Group 1: IonQ - IonQ is a provider of cloud-based quantum computing services, utilizing "qubits" for faster data processing compared to traditional computers [3] - The company aims to miniaturize quantum processing units (QPUs) to reduce costs and improve accuracy, with revenue increasing from $2 million in 2021 to $22 million in 2023 [4] - Analysts project a compound annual growth rate (CAGR) of 89% for IonQ's revenue, expecting it to reach $148 million by 2026 [4] - IonQ is establishing an early mover's advantage in the quantum computing market, despite currently being unprofitable and having a high valuation at 47 times its 2026 sales [5] Group 2: Opendoor - Opendoor operates as an online "iBuyer," making instant cash offers for homes and reselling them, but faces challenges due to its capital-intensive model and reliance on AI for pricing [6][7] - The company experienced a 55% revenue decline in 2023 due to rising interest rates, with an expected further decline of 28% in 2024 [8] - Despite short-term challenges, analysts forecast a CAGR of 27% for Opendoor's revenue from 2024 to 2026 as interest rates decline [8] - The stock is considered undervalued at 0.3 times this year's sales, with potential for significant gains if the macro environment improves [9] Group 3: DigitalOcean - DigitalOcean provides cloud infrastructure services, focusing on smaller customers with lower-priced offerings compared to larger competitors like Amazon and Microsoft [10] - The company has achieved a CAGR of 30% in revenue from 2020 to 2023 and became profitable in 2023 by streamlining expenses [11] - Analysts expect DigitalOcean's revenue and earnings per share (EPS) to grow at CAGRs of 13% and 85%, respectively, from 2023 to 2026, driven by demand for cloud and AI services [12] - The stock is valued at 47 times next year's earnings, reflecting its niche market dominance and improving profitability [12]

Core Viewpoint - DigitalOcean (NYSE: DOCN) is expected to experience accelerated growth in the coming years, driven by its successful AI strategy, an increasing number of large customers, and an improving net dollar retention rate [1]. Group 1: Growth Drivers - The success of DigitalOcean's AI strategy is anticipated to significantly contribute to its growth [1]. - The company is seeing a growing mix of large customers, which is expected to enhance its revenue streams [1]. - An improving net dollar retention rate indicates that existing customers are spending more, which is a positive sign for future growth [1]. Group 2: Investment Perspective - A buy rating is given for DigitalOcean, suggesting confidence in its future performance based on the outlined growth factors [1].

Core Viewpoint - DigitalOcean is a cloud computing platform provider that has shown strong growth potential and healthy financial results, despite a recent stock sell-off following its third-quarter earnings report [1][2]. Financial Performance - In Q3 2024, DigitalOcean's revenue increased by 12% year-over-year to $198 million, and adjusted earnings grew by 18% to $0.52 per share, surpassing both revenue guidance of $196 million to $197 million and earnings estimates of $0.40 per share [3][4]. - The company raised its full-year revenue guidance to $776 million from a previous estimate of $772.5 million, and adjusted earnings expectations increased to a range of $1.70 to $1.75 per share from $1.60 to $1.70 per share [4]. Market Position and Strategy - DigitalOcean focuses on providing cloud-based AI solutions, which is expected to enhance its market share among startups, developers, and small to medium-sized businesses [5]. - The company offers GPU-powered virtual machines through its GPU Droplets service, priced at $2.99 per GPU per hour, enabling customers to train and deploy AI models [6][7]. - The launch of the GenAI Platform allows users to build AI agents using DigitalOcean's GPU infrastructure, providing access to popular models like Llama 3.1 and Mistral NeMo [8]. Customer Engagement and Growth Potential - DigitalOcean's average revenue per user (ARPU) rose by 11% year-over-year to $102.51 in Q3 2024, reflecting a consistent upward trend throughout the year [10]. - The company anticipates a significant increase in market opportunity, with cloud spending by companies with fewer than 500 employees projected to reach $114 billion in 2024, growing at an annual rate of 23% to $213 billion by 2027 [11]. Valuation and Future Outlook - DigitalOcean is currently trading at 21 times forward earnings, which is lower than the Nasdaq-100 index's forward earnings multiple of nearly 30, suggesting it may be an attractive investment opportunity [13]. - Earnings estimates for 2024 indicate a potential increase of 8.5% from 2023, with projections suggesting double-digit growth by 2026, supported by the integration of AI tools [14].

