Cloud computing provider DigitalOcean (NYSE: DOCN) announced better-than-expected results in Q3 FY2023, with revenue up 16.4% year on year to $177.1 million. Guidance for next quarter's revenue was also better than expected at $178 million at the midpoint, 1.63% above analysts' estimates. Turning to EPS, DigitalOcean made a GAAP profit of $0.20 per share, improving from its profit of $0.10 per share in the same quarter last year.
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DigitalOcean (DOCN) Q3 FY2023 Highlights:
- Revenue: $177.1 million vs analyst estimates of $173.4 million (2.14% beat)
- EPS (non-GAAP): $0.44 vs analyst estimates of $0.35 (24.5% beat)
- Revenue Guidance for Q4 2023 is $178 million at the midpoint, above analyst estimates of $175.2 million
- Free Cash Flow of $32.6 million, down 19.7% from the previous quarter
- Net Revenue Retention Rate: 96%, down from 104% in the previous quarter
- Gross Margin (GAAP): 60.3%, down from 64.1% in the same quarter last year
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 accelerating. As a result, the importance of storing the data in scalable and efficient formats continues to rise, especially as its diversity and associated use cases expand from analyzing simple, structured datasets to high-scale processing of unstructured data such as images, audio, and video.
As you can see below, DigitalOcean's revenue growth has been very strong over the last two years, growing from $111.4 million in Q3 FY2021 to $177.1 million this quarter.
This quarter, DigitalOcean's quarterly revenue was once again up 16.4% year on year. We can see that DigitalOcean's revenue increased by $7.25 million quarter on quarter, which is a solid improvement from the $4.68 million increase in Q2 2023. Shareholders should applaud the re-acceleration of growth.
Next quarter's guidance suggests that DigitalOcean is expecting revenue to grow 9.2% year on year to $178 million, slowing down from the 36.2% year-on-year increase it recorded in the same quarter last year. Looking ahead, analysts covering the company were expecting sales to grow 8.7% over the next 12 months before the earnings results announcement.
While most things went back to how they were before the pandemic, a few consumer habits fundamentally changed. One founder-led company is benefiting massively from this shift and is set to beat the market for years to come. The business has grown astonishingly fast, with 40%+ free cash flow margins, and its fundamentals are undoubtedly best-in-class. Still, its total addressable market is so big that the company has room to grow many times in size. You can find it on our platform for free.
One of the best parts about the software-as-a-service business model (and a reason why SaaS companies trade at such 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 96% in Q3. This means DigitalOcean's revenue would've decreased by 4% over the last 12 months if it didn't win any new customers.
DigitalOcean's already weak net retention rate has been dropping the last year, signaling that some customers aren't satisfied with its products, leading to lost contracts and revenue streams.
Key Takeaways from DigitalOcean's Q3 Results
With a market capitalization of $1.76 billion, DigitalOcean is among smaller companies, but its $384.1 million cash balance and positive free cash flow over the last 12 months give us confidence that it has the resources needed to pursue a high-growth business strategy.
It was good to see DigitalOcean's strong revenue guidance for next quarter, which topped analysts' expectations. We were also glad it outperformed Wall Street's estimates this quarter. On the other hand, its net revenue retention fell. Zooming out, we think this was still a good quarter, showing that the company is staying on track. The stock is up 14.3% after reporting and currently trades at $24.25 per share.
So should you invest in DigitalOcean right now? When making that decision, it's important to consider its valuation, business qualities, as well as what has happened in the latest quarter. We cover that in our actionable full research report which you can read here, it's free.
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The author has no position in any of the stocks mentioned in this report.