Cloud computing provider DigitalOcean (NYSE: DOCN) reported results ahead of analysts' expectations in Q1 CY2024, with revenue up 11.9% year on year to $184.7 million. The company expects next quarter's revenue to be around $188.5 million, in line with analysts' estimates. It made a non-GAAP profit of $0.43 per share, improving from its profit of $0.26 per share in the same quarter last year.

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DigitalOcean (DOCN) Q1 CY2024 Highlights:

• Revenue: $184.7 million vs analyst estimates of $182.6 million (1.2% beat)

• EPS (non-GAAP): $0.43 vs analyst estimates of $0.38 (12.9% beat)

• Revenue Guidance for Q2 CY2024 is $188.5 million at the midpoint, roughly in line with what analysts were expecting

• The company reconfirmed its revenue guidance for the full year of $767.5 million at the midpoint

• Gross Margin (GAAP): 60.7%, up from 56.5% in the same quarter last year

• Free Cash Flow of $21.47 million, down 25.5% from the previous quarter

• Annual Recurring Revenue: $749 million at quarter end, up 11.9% year on year

• Net Revenue Retention Rate: 97%, in line with the previous quarter

• Market Capitalization: $2.97 billion

“The first quarter was a strong start to the year as we position the company to be the leading cloud and AI platform for growing technology businesses,” said Paddy Srinivasan, CEO of DigitalOcean.

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

As you can see below, DigitalOcean's revenue growth has been strong over the last three years, growing from $93.66 million in Q1 2021 to $184.7 million this quarter.

This quarter, DigitalOcean's quarterly revenue was once again up 11.9% year on year. We can see that DigitalOcean's revenue increased by $3.86 million in Q1, which was roughly the same growth rate observed in Q4 CY2023. This steady quarter-on-quarter growth shows that the company can maintain its paced growth trajectory.

Next quarter's guidance suggests that DigitalOcean is expecting revenue to grow 11% year on year to $188.5 million, slowing down from the 26.8% year-on-year increase it recorded in the same quarter last year. Looking ahead, analysts covering the company were expecting sales to grow 10.6% over the next 12 months before the earnings results announcement.

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Product Success

One of the best parts about the software-as-a-service business model (and a reason why SaaS companies trade at such 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% in Q1. This means DigitalOcean's revenue would've decreased by 3% over the last 12 months if it didn't win any new customers.

Despite significantly increasing since the previous quarter, 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 Q1 Results

We enjoyed seeing DigitalOcean materially improve its gross margin this quarter. We were also glad its ARR (annual recurring revenue) outperformed Wall Street's estimates. Guidance produced no surprises, with revenue for next quarter and the full year in line, showing that the company is on track. Overall, this quarter's results seemed fairly positive and shareholders should feel optimistic. The stock is up 2.9% after reporting and currently trades at $33.5 per share.

So should you invest in DigitalOcean right now? When making that decision, it's important to consider its valuation, business qualities, as well as what has happened in the latest quarter. We cover that in our actionable full research report which you can read here, it's free.