Core Viewpoint - DigitalOcean is positioned as a competitive player in the cloud computing market, particularly targeting small and mid-sized businesses (SMBs) while also expanding its AI service offerings, making it an attractive investment opportunity as it approaches 2025 [1][2][13]. Company Overview - DigitalOcean is a mid-cap company with a market capitalization below $4 billion, focusing on providing cloud computing services to SMBs, particularly those with fewer than 500 employees [3]. - The company has a growing portfolio of AI services, including advanced data center infrastructure utilizing Nvidia chips [2][6]. Market Positioning - DigitalOcean differentiates itself by targeting a market segment that larger cloud providers like Amazon Web Services, Microsoft Azure, and Google Cloud do not primarily serve, which includes startups and SMBs [3]. - The company offers affordable and transparent pricing, personalized service, and simplified deployment tools, catering to the limited resources of SMBs [4]. Customer Base - DigitalOcean has approximately 638,000 customers, with 474,000 spending an average of $15 per month, while around 18,000 "scalers" contribute significantly to its revenue, averaging $2,153 per month [4][5]. AI Services Expansion - The acquisition of Paperspace has allowed DigitalOcean to enhance its offerings for AI developers, providing competitive pricing that can be up to 70% cheaper than major competitors [6]. - The introduction of fractional GPU capacity allows SMBs to access Nvidia H100 GPUs, enabling them to deploy AI systems without needing extensive computing resources [7]. Financial Performance - In Q3, DigitalOcean reported a record revenue of $198.5 million, marking a 12% increase year-over-year, with AI revenue surging nearly 200% [8]. - The company has recently started generating consistent GAAP profits, with a trailing 12-month earnings per share (EPS) of $0.87, leading to a price-to-earnings (P/E) ratio of 44.2 [9][10]. Valuation Metrics - DigitalOcean's price-to-sales (P/S) ratio is currently 4.8, which is close to its lowest level since going public in 2021 and represents a 43% discount to its lifetime average P/S ratio of 8.5 [11]. - The cloud market for SMBs is valued at $114 billion annually, with projections to grow to $213 billion by 2027, indicating significant growth potential for DigitalOcean [12]. Investment Consideration - Given the company's strategic positioning in the AI and cloud markets, DigitalOcean presents a compelling investment opportunity for those looking to capitalize on the growth of AI and cloud services as they head into 2025 [13].

Core Viewpoint - DigitalOcean's stock declined despite beating Q3 expectations and raising full-year guidance, primarily due to disappointing Q4 guidance [1][3]. Financial Performance - DigitalOcean reported Q3 revenue of $198 million, exceeding management's expectation of up to $197 million [2]. - The company raised its full-year guidance for both revenue and profit metrics, indicating positive performance [2][3]. Investor Sentiment - Investors reacted negatively to the Q4 guidance, which was perceived as underwhelming compared to the strong Q3 results [3]. - The stock typically rises when a company beats and raises guidance, but in this case, the opposite occurred due to Q4 expectations [3]. Customer Growth - DigitalOcean continues to add customers, with 88% of its revenue coming from customers spending $50 or more monthly [5]. - The addition of customers in this category during Q3 is viewed as a positive long-term trend [5].

