DigitalOcean’s first quarter performance for 2025 saw revenue and non-GAAP profit surpass Wall Street expectations, but the market responded negatively, reflecting investor caution about the company’s outlook. Management attributed the quarter’s results to continued momentum with digital native enterprise customers, particularly those with high annual spending, and strong AI workload growth. CEO Paddy Srinivasan highlighted a “41% year-over-year increase in revenue from customers who are at $100,000-plus annual run rate,” emphasizing the impact of targeted product innovation and expanded account coverage. The company also pointed to improvements in net revenue retention and efficient cost management, with gross margin expansion aided by data center optimization.
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DigitalOcean (DOCN) Q1 CY2025 Highlights:
- Revenue: $210.7 million vs analyst estimates of $208.6 million (14.1% year-on-year growth, 1% beat)
- Adjusted EPS: $0.56 vs analyst estimates of $0.44 (26.3% beat)
- Adjusted Operating Income: $62.27 million vs analyst estimates of $53.38 million (29.6% margin, 16.7% beat)
- The company reconfirmed its revenue guidance for the full year of $880 million at the midpoint
- Management reiterated its full-year Adjusted EPS guidance of $1.90 at the midpoint
- Operating Margin: 17.9%, up from 6.2% in the same quarter last year
- Net Revenue Retention Rate: 100%, up from 99% in the previous quarter
- Annual Recurring Revenue: $843 million at quarter end, up 14.1% year on year
- Billings: $210.9 million at quarter end, up 14.1% year on year
- Market Capitalization: $2.53 billion
While we enjoy listening to the management's commentary, our favorite part of earnings calls are the analyst questions. Those are unscripted and can often highlight topics that management teams would rather avoid or topics where the answer is complicated. Here is what has caught our attention.
Our Top 5 Analyst Questions DigitalOcean’s Q1 Earnings Call
- Jason Ader (William Blair) asked about the timeline for the GenAI platform’s general availability and DigitalOcean’s AI differentiation. CEO Paddy Srinivasan projected a launch by the end of Q2 or early Q3 and emphasized a “full stack” approach across infrastructure, platform, and application layers.
- Pinjalim Bora (JPMorgan) questioned macroeconomic impacts on customer demand. Srinivasan noted that while some segments, such as AdTech, showed caution, the diversified customer base limited exposure to any one sector.
- Gabriela Borges (Goldman Sachs) inquired about the potential for more large, multi-year deals. Srinivasan described increasing predictability and larger deal discussions, driven by product and go-to-market advances, enabling staged workload migrations.
- James Fish (Piper Sandler) probed the rationale for front-loaded capital expenditures and future CapEx plans. CFO Matt Steinfort responded that new capacity, especially in Atlanta, underpins growth projections and that alternative financing tools are being considered for larger opportunities.
- Mark Zhang (Citi) asked how DigitalOcean achieved sales and marketing leverage despite new programs. Srinivasan explained the company is in early stages of optimizing its sales motions and will ramp investments cautiously as unit economics become clearer.
Catalysts in Upcoming Quarters
In the coming quarters, our team will closely monitor (1) the adoption and monetization of the GenAI platform as it moves from beta to general availability; (2) the success of the expanded named account model in driving high-value customer growth and retention; and (3) the impact of alternative capital strategies on growth and cash flow. Execution on AI initiatives, new product launches, and continued gross margin improvements will be key signposts for progress.
DigitalOcean currently trades at $28.02, down from $32.76 just before the earnings. Is the company at an inflection point that warrants a buy or sell? See for yourself in our full research report (it’s free).
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