Summary
DigitalOcean's fiscal 2026 first quarter delivered solid top-line growth alongside a much weaker bottom line. Revenue for the quarter ended March 31, 2026 was $257.9 million, up 22.4% from the prior-year quarter. Gross profit reached $144.7 million, up 11.8%. Gross margin fell to 56.1% from 61.4%. Management attributed the compression to data center expansions, where higher depreciation, co-location and ancillary equipment costs land on the income statement before new capacity starts producing.
Operating income slipped to $36.6 million, down 2.8% from the prior-year quarter, and operating margin fell to 14.2% from 17.9%. Below the operating line the decline steepened. Net income was $15.8 million, down 58.7%, and diluted EPS was $0.15, down from $0.39. Other expense, net swung from income to expense year over year, driven mainly by higher interest expense and foreign currency losses. Income tax expense also increased, which the company tied to a normalized statutory rate replacing a prior period provision held down by a valuation allowance.
Non-GAAP results held up better. Adjusted EBITDA was $105 million, up 21%, at a 41% margin. Adjusted operating income, a non-GAAP measure used for the first time this quarter, was $64 million, up 3%, at a 25% margin, down from 30%. Non-GAAP diluted net income per share was $0.44, compared with $0.56 a year earlier.
Customer mix is where the growth concentrates. AI Customer ARR reached $170 million, up 221% from $53 million a year earlier. Digital Native Enterprise customers numbered 21,577, up from 19,580, and they produced 64% of revenue, up from roughly 57%. Tiers below the top scaled too. Customers spending more than $100,000 a month rose to 626 from 558, the $500K+ group went to 97 from 63, and the $1M+ group went to 41 from 23. Net dollar retention was 101%, up from 100%. Concentration is building with that mix: the top 25 customers accounted for about 16% of revenue, up from 9%.
Cash generation thinned. Operating cash flow was $46.9 million, down 26.8%, and capital expenditures fell 35.5% to $40.0 million. Adjusted free cash flow was $2 million at a 1% margin, compared with negative $821 thousand in the prior-year quarter. Cash and cash equivalents stood at $741 million as of March 31, 2026. The quarter also reset the balance sheet. A follow-on offering of 11.9 million shares raised net proceeds of $888 million, and $500 million of Term Loan Facility principal was repaid. Even so, $312.3 million of 2026 Convertible Notes mature within the next 12 months.
Commitments are the main forward risk. As of March 31, 2026, the company had $668.4 million of estimated undiscounted fixed payment obligations, mostly co-location leases, that are not yet on the balance sheet. After quarter end it signed additional leases with total estimated undiscounted payments of $1,273.1 million. Guidance leans on demand from those builds. For the second quarter, the company guides to year-over-year revenue growth of 24% to 25%, adjusted EBITDA margin of 37% to 38%, and non-GAAP diluted net income per share of $0.20 to $0.23. For the full year 2026, it guides to revenue growth of 25% to 27%, adjusted EBITDA margin of 37% to 39%, adjusted free cash flow margin of 9% to 12% of revenue, and non-GAAP diluted net income per share of $1.10 to $1.20. Management raised its 2027 growth outlook to over 50%. Named risks include the pace of data center and GPU capacity additions, competition, customer concentration, credit losses, and trade and tariff uncertainty.
Forecast
Reported figures
GAAP, from SEC filings| Metric | Q1 FY2026 | Q4 FY2025 | QoQ | Q1 FY2025 | YoY |
|---|---|---|---|---|---|
| Revenue | $257.9M | $242.4M | +6.4% | $210.7M | +22.4% |
| Gross profit | $144.7M | $142.3M | +1.7% | $129.4M | +11.8% |
| Gross margin | 56.1% | 58.7% | -2.6 pp | 61.4% | -5.3 pp |
| Research & development | $48.8M | $44.3M | +10.3% | $39.6M | +23.3% |
| Sales & marketing | $21.7M | $22.5M | -3.8% | $19.4M | +11.7% |
| General & administrative | $37.6M | $36.7M | +2.6% | $32.8M | +14.7% |
| Total operating expenses | $108.1M | $103.5M | +4.5% | $91.8M | +17.8% |
| Operating income (loss) | $36.6M | $38.8M | -5.7% | $37.6M | -2.8% |
| Operating margin | 14.2% | 16.0% | -1.8 pp | 17.9% | -3.7 pp |
| Net income (loss) | $15.8M | $25.7M | -38.5% | $38.2M | -58.7% |
| Net margin | 6.1% | 10.6% | -4.5 pp | 18.1% | -12.0 pp |
| Diluted EPS | $0.15 | $0.24 | -$0.09 | $0.39 | -$0.24 |
| Net retention rate | 101.0% | — | — | 100.0% | +1.0 pp |
Risks
Gross margin fell to 56% for the three months ended March 31, 2026 from 61% in the prior-year quarter (down 5.3 pp per reported figures), which management attributes to incurring data center expansion costs in advance of the revenue ramp from new data centers. Cost of revenue rose 39% year over year, driven by $15.6 million of additional depreciation and amortization, $9.0 million of co-location costs and $3.6 million of ancillary equipment costs.
The company had $668.4 million of estimated undiscounted fixed payment obligations, mostly co-location leases, that had not commenced as of March 31, 2026, and subsequent to quarter end entered into additional data center leases with total estimated undiscounted payments of $1,273.1 million and a weighted-average lease term of 11.0 years. These long-dated commitments require sustained revenue growth to cover.
As of March 31, 2026, $312.3 million of the 2026 Convertible Notes mature within the next 12 months, and total principal outstanding under the 2030 and 2026 Convertible Notes was $937.3 million. Management plans to settle the 2026 notes by drawing on the Revolving Facility and using cash on hand, which depends on continued access to credit and liquidity.
Net income fell 58.7% to $15.8 million and diluted EPS fell to $0.15 from $0.39 in the prior-year quarter. Other (expense) income, net swung to a $12.1 million expense from $3.7 million of income, reflecting an $8.3 million increase in interest expense, a $4.1 million increase in unrealized foreign currency losses, and a $2.7 million loss on extinguishment of the Term Loan Facility.
Revenue concentration among the largest accounts increased: the top 25 customers made up approximately 16% of revenue in the three months ended March 31, 2026 versus 9% in the prior-year quarter, even as DNE customers grew to 21,577 from 19,580 and DNE revenue reached 64% of total revenue, up from approximately 57%.
Growth is increasingly tied to AI workloads, with AI Customer ARR of $170 million as of March 31, 2026, up from $53 million a year earlier, and total ARR up to $1,032 million from $843 million. Sustaining this requires continued heavy investment in GPU infrastructure and new AI/ML offerings against larger cloud competitors.
Income tax expense increased $5.5 million, or 175%, to $8.7 million for the three months ended March 31, 2026, as the current quarter reflects a normalized statutory rate while the prior-year quarter benefited from a valuation allowance that produced a much lower effective tax rate. This structurally lowers future net income relative to pre-tax results.
Management flags unfavorable economic conditions including recently imposed or threatened U.S. tariffs, retaliatory actions by other countries, and uncertainty over tariff refunds, alongside geopolitical tensions and currency volatility. Around two-thirds of revenue has historically come from customers outside the United States, with 44% from North America, 24% from Europe, 22% from Asia and 10% from the rest of the world in the quarter.
Summary, forecast, risks and KPIs are extracted from DigitalOcean Holdings, Inc.'s SEC filings for Q1 FY2026 (10-Q / 10-K and the 8-K earnings release); GAAP figures in the summary are checked against the reported XBRL data. They can contain errors; the filings are authoritative. Processed Oct 1, 2026.