Company Overview - DigitalOcean Holdings offers a range of cloud computing services, primarily targeting small and medium-sized businesses, differentiating itself from larger competitors like Microsoft, Google, and Amazon [3][4] - The company has over 600,000 paying customers and is positioned in a growing market, with the small and medium-sized enterprise segment of cloud computing expected to grow at an annualized rate of 14.9% through 2032 [5] Financial Performance - In the first two quarters of the year, DigitalOcean's revenue grew nearly 13%, following a 20% increase the previous year, indicating strong financial performance despite economic challenges [6] - Earnings are projected to continue improving at a similar pace, suggesting a stable growth trajectory for the company [6] Market Position and Competition - DigitalOcean is built specifically to meet the needs of cost-conscious small and mid-sized businesses, which is a significant market segment [9] - Larger competitors are beginning to offer more self-service and smaller-scale options, indicating that the competitive landscape is evolving [8] Investment Potential - A hypothetical $10,000 investment in DigitalOcean could take nearly 40 years to reach $1 million, assuming an average return of 13%, reflecting the long-term growth potential of the stock [10] - The stock is currently priced at less than 20 times next year's expected per-share profits, presenting a potentially attractive investment opportunity [14] Industry Trends - The demand for cloud computing services is being driven by the rise of artificial intelligence, with many small and medium-sized enterprises planning to increase their spending on such technology [12] - The need for basic cloud computing solutions, such as customer service applications and data storage, continues to grow, indicating a robust market outlook [12]

Core Viewpoint - DigitalOcean reported strong Q2 2024 financial results, with a 13% year-over-year revenue growth, marking its second consecutive quarter of accelerating growth, which led to a positive market reaction [2][3] Financial Performance - Revenue grew 13% year over year, indicating a positive trend in financial performance [2] - Adjusted free cash flow was $37 million, representing a 19% margin, although it was down from the previous year [2] - Average revenue per customer increased to $99.45, up 9% year over year and 25% from two years ago [5] Customer Metrics - DigitalOcean ended Q2 with 638,000 customers, a 3% increase year over year [5] - The net dollar retention rate was 97%, marking the fourth consecutive quarter below 100%, indicating potential revenue loss from churn and downgrades [4][6] - The company is losing customers who spend $50 or less per month, suggesting a shift away from smaller users towards higher-spending customers [9][10] Competitive Landscape - DigitalOcean competes with major players like Amazon, Alphabet, and Microsoft, focusing on small and medium-sized businesses [8] - The shift in customer base may bring DigitalOcean into closer competition with larger tech giants, intensifying market competition [9][10] Growth Strategy - Management attributes revenue growth to the release of 24 new products in Q2, indicating a surge in product velocity [11] - Research and development expenses fell by 11% in the first half of 2024 compared to the same period in 2023, highlighting fiscal restraint [11][12] - Despite expected profit margin impacts from AI investments, the company remains focused on profitable growth [13] Investment Consideration - DigitalOcean's stock is trading at about 4 times sales, suggesting it may be a decent value [13] - While there are concerns regarding customer retention, the company still shows promise for investors seeking diversification [14]

Core Insights - The article discusses the investment positions of Parkev Tatevosian, CFA, and mentions that The Motley Fool has positions in and recommends DigitalOcean [1] Group 1 - Parkev Tatevosian has no position in any of the stocks mentioned [1] - The Motley Fool has a disclosure policy regarding its investment positions [1] - Parkev Tatevosian may be compensated for promoting The Motley Fool's services [1]

Core Viewpoint - DigitalOcean Holdings demonstrated strong marketability of its small-business offerings, resulting in a 14.2% increase in shares following the release of its second-quarter results, which exceeded estimates and showcased business resilience [1][3]. Company Performance - DigitalOcean's revenue for the last quarter reached $192.5 million, reflecting a 13% year-over-year increase, surpassing estimates of approximately $188.6 million [3]. - The company reported per-share earnings of $0.48, exceeding the consensus estimate of $0.39 and improving from $0.44 per share in the previous year [3]. Future Outlook - DigitalOcean raised its full-year revenue guidance from a range of $760 million to $775 million to a new range of $770 million to $775 million, while also revising its per-share profit outlook from $1.60 to $1.67 to a new range of $1.60 to $1.70 [4]. - Analysts project a top-line growth of 11.1% for 2024, estimating revenues to be just under $770 million, with earnings expected to rise from $1.59 per share last year to $1.64 this year [4][5]. Industry Context - The global cloud computing industry, particularly serving small and medium-sized businesses, is anticipated to grow at an annualized rate of 14.9% through 2032, indicating a favorable environment for DigitalOcean's business model [7].

| --- | --- | |--------------------------------|-------| | | | | | | | | | | Earnings Presentation Q2 2024 | | | August 8, 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 exp ...