Financial Data and Key Metrics - Revenue in Q3 2024 was $198.5 million, up 12% YoY [46] - Annual Run Rate (ARR) in Q3 was $798.3 million, also up 12% YoY, with $17 million added in the quarter [46] - Adjusted EBITDA was $87 million, a 14% YoY increase, with a margin of 44%, up 200 basis points QoQ [50] - Diluted net income per share was $0.33, a 65% YoY increase, and non-GAAP diluted net income per share was $0.52, up 18% YoY [50] - Adjusted free cash flow was $26 million, or 13% of revenue, lower than the prior quarter due to timing of capital expense payments [51] - Net dollar retention rate (NDR) was steady at 97% [47] Business Line Performance - Core cloud computing platform saw 42 new product features released in Q3, almost double the previous quarter [12] - AI/ML platform ARR grew close to 200% YoY, contributing significantly to overall growth [10][46] - Managed hosting platform faced headwinds due to lapping price increases from April 2023 and a temporal surge in Asia in late 2023 [47] - Builders and scalers, representing 88% of total revenue, grew 15% YoY, ahead of the overall 12% revenue growth [11][52] Market Performance - The company saw steady growth in core cloud and AI, despite challenging comparisons from previous price increases and acquisitions [9] - The number of builders and scalers (customers spending more than $50 per month) increased by 2,260 QoQ, reaching approximately 163,000, up 6% YoY [52][53] - Total ARPU increased 11% YoY to $102.51, reflecting a shift towards higher-spending customers [54] Company Strategy and Industry Competition - The company is focusing on product innovation, particularly for builders and scalers, who drive 88% of total revenue [11] - Strategic partnerships with Hugging Face and Netlify were announced, aiming to simplify AI/ML model deployment and enhance developer tools [36][39] - The company is investing in AI infrastructure, including GPU droplets and Kubernetes GPU nodes, to democratize AI for all customers [24][25] - The company is also innovating in the platform and application layers, enabling customers to build AI applications without deep expertise [27][30] Management Commentary on Operating Environment and Future Outlook - Management highlighted the success of product innovation and customer engagement, particularly with builders and scalers [42] - The company is optimistic about its software-centric AI vision, with rapid product shipping across infrastructure, platform, and application layers [42] - Management expects baseline growth in the low to mid-teens entering 2025, driven by steady improvements in core business and AI contributions [57][74] - The company plans to host an Investor Day in late March or early Q2 2025 to share long-term strategy and financial outlook [43] Other Important Information - The company ended Q3 with $440 million in cash and cash equivalents and repurchased $11 million in shares, bringing total repurchases to $29.9 million YTD [54][55] - The company is targeting a net leverage ratio of 2.4x to 3x and maintaining flexibility to address its 2026 convertible debt [55] Q&A Session Summary Question: Product Innovation and NDR Disconnect [61] - Management acknowledged the disconnect between product innovation and NDR but emphasized that customer adoption takes time, with green shoots already visible [64][65] Question: EBITDA Margin Sustainability [66] - The strong EBITDA margin in Q3 was attributed to disciplined cost management and optimization, with expectations of ramping expenses in Q4 [67][68] Question: AI Customer Expansion [96] - AI customers are expanding their spend over time, particularly as they move from experimentation to production workloads [97][98] Question: GPU Supply Constraints [101] - The company has managed GPU supply effectively, with no current constraints, and has ordered enough capacity to meet demand [102][103] Question: Shift in Competitive Focus [106] - The company is following its customers' needs, particularly hyperscalers and scalers, to expand its share of wallet in a multi-cloud world [108][109] Question: Baseline Growth Outlook for 2025 [114] - The company expects baseline growth in the low to mid-teens entering 2025, driven by steady improvements in core business and AI contributions, without assuming NDR reaching 100% by Q1 [116]

