DigitalOcean Holdings, Inc. Q1 FY2025 earnings call

Strategy Execution

• The strategy includes scaling with digital native enterprise customers and democratizing AI access. Q1 results show progress on these priorities.

Product Innovation - Core Cloud Platform

• Released over 50 new products/features in Q1, with no appreciable increase in R&D spend as a percentage of revenue. Examples include DigitalOcean Partner Network Connect for secure multi-cloud networking, DOKS scaling up to 1,000 nodes, expanded scalable storage for managed databases, and network load balancing.

Product Innovation - AI/ML Initiatives

• Infrastructure layer: Customers have access to NVIDIA HGX H200 GPUs and AMD Instinct MI300X GPUs. GenAI platform in beta with over 5,000 customers and over 8,000 agents created since January. Cloudways Copilot in public preview with over 250 customers.

Customer Engagement

• Expanded named account coverage to top 3,000 revenue customers, with a named account engagement model including technical, solution, and growth account managers. Launched Sail to Success webinar series and case studies. Facilitated 79 migrations to the DigitalOcean platform in Q1.

In Q1 '25, DigitalOcean had revenue of $211 million, a 14% year-over-year increase. AI ARR continued to grow north of 160% year-over-year. Revenue from customers with an annualized run rate greater than $100,000 grew 41% year-over-year and accounted for 23% of total revenue. Higher spend customers as a whole grew to over 170,000 in number, with their revenue growing 16% year-over-year and making up 88% of total revenue. Gross margin was 61% and EBITDA margin was 41% in Q1. The 61% gross margin was 200 bps higher than the prior year, driven by cost optimization.

Second Quarter 2025

• Revenue expected to be in the range of $215.5 million to $217.5 million, representing approximately 12.5% year-over-year growth at the midpoint.
• Adjusted EBITDA margins expected to be in the range of 38% to 40%.
• Non-GAAP diluted earnings per share expected to be $0.42 to $0.47.

Full Year 2025

• Revenue guidance remains in the range of $870 million to $890 million, representing approximately 13% year-over-year growth at the midpoint.
• Adjusted EBITDA margin guide is in the range of 37% to 40%.
• Non-GAAP diluted earnings per share expected to be $1.85 to $1.95.
• Adjusted free cash flow margins guided at 16% to 18% for the full year.

Economic and Geopolitical Uncertainty

• Uncertainty in the current economic and geopolitical environments could impact the business. ### Supply Chain
• Potential risks related to GPU and other component supply, although currently not facing major issues, but market dynamics could change.

Q: Just on the GenAI platform, can you give us a sense of when it's expected to be generally available? And related to that, how do you think about DigitalOcean's differentiation within that AI landscape?

A: On the GenAI platform, we expect to go live sometime by end of Q2, beginning of Q3. Our differentiation includes having a full stack cloud for inferencing, democratizing access of AI with the GenAI platform for non-AI native companies, and the success of Cloudways Copilot. Our IPA stack (infrastructure platform and applications) is making progress on all layers, with a majority of AI workloads on the inferencing side serving real-world use cases.

Q: Maybe talk about just what are you seeing from a macro standpoint? Obviously, there's a lot of uncertainty over there. But so far in April in Q2, are you seeing any change in customer buying behavior or any change in the top of the funnel?

A: Whatever we are observing is reflected in our outlook. We have several leading indicators we look at, including usage patterns of large and long-tail customers, new business acquisition through self-service funnel, pipeline from sales team and partners, and AI demand. We have taken a cautious approach to projecting the outlook for the rest of the year due to uncertainty, but feel confident in our full year guidance given the lack of customer concentration in geography and vertical segments.