DigitalOcean Growth Rate Ticks Higher

Here's our initial take on DigitalOcean's (NYSE: DOCN) fiscal 2025 first-quarter financial results.

Key Metrics

Spending on Capacity Is Renewing Growth for DigitalOcean

Over the past year and a half, DigitalOcean's growth rates have slowed significantly, with revenue growth falling from 30% in the first quarter of 2023 to 12% revenue growth in Q1 of fiscal 2024. However, the cloud infrastructure-as-a-service platform operator is starting to build some momentum -- if modest -- in the right direction. After reporting 13% revenue growth in Q4 of 2024, a 2-percentage-point increase from 11% growth in the prior year, revenue increased 14% to start fiscal 2025, another 2-percentage-point acceleration year over year.

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It's also doing a better job of retaining -- and growing -- customers and their spending. Net dollar retention rate (NRR) was 100%, up from 97% (indicating a certain degree of customer churn when combined with revenue growth) in the year-ago quarter. This was also the first quarter in nearly two years that DigitalOcean's NRR was 100% or above.

The company continues to deliver on its efforts to transition its focus and products to "digital native" companies, and the results are improving. Revenue from customers that spend $100,000 per year or more in ARR was up 41% and now represents 23% of total revenue. The number of higher-spend customers, which the company defines as customers who spend more than $600 per year, increased 9% and now represents 88% of total revenue.

DigitalOcean's strategy is delivering solid bottom-line results too. Adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) margin was 41%, down a little from recent quarters but up from the year-ago period, while GAAP gross margin of 61% continues a positive margin trend. Both GAAP and adjusted earnings metrics continue to trend higher.

Cash flows are another story, though management should get the benefit of the doubt here. Operating cash flow was $64 million, down $2.6 million year over year, while free cash flow fell from $34 million to an $821,000 outflow. The decline in operating cash flow was almost entirely due to the timing of certain items, including accounts receivable. Negative free cash flow was the result of the timing of annual employee bonus payments and, to a greater extent, capex spending on its new data center in Atlanta. Management said that it is "front-loading" its capital spending for 2025 and that the company remains on track to deliver 16% to 18% in adjusted free cash flow margins this year.

Immediate Market Reaction

Share prices were down about 5% in premarket trading, a bit surprising considering the results were relatively solid and mostly better than expected and that management is maintaining its full-year financial outlook. That's not something every company is doing in the current environment. It was probably also a product of a market that was likely to open down today, with market futures down about 1% at this writing.

What to Watch

DigitalOcean is leaning in hard to its focus on digital native enterprises (DNE), aiming to continue expanding its relationship with the 171,000 current DNE customers and expand to 4 million more. It also has a goal to further accelerate growth, calling for revenue growth of 18% to 20% in 2027 and growing faster than 20% in the years following.

Adding more features and capabilities is core to this. Investors should watch closely for the company to continue adding more hyperscaler-level capabilities to its cloud stack, including more AI capabilities that its digital-native customers are increasingly building and integrating into their businesses.

Helpful Resources

• Earnings press release and presentation
• Investor relations page

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Jason Hall has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends DigitalOcean. The Motley Fool has a disclosure policy.