. Early pandemic, predictions for tech companies were favorable. They were hiring not because of quarterly targets or short-term objectives, but because companies believed they would be able to pull future goals forward. They are now laying off because future predictions are more bleak. With new data…

I'm curious what level of blending there is between the two states.

"We need to lay people off now to focus on profitability"

Are they also doing any hiring whatsoever?

If in 6 months Jerome Powell comes out and says "no more rate hikes, expect to taper down from 5% to 3% in the next 12 months", does DigitalOcean (and companies like them) turn around and "go for growth" again and restart the (expensive) hiring process (after having just laid people off not too long ago)?

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