DigitalOcean's (NYSE:DOCN) Posts Q1 Sales In Line With Estimates But Stock Drops

Adam Hejl 2022/05/04 4:17 pm EDT

Cloud computing provider DigitalOcean (NYSE: DOCN) reported results in line with analyst expectations in Q1 FY2022 quarter, with revenue up 35.9% year on year to $127.3 million. Guidance for the full year also exceeded estimates, however the guidance for the next quarter was less impressive, coming in at $134 million, 1.17% below analyst estimates. DigitalOcean made a GAAP loss of $18.1 million, down on its loss of $3.33 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) Q1 FY2022 Highlights:

  • Revenue: $127.3 million vs analyst estimates of $126.2 million (0.87% beat)
  • EPS (non-GAAP): $0.07 vs analyst expectations of $0.12 (40% miss)
  • Revenue guidance for Q2 2022 is $134 million at the midpoint, below analyst estimates of $135.5 million
  • The company reconfirmed revenue guidance for the full year, at $566 million at the midpoint
  • Free cash flow of $5.03 million, up from $52 thousand in previous quarter
  • Net Revenue Retention Rate: 117%, in line with previous quarter
  • Customers: 623,000, up from 609,000 in previous quarter
  • Gross Margin (GAAP): 63.2%, up from 57.7% same quarter last year

"Despite an uncertain macro environment, we had a good start to the year with strong growth and free cash flow," 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 $93.6 million, to $127.3 million.

DigitalOcean Total Revenue

And unsurprisingly, this was another great quarter for DigitalOcean with revenue up 35.9% year on year. Quarter on quarter the revenue increased by $7.66 million in Q1, which was in line with Q4 2021. This steady quarter-on-quarter growth shows the company is able to maintain a strong growth trajectory.

Guidance for the next quarter indicates DigitalOcean is expecting revenue to grow 29% year on year to $134 million, slowing down from the 34.9% 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 30.8% over the next twelve months.

There are others doing even better than DigitalOcean. Founded by ex-Google engineers, a small company making software for banks has been growing revenue 90% year on year and is already up more than 150% since the IPO last December. 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 117% in Q1. That means even if they didn't win any new customers, DigitalOcean would have grown its revenue 17% year on year. Trending up over the last year, this is 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 Q1 Results

With a market capitalization of $4.36 billion DigitalOcean is among smaller companies, but its more than $1.55 billion in cash and positive free cash flow over the last twelve months put it in a very strong position to invest in growth.

We enjoyed seeing DigitalOcean’s impressive revenue growth this quarter. And we were also glad to see the acceleration in customer growth. On the other hand, revenue guidance for the next quarter missed analysts' expectations. Zooming out, we think this was still a decent, albeit mixed, quarter, showing the company is staying on target. But the market was likely expecting more and the company is down 5.51% on the results and currently trades at $41.1 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.

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.