DOCN Q1 Earnings Call: Large Enterprise Momentum and AI Investments Drive Results

Cloud computing provider DigitalOcean (NYSE: DOCN) reported Q1 CY2025 results exceeding the market’s revenue expectations, with sales up 14.1% year on year to $210.7 million. The company expects next quarter’s revenue to be around $216.5 million, close to analysts’ estimates. Its non-GAAP profit of $0.56 per share was 25.8% above analysts’ consensus estimates.

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StockStory’s Take

DigitalOcean’s latest quarterly results reflected continued growth with management crediting strong demand from larger digital native enterprises and the expansion of AI-related services as primary drivers. CEO Paddy Srinivasan highlighted the company’s focus on scaling with these customers, noting a 41% year-over-year increase in revenue from clients spending over $100,000 annually. This expansion was further supported by product innovation and increased account engagement, particularly through enhanced support for complex workloads in both core cloud and AI infrastructure.

Looking ahead, management emphasized a cautious yet optimistic outlook for the remainder of the year, citing the diverse customer base and robust demand for AI inferencing capabilities. Srinivasan stated, "We have taken a very appropriately cautious approach to projecting the outlook for the rest of the year," acknowledging macroeconomic uncertainty while reaffirming guidance for both revenue and profitability. The ongoing rollout of AI platform features and investments in capacity are expected to support future growth, with management monitoring evolving customer needs and potential financing strategies to enable larger-scale deals.

Key Insights from Management’s Remarks

DigitalOcean’s management attributed quarterly performance to customer mix shifts, product innovation, and targeted go-to-market efforts. The company’s ability to serve rapidly growing digital native enterprises and expand AI workloads drove both the top line and improved operating metrics.

• Enterprise customer expansion: Revenue from customers spending over $100,000 annually grew 41% year-over-year, supported by targeted engagement and new product capabilities tailored to larger workloads.
• AI workload acceleration: The company’s AI annual recurring revenue (ARR) grew over 160% year-over-year, with most new AI business focused on real-world inferencing workloads. Access to advanced GPUs from NVIDIA and AMD underpinned this growth.
• Product innovation pace: Over 50 new products and features were released in the quarter—five times more than the prior year’s comparable period—without a significant increase in R&D spending as a percentage of revenue.
• Enhanced customer engagement: DigitalOcean doubled named account coverage to its top 3,000 customers, assigning dedicated managers and technical specialists to deepen relationships and identify new workload opportunities.
• Capacity and infrastructure strategy: The opening of a new Atlanta data center enabled the company to win larger, multi-year deals, but required substantial upfront capital investment, influencing short-term free cash flow.

Drivers of Future Performance

Management’s outlook for the next quarter and full year centers on sustained expansion with digital native enterprises and increased adoption of AI offerings, with a focus on maintaining operational efficiency and managing capital investments.

• AI and cloud platform adoption: Management expects continued demand for AI inferencing and scalable cloud solutions to fuel revenue growth, especially as larger customers migrate more workloads to DigitalOcean’s infrastructure.
• Capacity investments and financing: The company is evaluating additional funding strategies, including leasing arrangements, to support rapid deployment of infrastructure needed for larger customer commitments without compromising free cash flow.
• Customer diversification and macro risks: While customer concentration risk remains low, management is monitoring for changes in macroeconomic conditions that could impact usage trends or delay enterprise purchasing decisions.

Top Analyst Questions

• Jason Ader (William Blair): Asked about timing for general availability of the GenAI platform and differentiation in the AI market; management expects GA by end of Q2 or early Q3 and highlighted their full-stack approach to AI inferencing.
• Pinjalim Bora (JPMorgan): Inquired about macro environment impacts; management stated that observed trends are reflected in guidance and noted cautious optimism due to diversified customer base.
• Gabriela Borges (Goldman Sachs): Sought clarity on the nature of large multi-year deals; management explained these deals are enabled by new enterprise features and staged migration capabilities, with more such opportunities expected.
• James Fish (Piper Sandler): Probed on capital expenditure needs for supporting large deals; management clarified that recent CapEx was front-loaded for new capacity and outlined plans to maintain flexibility for future large contracts.
• Kingsley Crane (Canaccord Genuity): Asked about expansion of the named account model; management described the current focus on top 3,000 customers and a data-driven approach to scaling targeted engagement.

Catalysts in Upcoming Quarters

In the coming quarters, the StockStory team will be monitoring (1) the general availability and customer adoption of DigitalOcean’s GenAI platform, (2) progress on winning and onboarding large-scale enterprise and AI inferencing deals, and (3) the company’s execution on alternative capital strategies to support infrastructure growth. Continued innovation in core cloud offerings and expansion of targeted account engagement models will also be key areas of focus.

DigitalOcean currently trades at a forward price-to-sales ratio of 3.5×. Is the company at an inflection point that warrants a buy or sell? The answer lies in our free research report.

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