DigitalOcean Holdings, Inc. Q2 FY2024 earnings

DigitalOcean posted Q2 FY2024 revenue of $192.5 million, up 13.3% year over year. ARR ended the quarter at $781 million, up 15%. ARPU rose 9% to $99.45. The company counted roughly 638,000 Learners, Builders and Scalers at June 30, 2024. Within that base, Builders and Scalers, customers spending more than $50 per month, increased 7% from the prior-year quarter and their revenue grew 15%. Revenue from Builders and Scalers was 87% of total revenue. Net dollar retention was 97%, down from 104% a year earlier. Management highlighted that AI/ML ARR grew more than 200% year over year. The quarter brought 24 new product features, early availability of GPU droplets with NVIDIA H100 instances, and the Deploy developer conference on July 9. DigitalOcean ended the quarter with about 18,000 Scalers, up from about 16,000, and about 143,000 Builders, up from about 134,000. The company had no material customer concentration, as its top 25 customers made up 8% of revenue.

Gross profit was $117.3 million, up 14.5%. Gross margin improved to 61.0%, a gain of 0.6 percentage points. Operating income reached $22.3 million, swinging to a profit from an operating loss in the prior-year quarter. Operating margin was 11.6%, up 12.5 percentage points. Net income was $19.1 million, up 2777.9% year over year, and diluted EPS was $0.20. For the first six months, operating income was $33.9 million, swinging to a profit, and net income was $33.3 million, also a swing to a profit. Diluted EPS for the six months was $0.35. Adjusted EBITDA was $82 million at a 42% margin, up 13% year over year, while non-GAAP diluted EPS was $0.48. The profit swing reflects lower stock-based compensation after the former CEO's departure and cost optimization efforts. Sales and marketing spending still rose as the company invested in growth.

Operating cash flow was $71.3 million in the quarter, up 11.2% year over year. Capital expenditures were $31.9 million, up 35.4%. For the first six months, operating cash flow was $138.0 million, up 37.5%, and capital expenditures were $75.5 million, up 61.2%. Adjusted free cash flow was $37 million in the quarter, or 19% of revenue, compared with $45 million in the second quarter of 2023. Adjusted free cash flow margin was 19% in the quarter, down from 27% a year earlier. Deferred revenue, current portion, was $6.8 million, up 36.5% from the prior-year quarter. The company repurchased 297,106 shares during the quarter. It also had $153,698 of estimated undiscounted fixed payment obligations for leases not yet commenced, mostly for co-location space. The repurchase program allows up to an additional $140 million of common stock through fiscal 2025.

Third-quarter fiscal 2024 guidance targets $196 million to $197 million in total revenue, adjusted EBITDA margin of 37% to 38%, and non-GAAP diluted EPS of $0.39 to $0.41. DigitalOcean also assumes fully diluted weighted average shares outstanding of approximately 102 to 103 million for that quarter. For the full fiscal year 2024, the company targets $770 million to $775 million in total revenue, adjusted EBITDA margin of 37% to 39%, adjusted free cash flow margin of 15% to 17%, and non-GAAP diluted EPS of $1.60 to $1.70. The quarterly adjusted EBITDA margin guide sits below the 42% reported in the second quarter, which points to heavier investment ahead. Risks include a material weakness in internal control over financial reporting, a history of operating losses, competitive markets, customer retention challenges, security breaches, integration of the Paperspace acquisition, and macroeconomic pressures. The company also cites its ability to release updates and new features, its ability to attract and retain customers, and operational challenges tied to international operations.