DigitalOcean (NYSE:DOCN) Surprises With Q4 Sales

Petr Huřťák /
2024/02/21 4:14 pm EST

Cloud computing provider DigitalOcean (NYSE: DOCN) reported Q4 FY2023 results topping analysts' expectations, with revenue up 11% year on year to $180.9 million.

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DigitalOcean (DOCN) Q4 FY2023 Highlights:

  • Revenue: $180.9 million vs analyst estimates of $178.1 million (1.6% beat)
  • Free Cash Flow was -$88.79 million, down from $56.08 million in the previous quarter
  • Net Revenue Retention Rate: 96%, in line with the previous quarter
  • Gross Margin (GAAP): 58.9%, down from 61.1% in the same quarter last year
  • Market Capitalization: $3.18 billion

“I’m excited to have joined DigitalOcean and to advance our position as a preferred platform for developers at startups and growing digital businesses, enabling them to rapidly build, deploy and scale applications that can change the world,” said Paddy Srinivasan, 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 Storage

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.

Sales Growth

As you can see below, DigitalOcean's revenue growth has been strong over the last two years, growing from $119.7 million in Q4 FY2021 to $180.9 million this quarter.

DigitalOcean Total Revenue

This quarter, DigitalOcean's quarterly revenue was once again up 11% year on year. However, its growth did slow down compared to last quarter as the company's revenue increased by just $3.81 million in Q4 compared to $7.25 million in Q3 2023. While we'd like to see revenue increase by a greater amount each quarter, a one-off fluctuation is usually not concerning.

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Product Success

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 Net Revenue Retention Rate

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 Q4. 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, leading to lost contracts and revenue streams.

Key Takeaways from DigitalOcean's Q4 Results

DOCN delivered very solid free cash flow and we were also glad to see its revenue narrowly outperformed Wall Street's estimates. On the other hand, gross margin decreased. Zooming out, we think this was still a decent, albeit mixed, quarter, showing that the company is staying on track. The stock is up 4.3% after reporting and currently trades at $37.39 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.