DOCN Q2 Deep Dive: AI Adoption and Product Expansion Drive Upgraded Outlook

Cloud computing provider DigitalOcean (NYSE: DOCN) reported revenue ahead of Wall Street’s expectations in Q2 CY2025, with sales up 13.6% year on year to $218.7 million. Guidance for next quarter’s revenue was better than expected at $226.5 million at the midpoint, 1.4% above analysts’ estimates. Its non-GAAP profit of $0.59 per share was 26.2% above analysts’ consensus estimates.

Is now the time to buy DOCN? Find out in our full research report (it’s free).

StockStory’s Take

DigitalOcean’s second quarter saw positive market reaction, reflecting management’s focus on scaling its AI and core cloud businesses. CEO Paddy Srinivasan credited robust demand from AI/ML customers and stronger engagement with larger enterprise clients as the primary growth engines. Srinivasan pointed to the accelerated adoption of new features—over 60 products and updates this quarter—and highlighted that 64 of the top 100 customers had adopted recent releases, suggesting that product innovation played a significant role in driving customer growth and revenue.

Looking ahead, DigitalOcean’s upgraded guidance is underpinned by continued momentum in AI infrastructure, a growing pipeline of large enterprise deals, and enhanced customer migration initiatives. Management emphasized the scaling of its Gradient AI Agentic Cloud and ongoing investments in inferencing workloads as key contributors to future performance. CFO Matt Steinfort noted, “We are confident in our ability to deliver attractive adjusted free cash flow margins while we accelerate our top line growth,” underscoring the focus on balancing expansion and profitability.

Key Insights from Management’s Remarks

Management attributed quarterly performance to strong AI-driven demand, new customer acquisition, and expanded product capabilities targeting digital native enterprises.

• AI/ML revenue acceleration: Management highlighted that AI/ML revenue more than doubled year-over-year, led by expanded GPU infrastructure and the launch of inference-optimized products, addressing demand from AI-native companies seeking scalable, cost-effective solutions.
• Enterprise customer growth: The company saw Scalers+ customers—those spending over $100,000 annually—increase their revenue contribution to 24% of total, with a 35% year-over-year growth rate, reflecting success engaging higher-spend, enterprise-scale clients.
• Product innovation impact: Over 60 new features and products were released this quarter, including general availability of the Gradient AI Platform and advanced networking tools such as BYOIP and NAT Gateways, which are important for customers migrating complex workloads.
• Migration initiatives: DigitalOcean formed a dedicated migrations team to support transitions from larger hyperscale cloud providers, facilitating 76 customer migrations in the quarter, which management sees as a foundation for future large deal wins.
• Strong incremental ARR: The company achieved its highest incremental annual recurring revenue (ARR) since late 2022, driven by new product adoption and a balanced contribution from both core cloud and AI offerings, indicating durable growth across business lines.

Drivers of Future Performance

DigitalOcean expects ongoing AI adoption, enterprise migration trends, and infrastructure optimization to influence revenue growth and margin performance in the coming quarters.

• AI platform expansion: Management believes further rollout of the Gradient AI Agentic Cloud, particularly for inferencing workloads, will attract more large-scale customers and drive higher-margin service adoption, but notes the need to manage capacity constraints and evolving customer requirements.
• Core cloud and migration momentum: The company anticipates that continued investment in migration support and product-led growth will sustain new customer acquisition, with recent cohorts showing stronger initial revenue generation than in prior years—seen as an indicator for future retention and upsell opportunities.
• Margin and capital allocation discipline: Management expects to maintain healthy free cash flow margins by optimizing core infrastructure and balancing investments in AI with prudent capital allocation, although potential margin headwinds could arise if AI becomes a larger part of overall revenue faster than expected.

Catalysts in Upcoming Quarters

In the coming quarters, our analysts will monitor (1) the adoption trajectory of the Gradient AI Agentic Cloud among enterprise customers, (2) the effectiveness of new migration initiatives in driving large-scale transitions from other cloud providers, and (3) the pace at which recently launched products translate into sustained incremental ARR. We will also track margin trends as the business mix shifts toward AI workloads.

DigitalOcean currently trades at $30.35, up from $27.04 just before the earnings. Is the company at an inflection point that warrants a buy or sell? The answer lies in our full research report (it’s free).

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