Summary
DigitalOcean reported third quarter fiscal 2025 revenue of $229.6 million, up 15.7% from the prior-year quarter. Gross profit was $136.9 million, up 17.5% from the prior-year quarter, and gross margin reached 59.6%, up 0.9 percentage points. Operating income was $44.9 million, up 82.6% from the prior-year quarter, lifting operating margin to 19.6%, up 7.2 percentage points. Net income was $158.4 million, up 380.7% from the prior-year quarter, and diluted EPS was $1.51, up 357.6%. The net income figure includes one-time benefits from a valuation allowance release and a debt extinguishment gain, so the GAAP profitability spike is not a clean read on recurring earnings.
Cash generation was strong. Operating cash flow was $95.8 million, up 30.6% from the prior-year quarter. Capital expenditures were $7.8 million, down 86.5% from the prior-year quarter. Adjusted free cash flow, a non-GAAP measure, was $85 million at 37% margin, compared with $26 million at 13% margin in the third quarter of 2024. Unlevered adjusted free cash flow, another non-GAAP measure, was $85 million at 37% margin, compared with $21 million at 11% margin in the prior-year quarter. Deferred revenue, current portion, was $8.6 million, up 54.0% from the prior-year quarter. For the first nine months of fiscal 2025, operating cash flow was $252.3 million, up 19.4% from the first nine months of 2024, while capital expenditures were $102.9 million, down 22.5% from the first nine months of 2024.
Operational metrics point to larger customers carrying more of the growth. Annual run-rate revenue grew 16% year over year. Incremental ARR was $44 million, which the company called the highest incremental organic ARR in its history. Customers with more than $100,000 in ARR grew 26% in number, and revenue from those customers grew 41% year over year and represented 26% of total revenue. Customers with more than $1 million in ARR drove $110 million in total ARR, up 72% year over year. Net dollar retention rate improved to 99% from 97%. Higher Spend Customers totaled approximately 177,000 as of September 30, 2025, up from approximately 163,000 a year earlier. ARPU rose 13% to $116.20 from $102.51. Direct AI revenue more than doubled year over year for the fifth consecutive quarter. The company released products including Spaces Cold Storage, Network File Storage, and Managed Databases Storage Autoscaling, and added Multi-Modal AI Model support, Function Calling, and Guardrails to its DigitalOcean Gradient AI Platform.
Guidance is for the fourth quarter and the full fiscal year. For the fourth quarter ending December 31, 2025, DigitalOcean expects revenue of $237 million to $238 million, an adjusted EBITDA margin of 38.5% to 39.5%, and non-GAAP diluted net income per share of $0.35 to $0.40. It expects fully diluted weighted average shares of about 111 million to 112 million for the quarter. For full year 2025, the company raised its revenue outlook and now guides to an adjusted EBITDA margin of 40.7% to 41.0%, an adjusted free cash flow margin of 18% to 19%, and non-GAAP diluted net income per share of $2.00 to $2.05. It expects fully diluted weighted average shares of about 106 million to 107 million for the full year. Management said the momentum gives it confidence to increase investment to deliver its 2027 18% to 20% growth targets a full year earlier in 2026. The main risks include competitive pressure in cloud and AI infrastructure, the ability to sustain profitability, retain and expand customer usage, execute on AI/ML products, protect against security breaches, manage capacity constraints and bad debt, and navigate macro conditions such as tariffs and trade restrictions. The company also refinanced its 2026 convertible notes during the period, which it says strengthened the balance sheet.
Forecast
Reported figures
GAAP, from SEC filings| Metric | Q3 FY2025 | Q2 FY2025 | QoQ | Q3 FY2024 | YoY |
|---|---|---|---|---|---|
| Revenue | $229.6M | $218.7M | +5.0% | $198.5M | +15.7% |
| Gross profit | $136.9M | $130.9M | +4.6% | $119.4M | +14.6% |
| Gross margin | 59.6% | 59.9% | -0.2 pp | 60.2% | -0.5 pp |
| Research & development | $38.1M | $39.6M | -3.8% | $37.4M | +2.0% |
| Sales & marketing | $21.2M | $19.3M | +10.1% | $17.0M | +24.6% |
| General & administrative | $32.7M | $36.4M | -10.3% | $40.4M | -19.2% |
| Total operating expenses | $92.0M | $95.3M | -3.5% | $94.8M | -3.0% |
| Operating income (loss) | $44.9M | $35.6M | +26.1% | $24.6M | +82.6% |
| Operating margin | 19.6% | 16.3% | +3.3 pp | 12.4% | +7.2 pp |
| Net income (loss) | $158.4M | $37.0M | +327.7% | $32.9M | +380.7% |
| Net margin | 69.0% | 16.9% | +52.0 pp | 16.6% | +52.4 pp |
| Diluted EPS | $1.51 | $0.39 | +$1.12 | $0.33 | +$1.18 |
| Customers | 25 | 25 | ±0.0% | 25 | ±0.0% |
| Net retention rate | 99.0% | 99.0% | ±0.0 pp | 97.0% | +2.0 pp |
Risks
In August 2025 DigitalOcean issued $625.0 million of 2030 Convertible Notes and drew $380.0 million on Term Loan A, then used proceeds and cash to repurchase $1,187.7 million principal of 2026 Convertible Notes. As of September 30, 2025, $1,317.3 million aggregate principal remained outstanding, increasing interest expense and potential refinancing or dilution risk.
MD&A warns that unfavorable conditions including recent U.S. tariffs and retaliatory actions, inflation, high interest rates, supply chain disruptions, and geopolitical tensions such as military actions affecting Russia, Ukraine, or the Middle East could decrease business investment in information technology and negatively affect growth.
Cost of revenue rose on higher co-location costs, up $8.3 million for the quarter and $22.6 million year to date, due to data center expansion. As of September 30, 2025, $84.6 million of undiscounted fixed lease obligations for not-yet-commenced co-location space are expected to commence between October and December 2025, which could pressure future margins.
DigitalOcean continues to invest in its Gradient AI Agentic Cloud and AI/ML offerings, including GPU Droplets and LLMs, and created a dedicated AI sales team. If these investments do not drive adoption or if competition in AI cloud services intensifies, growth and returns could be affected.
The quarter included a $69.9 million release of a U.S. deferred tax asset valuation allowance, which significantly increased net income and diluted EPS. Future periods may see higher current tax expense and less favorable comparisons as taxable income rises.
Sales and marketing expenses increased 39% for the quarter and 15% year to date, driven by higher headcount and advertising. If these investments do not generate sufficient new Higher Spend Customers or revenue expansion, operating margins could be pressured.
SaaS KPIs
All quarters →Adjusted EBITDA Margin
Adjusted EBITDA
Net Dollar Retention Rate
Annual Run-Rate Revenue (ARR)
Adjusted free cash flow
Adjusted free cash flow margin
ARPU
Higher Spend Customers
Summary, forecast, risks and KPIs are extracted from DigitalOcean Holdings, Inc.'s SEC filings for Q3 FY2025 (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.