DigitalOcean boasts 72% net profit growth

Cloud service provider DigitalOcean (DOSN -11.24%) reported third-quarter earnings on Monday, Nov. 4, that beat internal estimates. Revenue reached $198 million, up 12% year over year. The company’s net income of $33 million also showed impressive growth, up 72% year over year. Adjusted EBITDA rose to $87 million, up from $75.8 million in the prior year. Along with the gains came a decline in adjusted free cash flow, which fell to $26 million from $56 million a year ago.

Overall, the quarter delivered strong financial performance despite some areas of concern.

Source: DigitalOcean Note. Management advice was provided on August 8, 2024. Annual = annual report. EBITDA = earnings before interest, taxes, depreciation and amortization.

About DigitalOcean

DigitalOcean offers cloud services tailored to the needs of developers, startups and small and medium enterprises. Its platform is known for its simplicity and ease of use, enabling rapid application deployment with minimal installation time. The focus is on serving three main customer segments: learners, builders and scalers. The company is prioritizing the development of builders and scalers by expanding product offerings and engaging the community.

Recent strategies have relied heavily on expansion in these key segments, resulting in increased average revenue per user (ARPU). The platform continues to benefit from its simple consumption-based pricing and community-focused approach. This model will appeal to customers who value simplicity and predictable pricing for managing cloud resources.

Main events of the quarter

DigitalOcean achieved several milestones in the third quarter. Revenue growth of 12% demonstrates outstanding performance. Gross profit margin was 60% and gross profit reached $119 million, up 12% from Q3 2023. Profitability was further boosted by adjusted EBITDA margin of 44%, beating management’s estimate of 37-38%.

Net income attributable to common stockholders increased significantly to $33 million from $19.2 million in the prior year. Earnings per share of $0.33 and adjusted earnings per share of $0.52 were up double-digit percentages year over year. This improvement reflects strong sales and operating efficiency.

In terms of innovation, DigitalOcean introduced 42 new product features, highlighting the capabilities of artificial intelligence (AI) and cloud technologies. Notable launches included graphical drops based on Nvidia H100 Tensor Core GPUs and early deployment of the GenAI platform, the company’s generative AI solution. Innovation like this is critical to keeping a company competitive with larger cloud enterprises.

This quarter also highlighted some challenges. Adjusted free cash flow fell to $26 million from $56 million, indicating potential problems with operating efficiency. Net dollar retention rate remained stable at 97%, reflecting stagnation in customer acquisition or upsell opportunities. The competitive environment continues to exert pressure as giants such as AmazonAWS and AlphabetGoogle Cloud is vying for market share.

Prospects and recommendations for the future

Looking ahead DigitalOcean raised its full-year revenue guidance to $775-$777 million (up 12% mid-year), indicating confidence in its growth trajectory. The company also revised its adjusted earnings per share estimate to between $1.70 and $1.75 (up 8.5% at the midpoint), and its full-year EBITDA margin guidance is now in the range of 40% to 41%. For the upcoming fourth quarter, revenue is projected to be between $199 million and $201 million (up 10.5% year over year at midyear).

Investors should keep an eye on ongoing strategic initiatives, especially in the areas of artificial intelligence and machine learning integration, as well as the company’s cash flow management. Focus on community engagement and simplicity as differentiation remains critical in the competitive cloud market. The outlook reflects optimism, albeit tempered by concerns about competition and the need for operational efficiency.