Financial Data and Key Metrics Changes - Revenue in Q2 2024 was $192.5 million, representing a 13% year-over-year increase and a 4% quarter-over-quarter increase [24] - Adjusted EBITDA margin was 42%, exceeding guidance and up approximately 200 basis points from the previous quarter [27] - Net dollar retention rate remained flat at 97%, indicating stable performance despite macroeconomic challenges [25][26] Business Line Data and Key Metrics Changes - The AI/ML platform saw annual recurring revenue (ARR) growth of over 200% year-over-year, contributing significantly to overall revenue growth [24][26] - Managed hosting products continued to show healthy revenue contributions, supporting overall growth [6][24] Market Data and Key Metrics Changes - The total customer count increased to approximately 638,000, with builders and scalers (customers spending over $50 per month) growing by 7% year-over-year [28] - Average revenue per user (ARPU) increased by 9% year-over-year to $99.45, driven by growth in higher spending cohorts [29] Company Strategy and Development Direction - The company is focused on democratizing access to AI infrastructure, aiming to simplify the integration of AI into customer applications [19][21] - A new data center in Atlanta is set to open in Q1 2025, which will support AI growth and optimize the existing data center footprint [16][17] - The leadership team has been strengthened with the addition of key executives to drive product strategy and customer engagement [7][9] Management's Comments on Operating Environment and Future Outlook - Management expressed optimism about the growth potential in AI and machine learning, despite current macroeconomic challenges [22] - The company anticipates stable net dollar retention and expansion levels through the end of the year, with ongoing efforts to enhance customer success and product offerings [26][30] Other Important Information - The company launched 24 new product features in Q2, doubling product velocity compared to the previous six months [10] - New product offerings include GPU Droplets and a global load balancer, aimed at enhancing application performance and resilience [11][12] Q&A Session Summary Question: Can you elaborate on the AI strategy and competitive environment? - Management highlighted that their GPU droplets offer fractional access to GPUs, differentiating them from competitors who require larger capital expenditures [34][36] Question: What is the outlook for net new ARR in Q3 and Q4? - Management indicated that growth may moderate compared to Q2 due to lapping previous high ARR figures and ongoing macroeconomic pressures [38][40] Question: How does the new Atlanta data center fit into the AI strategy? - The Atlanta data center will support AI workloads and help optimize existing data center capacity, allowing for better load balancing and cost efficiency [60][62] Question: What are the bottlenecks to growing the AI footprint? - Management noted constraints related to power, cooling, and network infrastructure as challenges in expanding AI capabilities [55][56] Question: How will customer success efforts drive usage in high-potential accounts? - The company is ramping up customer success initiatives to enhance product usage and expand customer relationships [47][49]

Core Insights - DigitalOcean Holdings, Inc. (DOCN) reported revenue of $192.48 million for the quarter ended June 2024, reflecting a year-over-year increase of 13.4% [1] - The earnings per share (EPS) for the quarter was $0.48, up from $0.44 in the same quarter last year, exceeding the consensus estimate of $0.39 by 23.08% [1] - The reported revenue surpassed the Zacks Consensus Estimate of $188.64 million, resulting in a surprise of 2.04% [1] Key Performance Metrics - Total Customers: 638,000, slightly below the estimated 638,530 [3] - Net Dollar Retention Rate: 97%, lower than the estimated 98% [4] - Average Revenue Per Customer (ARPU): $99.45, exceeding the estimated $97.11 [5] Stock Performance - DigitalOcean's shares have declined by 11.7% over the past month, compared to a 6.5% decline in the Zacks S&P 500 composite [5] - The stock currently holds a Zacks Rank 1 (Strong Buy), indicating potential for outperformance in the near term [5]

