Summary
DigitalOcean's third quarter of fiscal 2023 showed revenue of $177.1 million, up 16.4% year over year. Year-to-date revenue reached $512.0 million, up 23.9%. Gross profit was $106.7 million for the quarter, up 11.9%, and $302.4 million for the first nine months, up 15.6%. Gross margin compressed to 60.3% from 62.7% in the prior-year quarter. The company reported operating income of $35.5 million, up 392.7%, and an operating margin of 20.0%, up from 4.7%. Net income was $19.2 million, up 142.6%, and diluted EPS was $0.20, up from $0.08. On a year-to-date basis, operating income was $0.9 million, net income was $3.5 million, and diluted EPS was $0.04, all swinging to profits from prior-year losses.
Non-GAAP results were stronger. Adjusted EBITDA was $76 million, up 23% year over year, with a 43% adjusted EBITDA margin. Non-GAAP diluted net income per share was $0.44. Net dollar retention rate was 96%, compared with 118% a year earlier. The Paperspace acquisition closed in the quarter, adding cloud infrastructure for GPU-accelerated applications. Builders and Scalers, the customers spending more than $50 per month, increased 9% from the third quarter of 2022, and their revenue grew 16% year over year. The company ended the quarter with approximately 633,000 Learners, Builders, and Scalers. The fourth quarter is the first full period that includes Paperspace in the reported base, so the revenue mix will depend on how quickly those GPU workloads ramp.
Cash generation was mixed. Operating cash flow was $54.1 million in the quarter, down 3.2% year over year, while year-to-date operating cash flow was $154.4 million, up 16.7%. Capital expenditures were $20.2 million in the quarter, down 34.7%, and $67.1 million year to date, down 15.8%. Adjusted free cash flow was $56.1 million for the quarter and $126.9 million year to date. Deferred revenue was $5.1 million, down 7.0% year over year. The restructuring plan announced in early 2023 was substantially completed by the end of the third quarter, and the cost base now reflects a smaller headcount spread across a broader geographic footprint.
For the fourth quarter of 2023, the company targets an adjusted EBITDA margin of 36% to 37% and non-GAAP diluted net income per share of $0.36 to $0.37. It expects fully diluted weighted average shares of approximately 100 to 101 million for the quarter. For the full year 2023, DigitalOcean targets an adjusted EBITDA margin of 38% to 39%, an adjusted free cash flow margin of 21% to 22%, and non-GAAP diluted net income per share of $1.52 to $1.54. Full-year fully diluted weighted average shares are expected to be approximately 102 to 103 million. The softer margin planned for the fourth quarter is a reminder that spending tied to the Paperspace integration and GPU capacity lands before the related revenue scales.
The quarter carried familiar risks. DigitalOcean cites that its recent growth may not indicate future growth, a history of operating losses, and a limited operating history. It also points to risks around attracting and retaining customers, security breaches, product releases, competitive markets, privacy and data security laws, and managing growth. The integration of Cloudways and Paperspace remains a risk, as do general market, political, economic, and business conditions. Macroeconomic pressures such as inflation, rising interest rates, bank failures, and geopolitical conflicts could hurt information technology spending. Gross margin already reflects higher co-location and depreciation costs, and the full valuation allowance on U.S. deferred tax assets keeps the tax line heavy relative to pretax income.
Forecast
Reported figures
GAAP, from SEC filings| Metric | Q3 FY2023 | Q2 FY2023 | QoQ | Q3 FY2022 | YoY |
|---|---|---|---|---|---|
| Revenue | $177.1M | $169.8M | +4.3% | $152.1M | +16.4% |
| Gross profit | $106.7M | $102.5M | +4.2% | $97.6M | +9.4% |
| Gross margin | 60.3% | 60.3% | -0.1 pp | 64.2% | -3.9 pp |
| Research & development | $32.6M | $38.6M | -15.4% | $30.2M | +7.9% |
| Sales & marketing | $19.0M | $16.1M | +18.1% | $19.1M | -0.4% |
| General & administrative | $20.1M | $48.9M | -58.9% | $38.8M | -48.4% |
| Total operating expenses | $71.3M | $104.0M | -31.5% | $88.2M | -19.2% |
| Operating income (loss) | $35.5M | -$1.5M | +2463.0% | $9.4M | +277.6% |
| Operating margin | 20.0% | -0.9% | +20.9 pp | 6.2% | +13.9 pp |
| Net income (loss) | $19.2M | $665.0K | +2783.5% | $10.1M | +89.9% |
| Net margin | 10.8% | 0.4% | +10.4 pp | 6.6% | +4.2 pp |
| Diluted EPS | $0.20 | $0.01 | +$0.19 | $0.10 | +$0.10 |
| Customers | 25 | 25 | ±0.0% | 25 | ±0.0% |
| Net retention rate | 96.0% | 104.0% | -8.0 pp | — | — |
Risks
On September 12, 2023, a federal securities class action lawsuit was filed in the U.S. District Court for the Southern District of New York against DigitalOcean and certain executive officers. The outcome is uncertain, defense may be costly, and the matter could result in substantial damages, management distraction, and adverse publicity; the company cannot currently estimate possible costs and may not prevail within insurance coverage limits.
On August 24, 2023, the company announced a leadership succession plan to identify its next CEO; Yancey Spruill will continue as CEO until a successor is appointed and then step down from the CEO role and Board. Failure to implement the plan or retain and motivate executive officers and key employees during the transition could harm business and future growth, and could disrupt workforce morale and productivity.
Net dollar retention rate was 96% for the three months ended September 30, 2023, compared to 118% for the three months ended September 30, 2022. This metric decline highlights reduced expansion or increased contraction and attrition among existing customers, which could pressure long-term revenue growth.
Gross margin was 60.3% in the current quarter, down 2.4 percentage points from 62.7% in the prior-year quarter; year to date it was 59.1%, down 4.2 percentage points from 63.3%. The decline was primarily due to an increase in co-location and depreciation costs as a percentage of revenue.
MD&A highlights unfavorable economic conditions, including inflationary pressures, rising interest rates, financial and credit market fluctuations, bank failures, and geopolitical conflicts such as military actions affecting Russia and Ukraine or the Middle East. These factors could decrease business investments in information technology and negatively affect the growth of the business and results of operations.
SaaS KPIs
All quarters →Adjusted EBITDA Margin
Adjusted EBITDA
Net Dollar Retention Rate
ARR
Adjusted free cash flow
Adjusted free cash flow margin
ARPU
Builders
Learners
Scalers
Summary, forecast, risks and KPIs are extracted from DigitalOcean Holdings, Inc.'s SEC filings for Q3 FY2023 (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 2, 2026.