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DigitalOcean (NYSE:DOCN) Q3: Beats On Revenue But Guidance Underwhelms


Petr Huřťák /
2022/11/07 4:28 pm EST
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Cloud computing provider DigitalOcean (NYSE: DOCN) reported results ahead of analyst expectations in the Q3 FY2022 quarter, with revenue up 36.5% year on year to $152.1 million. However, guidance for the next quarter was less impressive, coming in at $161 million at the midpoint, being 4.14% below analyst estimates. DigitalOcean made a GAAP profit of $10 million, improving on its loss of $1.85 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 FY2022 Highlights:

  • Revenue: $152.1 million vs analyst estimates of $147.7 million (2.95% beat)
  • EPS (non-GAAP): $0.38 vs analyst estimates of $0.23 ($0.15 beat)
  • Revenue guidance for Q4 2022 is $161 million at the midpoint, below analyst estimates of $167.9 million
  • Free cash flow of $22.4 million, up 10.4% from previous quarter
  • Net Revenue Retention Rate: 118%, up from 112% previous quarter
  • Gross Margin (GAAP): 64.1%, up from 60.9% same quarter last year

“I'm proud that we delivered top-line acceleration combined with significant operating margin and free cash flow leverage in the third quarter, despite the difficult operating environment due to global macro challenges,” 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 two years, growing from quarterly revenue of $81.1 million in Q3 FY2020, to $152.1 million.

DigitalOcean Total Revenue

And unsurprisingly, this was another great quarter for DigitalOcean with revenue up 36.5% year on year. On top of that, revenue increased $18.2 million quarter on quarter, a very strong improvement on the $6.55 million increase in Q2 2022, and a sign of acceleration of growth.

Guidance for the next quarter indicates DigitalOcean is expecting revenue to grow 34.5% year on year to $161 million, in line with the 36.7% 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 37.7% 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 118% in Q3. That means even if they didn't win any new customers, DigitalOcean would have grown its revenue 18% 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 $2.95 billion DigitalOcean is among smaller companies, but its more than $824.6 million 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.

We were very impressed by the strong improvements in DigitalOcean’s revenue retention rate. And we were also excited to see the really strong revenue growth. On the other hand, it was unfortunate to see that the revenue guidance missed expectations. Overall, it seems to us that this was a complicated quarter for DigitalOcean. The company is up 3.83% on the results and currently trades at $30.6 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.