Group 1: Earnings Performance - DigitalOcean Holdings, Inc. reported quarterly earnings of $0.48 per share, exceeding the Zacks Consensus Estimate of $0.39 per share, and up from $0.44 per share a year ago, representing an earnings surprise of 23.08% [1] - The company has surpassed consensus EPS estimates for four consecutive quarters [2] - DigitalOcean's revenues for the quarter ended June 2024 were $192.48 million, surpassing the Zacks Consensus Estimate by 2.04%, and up from $169.81 million year-over-year [2] Group 2: Stock Performance and Outlook - DigitalOcean shares have declined approximately 24.5% since the beginning of the year, while the S&P 500 has gained 9% [3] - The company's earnings outlook is crucial for investors, as it includes current consensus earnings expectations for upcoming quarters [4] - The current consensus EPS estimate for the next quarter is $0.41 on revenues of $195.1 million, and for the current fiscal year, it is $1.64 on revenues of $768.81 million [7] Group 3: Industry Context - The Internet - Software industry, to which DigitalOcean belongs, is currently ranked in the top 38% of over 250 Zacks industries, indicating a favorable outlook [8] - Empirical research shows a strong correlation between near-term stock movements and trends in earnings estimate revisions, which can impact stock performance [5] - DigitalOcean currently holds a Zacks Rank 1 (Strong Buy), suggesting that the shares are expected to outperform the market in the near future [6]

Customer Growth and Revenue - As of June 30, 2024, DigitalOcean had approximately 638,000 active customers categorized as Learners, Builders, and Scalers, with a significant increase in Builders and Scalers contributing to revenue growth[68]. - Average Revenue Per User (ARPU) increased from $90.84 in Q2 2023 to $99.45 in Q2 2024, indicating a strong ability to attract higher spending customers[68][78]. - Annual Run-Rate Revenue (ARR) reached $781 million as of June 30, 2024, up from $682 million in the same period of 2023, reflecting a growth of approximately 14.6% year-over-year[68][79]. - Revenue from Builders and Scalers accounted for 87% of total revenue in Q2 2024, up from 86% in Q2 2023, highlighting the importance of these customer segments[69]. - The number of Scalers increased to approximately 18,000 as of June 30, 2024, up from 16,000 in the previous year, while Builders rose to approximately 143,000 from 134,000[69]. Financial Performance - Revenue for the three months ended June 30, 2024, increased by $22.7 million, or 13%, to $192.5 million compared to $169.8 million for the same period in 2023, driven by a 9% increase in ARPU to $99.45[91]. - Revenue for the six months ended June 30, 2024, increased by $42.3 million, or 13%, to $377.2 million compared to $334.9 million for the same period in 2023[94]. - Net income attributable to common stockholders for the three months ended June 30, 2024, was $19.1 million, compared to a net loss of $0.7 million in the same period of 2023[88]. - GAAP net income attributable to common stockholders for the three months ended June 30, 2024, was $19,138 thousand, compared to a loss of $665 thousand for the same period in 2023[113]. - Non-GAAP net income for the six months ended June 30, 2024, was $90,352 thousand, an increase from $74,405 thousand for the same period in 2023, representing a growth of approximately 21.5%[113]. Cost and Expenses - Cost of revenue for the three months ended June 30, 2024, rose by $7.8 million, or 12%, to $75.1 million, primarily due to increased depreciation and amortization costs[91]. - Gross profit margin improved to 61% for the three months ended June 30, 2024, up from 60% in the same period of 2023, attributed to ongoing cost optimization efforts[91]. - Research and development expenses decreased by $4.5 million, or 12%, to $34.0 million for the three months ended June 30, 2024, mainly due to reduced personnel costs[92]. - Sales and marketing expenses increased by $4.0 million, or 25%, to $20.1 million for the three months ended June 30, 2024, driven by higher personnel and advertising costs[92]. - General and administrative expenses decreased by $8.0 million, or 16%, to $40.8 million for the three months ended June 30, 2024, largely due to a reduction in stock-based compensation[92]. Cash Flow and Investments - Net cash provided by operating activities was $138.0 million for the six months ended June 30, 2024, an increase from $100.4 million in 2023[99]. - Net cash provided by investing activities was $12.1 million for the six months ended June 30, 2024, a significant decrease from $243.7 million in 2023[100]. - Net cash used in financing activities was $24.2 million for the six months ended June 30, 2024, compared to $365.0 million in 2023, primarily due to stock repurchases[101]. - As of June 30, 2024, the company had $443.1 million in cash and cash equivalents, primarily consisting of cash and money market funds[97]. Tax and Other Financial Metrics - Income tax expense increased by $14.0 million, or 171%, for the six months ended June 30, 2024, due to U.S. pre-tax income creating a tax expense compared to a tax benefit in 2023[96]. - The company utilized a tax rate of 16% for the fiscal year 2024, compared to 17% for 2023, reflecting a strategic adjustment in tax planning[116]. - Stock-based compensation for the six months ended June 30, 2024, totaled $44,563 thousand, down from $64,023 thousand in the same period of 2023, indicating a reduction of approximately 30.5%[113]. - Non-GAAP diluted net income per share for the three months ended June 30, 2024, was $0.48, compared to $0.44 for the same period in 2023, reflecting an increase of 9.1%[114]. Strategic Initiatives - The company continues to invest in its platform and product offerings, particularly in IaaS, PaaS, SaaS, and AI/ML markets, to drive future growth[73]. - The company is actively pursuing strategies to attract more Builders and Scalers, including marketing initiatives and acquisitions like Cloudways and Paperspace, which enhance its service offerings[72]. - The company approved an additional repurchase program of up to $140 million of common stock through fiscal year 2025[97]. Market and Risk Assessment - Approximately 38% of revenue in Q2 2024 was generated from North America, with 28% from Europe, 23% from Asia, and 11% from the rest of the world, showcasing a diverse revenue base[68]. - There have been no material changes in market risk from the information provided in the Annual Report for the fiscal year ended December 31, 2023[117].