Core Viewpoint - DigitalOcean Holdings, Inc. reported quarterly earnings of $0.52 per share, exceeding the Zacks Consensus Estimate of $0.40 per share, and showing an increase from $0.44 per share a year ago, representing a 30% earnings surprise [1] Financial Performance - The company achieved revenues of $198.48 million for the quarter ended September 2024, surpassing the Zacks Consensus Estimate by 0.96%, and up from $177.06 million year-over-year [2] - Over the last four quarters, DigitalOcean has consistently exceeded consensus EPS estimates [2] Stock Performance - DigitalOcean shares have increased approximately 11.3% since the beginning of the year, while the S&P 500 has gained 20.1% [3] - The stock currently holds a Zacks Rank 4 (Sell), indicating expectations of underperformance in the near future [6] Earnings Outlook - The current consensus EPS estimate for the upcoming quarter is $0.36 on revenues of $199.84 million, and for the current fiscal year, it is $1.67 on revenues of $773.63 million [7] - The trend of estimate revisions for DigitalOcean has been unfavorable leading up to the earnings release [6] Industry Context - The Internet - Software industry, to which DigitalOcean belongs, is currently ranked in the top 34% of over 250 Zacks industries, suggesting a favorable environment for stocks in this sector [8] - Empirical research indicates a strong correlation between near-term stock movements and trends in earnings estimate revisions, which can be tracked by investors [5]

| --- | --- | |--------------------------------|-------| | | | | | | | | | | Earnings Presentation Q3 2024 | | | November 4, 2024 | | Safe Harbor This presentation contains forward-looking statements that involve substantial risks and uncertainties. In some cases, you can identify forward-looking statements by terms such as "may," "will," "should," "expect," "plan," "anticipate," "could," "intend," "target," "estimate," "believe," "predict," "potential" or "continue" or the negative terms or other similar e ...

Customer Metrics - As of September 30, 2024, DigitalOcean had approximately 638,000 active customers categorized as Learners, Builders, and Scalers[77]. - The number of Scalers increased to approximately 18,000 in Q3 2024, up from 16,000 in Q3 2023, while Builders grew to approximately 145,000 from 138,000[78]. Revenue Growth - Average Revenue Per User (ARPU) increased from $92.06 in Q3 2023 to $102.51 in Q3 2024[78]. - Annual Run-Rate Revenue (ARR) rose to $798 million as of September 30, 2024, up from $713 million in the same period last year[78]. - Revenue for the three months ended September 30, 2024, was $198,484 thousand, an increase of $21,422 thousand or 12% compared to $177,062 thousand for the same period in 2023[105]. - Revenue for the nine months ended September 30, 2024, was $575,690 thousand, an increase of $63,680 thousand or 12% compared to $512,010 thousand for the same period in 2023[111]. Revenue Sources - Revenue from Builders and Scalers increased by 7% and 19%, respectively, for the three months ended September 30, 2024, compared to the same period in 2023[78]. - For the three months ended September 30, 2024, 39% of revenue was generated from North America, 28% from Europe, 23% from Asia, and 10% from the rest of the world[78]. Profitability and Margins - Gross profit remained consistent at 60% for both the three months ended September 30, 2024, and 2023[105]. - Gross profit margin improved to 61% for the nine months ended September 30, 2024, up from 59% in the same period of 2023[112]. - The net income margin for Q3 2024 was 17%, compared to 11% in Q3 2023, showing a significant improvement[127]. - The adjusted EBITDA margin for Q3 2024 was 44%, slightly up from 43% in Q3 2023[127]. Expenses - DigitalOcean's sales and marketing expenses were approximately 9% of revenue for Q3 2024, down from 11% in Q3 2023[78]. - Research and development expenses increased by $4,750 thousand or 15% to $37,377 thousand for the three months ended September 30, 2024, compared to $32,627 thousand in 2023[107]. - General and administrative expenses increased by $20,358 thousand or 101% to $40,422 thousand for the three months ended September 30, 2024, compared to $20,064 thousand in 2023[107]. Cash Flow and Liquidity - Net cash provided by operating activities was $211.4 million for the nine months ended September 30, 2024, compared to $154.4 million in 2023[118]. - Net cash used in investing activities was $47.7 million for the nine months ended September 30, 2024, a significant decrease from $248.3 million in 2023[119]. - As of September 30, 2024, the company had $439.9 million in cash and cash equivalents, indicating strong liquidity[116]. Income and Earnings - GAAP net income attributable to common stockholders for Q3 2024 was $32,949,000, compared to $19,175,000 in Q3 2023, representing a 71% increase[127]. - Adjusted EBITDA for Q3 2024 was $86,720,000, up from $75,776,000 in Q3 2023, reflecting a 14% growth[127]. - Non-GAAP net income for the nine months ended September 30, 2024, was $142,026,000, compared to $117,996,000 for the same period in 2023, indicating a 20% increase[132]. Stock-Based Compensation - Stock-based compensation for Q3 2024 was $22,949,000, down from $28,731,000 in Q3 2023, a decrease of 20%[132]. - Acquisition-related compensation for Q3 2024 was $3,193,000, compared to $7,995,000 in Q3 2023, a reduction of 60%[132].

