DigitalOcean (NASDAQ:DOCN) Surprises With Q3 Sales, Gross Margin Improves

Adam Hejl /
2021/11/04 7:23 am EDT
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Cloud computing provider DigitalOcean (NYSE: DOCN) announced better-than-expected results in the Q3 FY2021 quarter, with revenue up 37.2% year on year to $111.4 million. The company expects that next quarter's revenue would be around $118 million, which is the midpoint of the guidance range. That was in roughly line with analyst expectations. DigitalOcean made a GAAP loss of $1.85 million, down on its profit of $2.5 million, in the same quarter last year.

Is now the time to buy DigitalOcean? Access our full analysis of the earnings results here, it's free.

DigitalOcean (DOCN) Q3 FY2021 Highlights:

  • Revenue: $111.4 million vs analyst estimates of $108.8 million (2.38% beat)
  • EPS (non-GAAP): $0.12 vs analyst estimates of $0.07 ($0.05 beat)
  • Revenue guidance for Q4 2021 is $118 million at the midpoint, roughly in line with what analysts were expecting
  • Free cash flow of $19.1 million, up 46.6% from previous quarter
  • Net Revenue Retention Rate: 116%, up from 113% previous quarter
  • Customers: 598,000, down from 602,000 in previous quarter
  • Gross Margin (GAAP): 60.9%, up from 54.6% same quarter last year

“We are excited about the continued acceleration across our business,” said Yancey Spruill, CEO of DigitalOcean.

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.

Digital Ocean is a beneficiary of trends supportive of cloud computing. Cloud’s benefits are multiple: greater flexibility, scalability, and reliability than old school on-premise data centers. Virtually every business is undergoing some degree of digital transformation, which is reliant on cloud’s benefits to accelerate their pace of innovation. But cloud has also reduced the barriers to starting new businesses, generating a proliferation of developer-led start-ups and SMBs.

Sales Growth

As you can see below, DigitalOcean's revenue growth has been very strong over the last year, growing from quarterly revenue of $81.2 million, to $111.4 million.

DigitalOcean Total Revenue

And unsurprisingly, this was another great quarter for DigitalOcean with revenue up an absolutely stunning 37.2% year on year. But the growth did slow down compared to last quarter, as the revenue increased by just $7.61 million in Q3, compared to $10.1 million in Q2 2021. We'd like to see revenue increase by a greater amount each quarter, but a one-off fluctuation is usually not concerning.

Analysts covering the company are expecting the revenues to grow 30.5% over the next twelve months, although estimates are likely to change post earnings.

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Product Success

One of the best things about software as a service businesses (and a reason why they trade at such high multiples) is that customers tend to spend more with the company over time.

DigitalOcean Net Revenue Retention Rate

DigitalOcean's net revenue retention rate, an important measure of how much customers from a year ago were spending at the end of the quarter, was at 116% in Q3. That means even if they didn't win any new customers, DigitalOcean would have grown its revenue 16% year on year. Significantly up from the last quarter, this a good retention rate and a proof that DigitalOcean's customers are satisfied with their software and are getting more value from it over time. That is good to see.

Key Takeaways from DigitalOcean's Q3 Results

With a market capitalization of $10.1 billion, more than $589.7 million in cash and with free cash flow over the last twelve months being positive, the company is in a very strong position to invest in growth.

We were very impressed by the strong improvements in DigitalOcean’s gross margin this quarter. And we were also excited to see the really strong revenue growth. On the other hand, it was unfortunate to see the slowdown in customer growth. Overall, this quarter's results seemed pretty positive and shareholders can feel optimistic. But the market was likely expecting more and the company is down 4.62% on the results and currently trades at $90.25 per share.

Should you invest in DigitalOcean right now? It is important that you take into account its valuation and business qualities, as well as what happened in the latest quarter. We look at that in our actionable report which you can read here, it's free.

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The author has no position in any of the stocks mentioned.