Needham analyst Mike Cikos reiterated a Hold rating on the shares of DigitalOcean Holdings Inc (NYSE:DOCN).

The analyst has a favorable outlook on DigitalOcean ahead of its earnings report, as the analyst notes the increased pace of product development under CEO Paddy Srinivasan will lead to stronger growth among Scalers & Builders, while improving customer retention before they transition to Hyperscalers.

Net Dollar Retention is expected to stay below 100%, but the comparison will become easier as the analyst anniversary Cloudways price gains in April.

Management has projected fourth-quarter revenue to reach between $199.0 million and $201.0 million, reflecting a year-over-year growth of 10.0%-11.1%.

The sell-side model anticipates a 10.9% increase, reaching $200.6 million, which is at the upper end of the guidance range and slightly above the analyst’s forecast of $200.2 million.

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The analyst expects DigitalOcean to surpass both the upper limit of the guidance and the consensus estimate, in line with the company’s history of exceeding expectations by an average of 1.3% over the past four quarters.

DigitalOcean’s Net Dollar Retention (NDR) has remained at 97% for the past three quarters due to challenging year-over-year comparisons related to Cloudways’ price hike, which the company will lap in April.

The core DigitalOcean business is performing better than the reported NDR, a positive sign for pushing NDR above 100% in the future.

DigitalOcean has significantly adjusted its strategy to better engage Builders and Scalers, which made up 88% of its revenue in the latest quarter.

Recent product updates, such as Virtual Private Cloud (VPC) peering and Global Load Balancers, are designed to better serve these customers. The analyst notes DigitalOcean is carefully balancing the need to retain Builders and Scalers on its platform before they transition to a Hyperscaler.

The analyst anticipates that DigitalOcean will offer a more comprehensive update on customer demand, the progress of commitments, and its overall approach to AI/ML products, especially within the Platform and SaaS layers.

Price Action: DOCN shares are trading lower by 7.05% at $36.53 at the last check Monday.

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