• 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.

Q: Matt, the EBITDA guidance for Q4 has a wide range. What factors could lead to the lower or higher end of this range? A: The range is due to the timing of ramping R&D spend, particularly using contractors to accelerate product development. The timing of these expenses, whether they hit in Q4 or Q1, causes the range. We don't anticipate a significant change in overall expense levels, maintaining our trailing margin profile into next year.

Q: Are you seeing adoption of the GPU droplet more with builders and scalars or new customers, and how is the mix between on-demand and multi-year contracts? A: We see adoption across the board, with new customers and existing ones deploying live workloads. Contracts are more common for live workloads, while on-demand is used for experimentation. Our GenAI platform is also seeing interest from companies without deep AI/ML expertise.

Q: How should we think about the seasonality of the business and the size of the beat this quarter compared to last? A: There's no significant seasonality affecting the beat size. We focus on annual guidance, which can cause quarterly variations. We're encouraged by steady growth and improving metrics, with managed hosting and AI businesses performing well.

Q: Given the pace of change in the GPUs as a service market, what have you learned about your AI services strategy, and how do you differentiate from competitors like SageMaker or Bedrock? A: We've learned that our customers, often without deep AI expertise, look for easy-to-use platforms. Our GenAI platform stands out for its simplicity, allowing customers to quickly integrate AI into their applications. We focus on making complex processes simple and scalable, differentiating us from broader, more complex platforms.

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