Cloud services provider DigitalOcean (DOCN -2.81%) reported third-quarter earnings on Monday, Nov. 4, that exceeded internal guidance. Revenue reached $198 million, a 12% increase 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, exceeding the prior year’s $75.8 million. Along with the successes, there was a decline in adjusted free cash flow, which fell to $26 million from $56 million a year ago.
Overall, the quarter highlighted strong financial performance, notwithstanding certain areas of concern.
| Metric | Q3 2024 | Management's Guidance | Q3 2023 | Change (YOY) |
|---|---|---|---|---|
| Revenue | $198 million | $196 million-$197 million | $177.1 million | 12% |
| Net income | $33 million | N/A | $19.2 million | 72% |
| Adjusted EBITDA | $87 million | $74 million-$76 million | $75.8 million | 14% |
| Adjusted free cash flow | $26 million | NA | $56 million | (54%) |
Source: DigitalOcean. Note: Management guidance was provided on Aug. 8, 2024. YOY = Year over year. EBITDA = Earnings before interest, taxes, depreciation, and amortization.
About DigitalOcean
DigitalOcean offers cloud services tailored to the needs of developers, startups, and small to medium-sized enterprises. Its platform is known for simplicity and ease of use, promoting rapid deployment of applications with minimal setup time. A key focus involves catering to three main customer segments: Learners, Builders, and Scalers. The company prioritizes the growth of Builders and Scalers by enhancing product offerings and community engagement.
Recent strategies relied heavily on expanding these key segments, resulting in an increased average revenue per user (ARPU). The platform continues to capitalize on its straightforward, consumption-based pricing and community-driven approach. This model appeals to customers who value simplicity and predictable pricing for managing cloud resources.
Quarter Highlights
DigitalOcean delivered multiple achievements in Q3. Revenue growth of 12% marks a standout performance. Gross profit margin came in at 60% while gross profit reached $119 million, a 12% increase from Q3 2023. Profitability was further enhanced with a 44% adjusted EBITDA margin, surpassing management’s estimate of 37% to 38%.
The net income attributable to common stockholders saw a remarkable rise to $33 million from $19.2 million the previous year. Earnings per share of $0.33 and adjusted EPS of $0.52 both rose by double-digit percentages year over year. This improvement reflects strong sales performance and operational efficiency.
On the innovation front, DigitalOcean introduced 42 new product features, emphasizing its artificial intelligence (AI) and cloud capabilities. The notable launches included GPU Droplets powered by Nvidia H100 Tensor Core GPUs and the early deployment of the GenAI Platform, the company's generative AI solution. Such innovations are pivotal in maintaining its competitive edge against larger cloud enterprises.
The quarter also highlighted some challenges. Adjusted free cash flow fell to $26 million from $56 million, indicating potential operational efficiency issues. The net dollar retention rate remained steady at 97%, reflecting stagnation in customer engagement or upselling capabilities. The competitive landscape continues to exert pressure as giants like Amazon's (NASDAQ: AMZN) AWS and Alphabet's (NASDAQ: GOOG)(NASDAQ: GOOGL) Google Cloud vie for market share.
Outlook and Future Guidance
Looking ahead, DigitalOcean raised its full-year revenue guidance to $775 million to $777 million (up 12% at the midpoint), indicating confidence in its growth trajectory. It also adjusted its adjusted EPS estimate to between $1.70 and $1.75 (up 8.5% at the midpoint) and its full-year EBITDA margin guidance is now in a range of 40% to 41%. For the upcoming fourth quarter, revenue is projected between $199 to $201 million (up 10.5% year over year at the midpoint).
Investors should monitor ongoing strategic initiatives, particularly in AI and machine learning integration, and the company's cash flow management. Focus on community engagement and simplicity as differentiators remain crucial in a competitive cloud market. The outlook reflects optimism, albeit tempered with awareness of competitive challenges and operational efficiency needs.