Revenue and Growth - Revenue for Q2 2024 was $192 million, representing a 13% year-over-year increase[2] - Annual Run-Rate Revenue (ARR) reached $781 million, up 15% year-over-year[2] - Average Revenue Per Customer (ARPU) increased to $99.45, a 9% rise compared to Q2 2023[3] - The number of Builders and Scalers increased by 7% year-over-year, contributing to a 15% revenue growth from this segment[3] - DigitalOcean plans to achieve total revenue of $770 to $775 million for the full year 2024[4] - The company initiated guidance for Q3 2024 with expected revenue of $196 to $197 million[4] - Total revenue for Q2 2024 was $192,476, an increase of 13.3% compared to $169,814 in Q2 2023[24] Profitability and Income - Adjusted EBITDA was $82 million, with an adjusted EBITDA margin of 42%[2] - Net income attributable to common stockholders for the first half of 2024 was $33,277, compared to a net loss of $15,705 in the same period of 2023[26] - The company reported a basic net income per share of $0.21 for Q2 2024, compared to $0.01 in Q2 2023[24] - GAAP net income attributable to common stockholders for the three months ended June 30, 2024, was $19,138, compared to $665 for the same period in 2023[27] - Non-GAAP net income for the six months ended June 30, 2024, was $90,352, compared to $74,405 for the same period in 2023, reflecting a 21% increase[29] - Non-GAAP net income per share, diluted, for the three months ended June 30, 2024, was $0.48, compared to $0.44 for the same period in 2023[30] - The company reported a net income margin of 10% for the three months ended June 30, 2024, compared to a loss margin of -% in the same period of 2023[27] Cash Flow and Assets - Cash and cash equivalents increased to $443,110 as of June 30, 2024, from $317,236 at the end of 2023, representing a growth of 39.7%[22] - Total assets grew to $1,536,793 as of June 30, 2024, compared to $1,460,967 at the end of 2023, indicating a 5.2% increase[22] - The company generated $138,033 in net cash provided by operating activities for the first half of 2024, compared to $100,376 in the same period of 2023, an increase of 37.6%[26] - GAAP net cash provided by operating activities for the six months ended June 30, 2024, was $138,033, compared to $100,376 in the same period of 2023[32] Expenses and Investments - Operating expenses decreased to $95,009 in Q2 2024 from $103,961 in Q2 2023, a reduction of 8.5%[24] - Capital expenditures for property and equipment were $75,534 in the first half of 2024, compared to $46,848 in the same period of 2023, reflecting a significant investment in growth[26] - Capital expenditures for property and equipment for the three months ended June 30, 2024, were $31,869, compared to $23,534 in the same period of 2023[32] - Stock-based compensation for the three months ended June 30, 2024, was $21,833, down from $36,429 in the same period of 2023[29] Other Metrics - Net Dollar Retention Rate (NDR) remained stable at 97% compared to the previous quarter[3] - DigitalOcean announced the Early Availability of GPU droplets, enhancing access to NVIDIA H100 instances for approximately 638,000 customers[3] - Adjusted EBITDA for the six months ended June 30, 2024, was $155,910, representing a 22% increase from $127,908 in the same period of 2023[27] - Adjusted EBITDA margin for the three months ended June 30, 2024, was 42%, slightly down from 43% in the same period of 2023[27] - Adjusted free cash flow for the three months ended June 30, 2024, was $37,429, down from $45,104 in the same period of 2023[32]