DigitalOcean (NYSE:DOCN) Misses Q2 Revenue Estimates

Kayode Omotosho /
2022/08/08 4:19 pm EDT
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Cloud computing provider DigitalOcean (NYSE: DOCN) missed analyst expectations in Q2 FY2022 quarter, with revenue up 28.9% year on year to $133.8 million. Guidance for the next quarter also missed analyst expectations with revenues guided to $146.2 million at the midpoint, or 0.37% below analyst estimates. DigitalOcean made a GAAP loss of $6.19 million, down on its loss of $2.18 million, in the same quarter last year.

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DigitalOcean (DOCN) Q2 FY2022 Highlights:

  • Revenue: $133.8 million vs analyst estimates of $134.4 million (small miss)
  • EPS (non-GAAP): $0.20 vs analyst estimates of $0.10 ($0.10 beat)
  • Revenue guidance for Q3 2022 is $146.2 million at the midpoint, below analyst estimates of $146.7 million
  • The company reconfirmed revenue guidance for the full year, at $566 million at the midpoint
  • Free cash flow of $18.2 million, up from $5.03 million in previous quarter
  • Net Revenue Retention Rate: 112%, down from 117% previous quarter
  • Gross Margin (GAAP): 64.7%, up from 58.4% same quarter last year

"We are taking a number of actions in the second half to deliver 30% growth with improving profitability and cash flow despite an uncertain environment driven by macroeconomic factors beyond our control," 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.

Data is the lifeblood of the internet and software in general, and the amount of data created is growing at an accelerating pace. Likewise, the importance of storing the data in scalable and efficient formats continues to rise, especially as the diversity of the data and associated use cases expand from analyzing simple, structured data to high-scale processing of unstructured data, images, audio and video.

Sales Growth

As you can see below, DigitalOcean's revenue growth has been very strong over the last year, growing from quarterly revenue of $103.8 million, to $133.8 million.

DigitalOcean Total Revenue

Even though DigitalOcean fell short of revenue estimates, its quarterly revenue growth was still up a very solid 28.9% year on year. But the growth did slow down a little compared to last quarter, as DigitalOcean increased revenue by $6.55 million in Q2, compared to $7.66 million revenue add in Q1 2022. We'd like to see revenue increase by a greater amount each quarter, but a one-off fluctuation is usually not concerning.

Guidance for the next quarter indicates DigitalOcean is expecting revenue to grow 31.2% year on year to $146.2 million, slowing down from the 37.2% year-over-year increase in revenue the company had recorded in the same quarter last year. Ahead of the earnings results the analysts covering the company were estimating sales to grow 32.1% over the next twelve months.

In volatile times like these we look for robust businesses with strong pricing power. Unknown to most investors, this company is one of the highest-quality software companies in the world, and their software products have been the default standard in critical industries for decades. The result is an impressive business that is up an incredible 18,152% since the IPO. You can find it on our platform for free.

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 112% in Q2. That means even if they didn't win any new customers, DigitalOcean would have grown its revenue 12% year on year. Despite the recent drop this is still 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 Q2 Results

With a market capitalization of $4.67 billion DigitalOcean is among smaller companies, but its more than $1.16 billion in cash and positive free cash flow over the last twelve months give us confidence that DigitalOcean has the resources it needs to pursue a high growth business strategy.

It was good to see DigitalOcean improve their gross margin this quarter. And we were also glad to see good revenue growth. On the other hand, it was less good to see the deterioration in revenue retention rate and it missed analysts' revenue expectations. Overall, it seems to us that this was a complicated quarter for DigitalOcean. The company is down 2.42% on the results and currently trades at $46.7 per share.

DigitalOcean may have had a tough quarter, but does that actually create an opportunity to invest 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.

One way to find opportunities in the market is to watch for generational shifts in the economy. Almost every company is slowly finding itself becoming a technology company and facing cybersecurity risks and as a result, the demand for cloud-native cybersecurity is skyrocketing. This company is leading a massive technological shift in the industry and with revenue growth of 70% year on year and best-in-class SaaS metrics it should definitely be on your radar.

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