• Revenue: $198.5 million, up 12% year over year.

• Annual Run Rate Revenue (ARR): $798.3 million, up 12% year over year.

• Adjusted EBITDA: $87 million, an increase of 14% year over year.

• Adjusted EBITDA Margin: 44%.

• Gross Margin: 60%, consistent with the prior year.

• Net Dollar Retention Rate: 97%.

• Diluted Net Income Per Share: $0.33, a 65% increase year over year.

• Non-GAAP Diluted Net Income Per Share: $0.52, an 18% increase year over year.

• Adjusted Free Cash Flow: $26 million, 13% of revenue.

• Cash and Cash Equivalents: $440 million.

• Full Year Revenue Guidance: Increased to $775 million to $777 million.

• Full Year Adjusted EBITDA Margin Guidance: 40% to 41%.

• Full Year Non-GAAP Diluted Earnings Per Share Guidance: $1.70 to $1.75.

• Full Year Adjusted Free Cash Flow Margin Guidance: 15% to 17%.

• Warning! GuruFocus has detected 6 Warning Sign with DOCN.

Release Date: November 04, 2024

For the complete transcript of the earnings call, please refer to the full earnings call transcript.

Positive Points

• DigitalOcean Holdings Inc (NYSE:DOCN) reported a steady revenue growth of 12% year over year in Q3 2024, with significant contributions from AI/ML products.

• The company increased the lower end of its full-year revenue guidance by $5 million and the top end by $2 million, indicating confidence in future performance.

• Adjusted EBITDA margins were strong at 44%, reflecting effective cost management while continuing to invest in product innovation.

• DigitalOcean Holdings Inc (NYSE:DOCN) released 42 new product features in Q3, nearly doubling the previous quarter's output, enhancing its core cloud computing platform.

• The company is seeing increased adoption of its AI/ML platform, with annual run rate revenue (ARR) for AI/ML products growing close to 200% year over year.

Negative Points

• Net dollar retention rate remained steady at 97%, indicating challenges in achieving higher customer expansion.

• Managed hosting platform growth was muted due to difficult comparisons from previous price increases and a temporary surge in revenue in Asia.

• Gross margin for the quarter was 60%, which was 100 basis points lower than the prior quarter.

• Free cash flow margin decreased to 13% of revenue in Q3, down approximately 600 basis points from the prior quarter due to timing of capital expense payments.

• The company faces challenges in translating product innovation into immediate financial performance, as adoption and impact on financial metrics take time.

Q & A Highlights

Q: Paddy, there was a lot of product innovation that you discussed. Can you talk about how these innovations feed into the installed base and the timing of their impact on financials, given the net dollar retention rate at 97%? A: We are seeing a lot of product innovation aimed at enabling our scalars to run larger workloads on DigitalOcean. While there's no magical answer for translating product innovation to financial impact, we are starting to see customers sign multi-year contracts and migrate from other clouds. This takes time, given our large customer base, but we are seeing positive leading indicators.