Financial Performance - Revenue for Q3 2024 was $198 million, representing a 12% year-over-year increase[2] - Net income was $33 million, a 72% increase year-over-year, with a net income margin of 17%[3] - Adjusted EBITDA was $87 million, up 14% year-over-year, with an adjusted EBITDA margin of 44%[3] - Annual Run-Rate Revenue (ARR) reached $798 million, also a 12% increase year-over-year[2] - Revenue for Q3 2024 reached $198,484,000, a 12.5% increase from $177,062,000 in Q3 2023[27] - Gross profit for Q3 2024 was $119,441,000, up 11.8% from $106,733,000 in Q3 2023[27] - Net income attributable to common stockholders for Q3 2024 was $32,949,000, compared to $19,175,000 in Q3 2023, representing a 71.6% increase[27] - Non-GAAP Net income for the three months ended September 30, 2024, was $51,674,000, compared to $43,591,000 for the same period in 2023, indicating an 18.5% increase[35] - The company reported a net income margin of 17% for the three months ended September 30, 2024, compared to 11% for the same period in 2023[33] Guidance and Expectations - DigitalOcean is raising its full year 2024 revenue guidance to $775 to $777 million[6] - The fourth quarter revenue guidance is set between $199 to $201 million[5] - The company expects continued growth in adjusted EBITDA and net income margins in the upcoming quarters, driven by operational efficiencies and market expansion strategies[33] Customer Metrics - Average Revenue Per Customer (ARPU) increased to $102.51, an 11% rise compared to Q3 2023[4] - Net Dollar Retention Rate (NDR) remained stable at 97% compared to the prior quarter[4] Cash and Assets - Cash and cash equivalents totaled $440 million as of September 30, 2024[3] - Total current assets increased to $552,006,000 as of September 30, 2024, from $502,994,000 at the end of 2023, a growth of 9.7%[25] - Cash and cash equivalents rose to $439,872,000 as of September 30, 2024, compared to $317,236,000 at the end of 2023, an increase of 38.7%[25] - Total assets increased to $1,526,478,000 as of September 30, 2024, from $1,460,967,000 at the end of 2023, reflecting a growth of 4.5%[25] Operating Expenses and Cash Flow - Operating expenses for Q3 2024 totaled $94,835,000, a 33.1% increase from $71,265,000 in Q3 2023[27] - The company reported net cash provided by operating activities of $211,386,000 for the nine months ended September 30, 2024, compared to $154,426,000 for the same period in 2023[29] - GAAP Net cash provided by operating activities for the three months ended September 30, 2024, was $73,353,000, compared to $54,050,000 for the same period in 2023, a 35.8% increase[39] Capital Expenditures - Capital expenditures for property and equipment for the three months ended September 30, 2024, were $57,352,000, compared to $20,229,000 in the same period of 2023[39] Share Metrics - The weighted-average shares used to compute net income per share (diluted) were 102,591,000 for Q3 2024, compared to 102,674,000 for Q3 2023[27] - Non-GAAP Net income per share, diluted, for the three months ended September 30, 2024, was $0.52, compared to $0.44 for the same period in 2023[36] Product Development - The company launched 42 new product features in Q3, including Global Load Balancers and Kubernetes Log Forwarding[4]