Cloud computing provider DigitalOcean (NYSE: DOCN) announced better-than-expected revenue in Q2 CY2025, with sales up 13.6% year on year to $218.7 million. Guidance for next quarter’s revenue was better than expected at $226.5 million at the midpoint, 1.4% above analysts’ estimates. Its non-GAAP profit of $0.59 per share was 26.2% above analysts’ consensus estimates.
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DigitalOcean (DOCN) Q2 CY2025 Highlights:
- Revenue: $218.7 million vs analyst estimates of $216.6 million (13.6% year-on-year growth, 1% beat)
- Adjusted EPS: $0.59 vs analyst estimates of $0.47 (26.2% beat)
- Adjusted EBITDA: $89.47 million vs analyst estimates of $85.17 million (40.9% margin, 5% beat)
- The company lifted its revenue guidance for the full year to $890 million at the midpoint from $880 million, a 1.1% increase
- Management raised its full-year Adjusted EPS guidance to $2.08 at the midpoint, a 9.2% increase
- Operating Margin: 16.3%, up from 11.6% in the same quarter last year
- Free Cash Flow was $57.02 million, up from -$821,000 in the previous quarter
- Net Revenue Retention Rate: 99%, down from 100% in the previous quarter
- Annual Recurring Revenue: $875 million at quarter end, up 13.6% year on year
- Market Capitalization: $2.46 billion
“We delivered another quarter of solid performance across both AI and core cloud. Total revenue grew 14% year-over-year, we achieved the highest incremental ARR since Q4 of 2022, and we more than doubled our AI/ML revenue year-over-year.” said Paddy Srinivasan, CEO of DigitalOcean.
Company Overview
Started by brothers Ben and Moisey Uretsky, DigitalOcean (NYSE: DOCN) provides a simple, low-cost platform that allows developers and small and medium-sized businesses to host applications and data in the cloud.
Revenue Growth
Examining a company’s long-term performance can provide clues about its quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years. Over the last three years, DigitalOcean grew its sales at a 19.2% compounded annual growth rate. Although this growth is acceptable on an absolute basis, it fell slightly short of our standards for the software sector, which enjoys a number of secular tailwinds.
This quarter, DigitalOcean reported year-on-year revenue growth of 13.6%, and its $218.7 million of revenue exceeded Wall Street’s estimates by 1%. Company management is currently guiding for a 14.1% year-on-year increase in sales next quarter.
Looking further ahead, sell-side analysts expect revenue to grow 13.1% over the next 12 months, a deceleration versus the last three years. Still, this projection is healthy and indicates the market is forecasting success for its products and services.
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Annual Recurring Revenue
While reported revenue for a software company can include low-margin items like implementation fees, annual recurring revenue (ARR) is a sum of the next 12 months of contracted revenue purely from software subscriptions, or the high-margin, predictable revenue streams that make SaaS businesses so valuable.
DigitalOcean’s ARR punched in at $875 million in Q2, and over the last four quarters, its growth slightly outpaced the sector as it averaged 13.3% year-on-year increases. This performance aligned with its total sales growth and shows the company is securing longer-term commitments. Its growth also contributes positively to DigitalOcean’s revenue predictability, a trait long-term investors typically prefer. 
Customer Retention
One of the best parts about the software-as-a-service business model (and a reason why they trade at high valuation multiples) is that customers typically spend more on a company’s products and services over time.
DigitalOcean’s net revenue retention rate, a key performance metric measuring how much money existing customers from a year ago are spending today, was 98.8% in Q2. This means DigitalOcean’s revenue would’ve decreased by 1.2% over the last 12 months if it didn’t win any new customers.
DigitalOcean has a weak net retention rate, signaling that some customers aren’t satisfied with its products, leading to lost contracts and revenue streams.
Key Takeaways from DigitalOcean’s Q2 Results
This was a beat and raise quarter. We were impressed by DigitalOcean’s optimistic full-year EPS guidance, which blew past analysts’ expectations. We were also glad its EBITDA outperformed Wall Street’s estimates. On the other hand, its net revenue retention declined. Overall, we think this was still a solid quarter with some key areas of upside. The stock traded up 12.8% to $30.50 immediately following the results.
Sure, DigitalOcean had a solid quarter, but if we look at the bigger picture, is this stock a buy? If you’re making that decision, you should consider the bigger picture of valuation, business qualities, as well as the latest earnings. We cover that in our actionable full research report which you can read here, it’s free.
