DigitalOcean Holdings, Inc. Q1 FY2024 earnings

DigitalOcean opened fiscal 2024 with stronger core cloud performance and rising AI platform demand. Revenue for the first quarter ended March 31, 2024 was $184.73 million, up 11.9% year over year. Gross profit rose to $112.09 million, up 20.2%. Gross margin was 60.7%, up 4.2 percentage points. The company swung to an operating profit of $11.54 million, and operating margin was 6.2%, up 26.3 percentage points. Net income was $14.14 million, swinging to a profit. Diluted earnings per share was $0.15, up from a prior-year loss per share. On a non-GAAP basis, adjusted EBITDA was $74 million, up 33% year over year, and adjusted EBITDA margin was 40%. Non-GAAP diluted net income per share was $0.43.

Cash generation improved. Operating cash flow was $66.69 million for the quarter, up 84.2% year over year. Capital expenditures were $43.66 million, up 87.3%. Adjusted free cash flow was $34 million, compared with $26 million in the first quarter of 2023. Deferred revenue, current portion, was $5.48 million, up 9.2%. The company repurchased 200,258 shares during the quarter. It ended the period with ARR of $749 million, up from $669 million a year earlier. ARPU was $95.13, an increase of 8% over the first quarter of 2023, when it was $88.35. The MD&A attributes the revenue rise to new customers, higher utilization from existing customers, Managed Hosting, and AI/ML offerings.

Customer mix continued to shift toward higher spend accounts. Builders and Scalers, customers spending more than $50 per month, grew 8% from the first quarter of 2023, and their revenue rose 13% year over year. The company had approximately 17,000 Scalers as of March 31, 2024, up from approximately 15,000 a year earlier, and approximately 140,000 Builders, up from approximately 131,000. Total Learners, Builders, and Scalers were approximately 637,000. Net Dollar Retention Rate was 97%, compared with 96% in the prior quarter. The MD&A table shows 97% for the first quarter of 2024 and 107% for the first quarter of 2023, a decline that deserves attention. Revenue from Builders and Scalers was 87% of total revenue, compared with 86% a year earlier.

Guidance points to moderating profitability. For the second quarter of 2024, DigitalOcean expects adjusted EBITDA margin of 37% to 38% and non-GAAP diluted net income per share of $0.38 to $0.40, on fully diluted weighted average shares outstanding of approximately 102 million to 103 million. For the full year 2024, the company expects adjusted EBITDA margin of 36% to 38%, adjusted free cash flow margin of 19% to 21% of revenue, and non-GAAP diluted net income per share of $1.60 to $1.67, again on approximately 102 million to 103 million fully diluted shares. The company does not reconcile these non-GAAP outlook measures to GAAP figures, citing uncertainty around stock-based compensation and other items.

Risks remain. The 10-Q cites a material weakness in internal control over financial reporting, a history of operating losses, and competitive markets. It also flags the ability to attract and retain customers, expand usage, release new features, integrate acquired businesses including Paperspace, and manage macroeconomic and geopolitical conditions, including military actions affecting Russia, Ukraine, and the Middle East. The restructuring plan announced in February 2023 was substantially completed by the third quarter of 2023. That cleanup helps current profitability comparisons, but the company still has to prove that the core cloud and AI platform can sustain growth as it invests in infrastructure.