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.
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DigitalOcean (DOCN) Q2 CY2025 Highlights:
- Revenue: $218.7 million vs analyst estimates of $216.6 million (13.6% year-on-year growth, 1% beat)
- Adjusted EPS: $0.59 vs analyst estimates of $0.47 (26.2% beat)
- Adjusted Operating Income: $61.73 million vs analyst estimates of $56.96 million (28.2% margin, 8.4% beat)
- The company lifted its revenue guidance for the full year to $890 million at the midpoint from $880 million, a 1.1% increase
- Management raised its full-year Adjusted EPS guidance to $2.08 at the midpoint, a 9.2% increase
- Operating Margin: 16.3%, up from 11.6% in the same quarter last year
- Net Revenue Retention Rate: 99%, down from 100% in the previous quarter
- Annual Recurring Revenue: $875 million vs analyst estimates of $871.5 million (13.6% year-on-year growth, in line)
- Billings: $224.3 million at quarter end, up 15.7% year on year
- Market Capitalization: $2.74 billion
While we enjoy listening to the management's commentary, our favorite part of earnings calls are the analyst questions. Those are unscripted and can often highlight topics that management teams would rather avoid or topics where the answer is complicated. Here is what has caught our attention.
Our Top 5 Analyst Questions From DigitalOcean’s Q2 Earnings Call
- Patrick D. Walravens (Citizens) asked about the drivers behind AI/ML revenue growth. CEO Paddy Srinivasan detailed the three-layer AI stack and emphasized that most current revenue comes from infrastructure, with future potential in higher-margin services.
- Michael Joseph Cikos (Needham & Company) pressed for more color on net new AI/ML ARR and NDR trends. CFO Matt Steinfort explained that incremental ARR was balanced between AI and core cloud, and that NDR will likely remain stable in the near term.
- Gabriela Borges (Goldman Sachs) questioned the gross margin profile of AI versus core business. Steinfort clarified that while infrastructure margins are lower, higher stack services will improve margins as adoption grows, and that LTV/CAC is attractive.
- Raimo Lenschow (Barclays) probed whether industry capacity constraints or differentiation drive AI customer wins. Srinivasan said differentiation, particularly the twin cloud stack, is the primary factor, with capacity constraints a persistent but manageable concern.
- James Edward Fish (Piper Sandler) asked about the sustainability of the second-half guidance step-up. Steinfort pointed to durable new customer acquisition, a strong migration pipeline, and conservative guidance for large deals as the basis for confidence.
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 there an opportunity in the stock?Find out in our full research report (it’s free).
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