Core Insights - Cloud computing is entering a growth phase driven by AI workloads, leading investors to be more selective about value opportunities [1] - DigitalOcean (DOCN) is a notable mid-sized cloud platform showing strong growth and profitability, particularly benefiting from AI-driven demand [1] Company Performance - In Q3 2025, DigitalOcean reported revenue of $230 million, a 16% year-over-year increase, marking its highest growth since Q3 2023 [5] - The company achieved its highest organic incremental annual recurring revenue (ARR) of $44 million, bringing total ARR to $919 million [5] - DigitalOcean's gross margin improved to 60%, and adjusted EBITDA margin reached 43%, exceeding internal targets [5] Client Growth - Revenue from clients paying over $100,000 per year increased by 41% year-over-year, now representing 26% of total revenue [6] - Customers with an annual run rate exceeding $500,000 grew by 55%, while those with an ARR over $1 million increased by 72% to $110 million [6] - Many clients signed eight-figure committed contracts post-quarter, enhancing revenue visibility and confidence in future growth [6] AI Revenue - DigitalOcean's Gradient AI agentic cloud is gaining traction among AI and digital-native enterprise customers [7] - For five consecutive quarters, AI revenue has more than doubled year-over-year, driven by increased inference workloads on the platform [7]

Financial Data and Key Metrics Changes - Revenue for Q3 2025 reached $230 million, representing a 16% year-over-year increase, marking the highest growth since Q3 2023 [7][27] - Adjusted EBITDA was $100 million, a 15% increase year-over-year, with an adjusted EBITDA margin of 43% [30] - Non-GAAP diluted net income per share was $0.54, a 4% increase year-over-year, while GAAP diluted net income per share was $1.51, a 358% increase year-over-year [31] - Adjusted free cash flow was $85 million, or 37% of revenue, significantly up from $19 million, or 10% of revenue, in the prior year [32] Business Line Data and Key Metrics Changes - Direct AI revenue more than doubled year-over-year for the fifth consecutive quarter, contributing to the overall revenue growth [7][28] - Revenue from customers with an annualized run rate greater than $1 million reached $110 million, growing 72% year-over-year [6][10] - Revenue from customers with an annualized run rate greater than $100,000 grew 41% year-over-year, representing 26% of total revenue [29] Market Data and Key Metrics Changes - The demand for the agentic cloud has exceeded supply, leading to increased investments in data centers and GPU capacity [6][24] - The company has signed multiple eight-figure committed contracts after the quarter closed, indicating strong demand from AI-native companies [24][35] Company Strategy and Development Direction - The company is focused on enhancing its unified agentic cloud to support scaling AI and digital native enterprise customers [5][19] - Investments in data centers and GPU capacity are being increased to accelerate growth while maintaining attractive margins [6][24] - The company aims to achieve 18%-20% revenue growth in 2026, a year earlier than previously projected [25][39] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in raising the 2025 and 2026 revenue and adjusted free cash flow outlook due to strong performance and visibility into demand [26][35] - The company is seeing more demand than it can currently support, prompting expansion of data center capacity [24][39] Other Important Information - The company introduced equipment leasing in Q3 to better align investments with revenue [8][32] - A new AI Partner Program was launched to empower AI and digital native enterprises [18] Q&A Session Summary Question: About the eight-figure committed contracts and their customer cohort - The eight-figure contracts primarily come from AI-native companies looking to leverage the infrastructure, with increasing overlap between AI and core cloud services [42][44] Question: Impact of recent outages at AWS and Azure on migrations - There has been a steady increase in migration workloads, driven by dissatisfaction with incumbents and attractive offerings from DigitalOcean [48][50] Question: Capacity to serve new contracts and ramp-up times - Some capacity is already available in existing data centers, while new data center capacities will come online progressively through 2026 [52][54] Question: Competitive positioning and strategy in light of competitors' acquisitions - The company remains customer-focused while being aware of competition, emphasizing its unique software stack and capabilities [57][65] Question: Expectations for AI business growth and its impact on overall revenue - The AI business is expected to continue doubling, contributing significantly to overall revenue growth [67][69] Question: Inclusion of AI revenue in net dollar retention metrics - The company is considering incorporating AI revenue into net dollar retention metrics as it becomes more predictable [71][73] Question: Changes in customer behavior regarding expansion - Expansion activity is primarily driven by larger customers, with strong growth observed among those spending over $100,000 in ARR [75]