Cloud computing provider DigitalOcean (NYSE: DOCN) announced better-than-expected revenue in Q4 CY2024, with sales up 13.3% year on year to $204.9 million. The company expects next quarter’s revenue to be around $208 million, close to analysts’ estimates. Its non-GAAP profit of $0.49 per share was 43.7% above analysts’ consensus estimates.
Revenue: $204.9 million vs analyst estimates of $200.5 million (13.3% year-on-year growth, 2.2% beat)
Adjusted EPS: $0.49 vs analyst estimates of $0.34 (43.7% beat)
Adjusted EBITDA: $85.87 million vs analyst estimates of $72.56 million (41.9% margin, 18.4% beat)
Management’s revenue guidance for the upcoming financial year 2025 is $880 million at the midpoint, in line with analyst expectations and implying 12.7% growth (vs 12.7% in FY2024)
Adjusted EPS guidance for the upcoming financial year 2025 is $1.90 at the midpoint, beating analyst estimates by 3.1%
Operating Margin: 15.9%, up from 6.1% in the same quarter last year
Free Cash Flow Margin: 11.8%, down from 13.2% in the previous quarter
Net Revenue Retention Rate: 99%, up from 97% in the previous quarter
Annual Recurring Revenue: $820 million at quarter end, up 12.3% year on year
Billings: $204.7 million at quarter end, up 13% year on year
Market Capitalization: $3.43 billion
"We are entering 2025 with increasing momentum - in Q4 alone, we released more than four times as many products and features than we did in Q4 of the prior year, increased net dollar retention to 99%, grew revenue 13% year-over-year and delivered 18% adjusted free cash flow margin,” said Paddy Srinivasan, CEO of DigitalOcean.
Company Overview
Started by brothers Ben and Moisey Uretsky, DigitalOcean (NYSE: DOCN) provides a simple, low-cost platform that allows developers and small and medium-sized businesses to host applications and data in the cloud.
Data Storage
Data is the lifeblood of the internet and software in general, and the amount of data created is accelerating. As a result, the importance of storing the data in scalable and efficient formats continues to rise, especially as its diversity and associated use cases expand from analyzing simple, structured datasets to high-scale processing of unstructured data such as images, audio, and video.
Sales Growth
Examining a company’s long-term performance can provide clues about its quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. Thankfully, DigitalOcean’s 22.1% annualized revenue growth over the last three years was decent. Its growth was slightly above the average software company and shows its offerings resonate with customers.
DigitalOcean Quarterly Revenue
This quarter, DigitalOcean reported year-on-year revenue growth of 13.3%, and its $204.9 million of revenue exceeded Wall Street’s estimates by 2.2%. Company management is currently guiding for a 12.6% year-on-year increase in sales next quarter.
Looking further ahead, sell-side analysts expect revenue to grow 12.5% over the next 12 months, a deceleration versus the last three years. Despite the slowdown, this projection is above average for the sector and indicates the market is baking in some success for its newer products and services.
While reported revenue for a software company can include low-margin items like implementation fees, annual recurring revenue (ARR) is a sum of the next 12 months of contracted revenue purely from software subscriptions, or the high-margin, predictable revenue streams that make SaaS businesses so valuable.
DigitalOcean’s ARR punched in at $820 million in Q4, and over the last four quarters, its growth slightly outpaced the sector as it averaged 12.7% year-on-year increases. This performance aligned with its total sales growth and shows the company is securing longer-term commitments. Its growth also contributes positively to DigitalOcean’s revenue predictability, a trait long-term investors typically prefer.
DigitalOcean Annual Recurring Revenue
Customer Retention
One of the best parts about the software-as-a-service business model (and a reason why they trade at high valuation multiples) is that customers typically spend more on a company’s products and services over time.
DigitalOcean’s net revenue retention rate, a key performance metric measuring how much money existing customers from a year ago are spending today, was 97.5% in Q4. This means DigitalOcean’s revenue would’ve decreased by 2.5% over the last 12 months if it didn’t win any new customers.
DigitalOcean Net Revenue Retention Rate
Despite trending up over the last year, DigitalOcean still has a weak net retention rate, signaling that some customers aren’t satisfied with its products, leading to lost contracts and revenue streams.
Key Takeaways from DigitalOcean’s Q4 Results
It was great to see DigitalOcean beat analysts’ revenue, EPS, and EBITDA expectations this quarter. We were also glad its full-year EPS guidance trumped Wall Street’s estimates. Overall, we think this was still a solid quarter with some key areas of upside. The stock traded up 18.3% to $44 immediately after reporting.
DigitalOcean had an encouraging quarter, but one earnings result doesn’t necessarily make the stock a buy. Let’s see if this is a good investment. We think that the latest quarter is just one piece of the longer-term business quality puzzle. Quality, when combined with valuation, can help determine if the stock is a buy. We cover that in our actionable full research report which you can read here, it’s free.
