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DigitalOcean Holdings, Inc. (DOCN)·Q3 2025 Earnings Summary

Executive Summary

  • Q3 2025 delivered accelerating growth and profitability: revenue $230.0M (+16% y/y), non-GAAP diluted EPS $0.54, adjusted EBITDA $100.0M (43% margin); both revenue and EPS exceeded S&P Global consensus, while GAAP EPS was inflated by a $70M valuation-allowance release and a $48M debt extinguishment gain .
  • Guidance raised: FY25 revenue to $896–$897M and adjusted EBITDA margin to 40.7%–41.0%; adjusted FCF margin nudged to 18%–19%. Q4 guidance initiated with revenue $237–$238M, adjusted EBITDA margin 38.5%–39.5%, and non-GAAP EPS $0.35–$0.40 .
  • Demand visibility improved with multiple eight‑figure committed contracts signed post‑quarter; management plans to pull forward 18–20% growth target to 2026, backed by ~30MW new data center capacity and incremental GPUs .
  • Strategic narrative: unified Agentic Cloud (AI + core cloud) winning larger AI-native and digital-native enterprises; AI revenue more than doubled y/y for the fifth consecutive quarter; incremental organic ARR hit a company record ($44M) .
  • Potential stock catalysts: sustained AI inference adoption, contract-driven RPO step-up in Q4, execution on capacity ramp and margin resilience despite leasing and near-term COGS/OpEx ramp .

What Went Well and What Went Wrong

What Went Well

  • Record incremental organic ARR ($44M) and ARR reached $919M (+16% y/y), signaling durable demand across AI and general cloud workloads .
  • Strong beat vs consensus: revenue $229.6M vs $226.6M*, non-GAAP diluted EPS $0.54 vs $0.49*, with adjusted EBITDA $99.8M (43% margin); management cited balanced growth and disciplined execution .
  • Larger-customer traction: $100k+ ARR customers’ revenue +41% y/y to 26% of total; $1M+ run-rate customers >$100M ARR (+72% y/y). CEO: “Our unified agentic cloud platform is emerging as a preferred destination for AI and digital native enterprises” .

What Went Wrong

  • GAAP EPS quality: net income margin 69% was boosted by one-time tax VA release ($70M) and debt extinguishment gain ($48M), obscuring underlying profitability trajectory .
  • Near-term margin headwinds expected as new data center capacity comes online; CFO flagged early ramp costs (NRCs, space/power) before full utilization in 2026 .
  • FY25 non-GAAP EPS guidance trimmed to $2.00–$2.05 (from $2.05–$2.10) due to refinancing/interest impacts and share count changes, despite higher revenue and EBITDA margin guidance .

Financial Results

Quarterly Performance vs Prior Periods

MetricQ3 2024Q1 2025Q2 2025Q3 2025
Revenue ($USD Millions)$198.5 $210.7 $218.7 $229.6
Non-GAAP Diluted EPS ($USD)$0.52 $0.56 $0.59 $0.54
Adjusted EBITDA ($USD Millions)$86.7 $86.3 $89.5 $99.8
Adjusted EBITDA Margin %44% 41% 41% 43%
Gross Profit ($USD Millions)$116.6 $129.4 $130.9 $136.9
Gross Margin %58.7% 61% 60% 60%
Net Income ($USD Millions)$32.9 $38.2 $37.0 $158.4
Net Income Margin %17% 18% 17% 69%

Q3 2025 Results vs S&P Global Consensus

MetricActualConsensusSurprise
Revenue ($USD Millions)$229.6 $226.6*+$3.0; +1.3%*
Non-GAAP Diluted EPS ($USD)$0.54 $0.49*+$0.05*
EBITDA ($USD Millions)Company Adjusted EBITDA: $99.8 EBITDA Consensus Mean: $89.6*+$10.2* (note: consensus EBITDA may not equal company “adjusted EBITDA”)

Values retrieved from S&P Global.*

KPIs and Operating Metrics

KPIQ1 2025Q2 2025Q3 2025
ARR ($USD Millions)$843 $875 $919
Incremental ARR ($USD Millions)—$32 $44
Net Dollar Retention (NDR) %100% 99% 99%
RPO ($USD Millions)—$53 $47
$100k+ ARR Customers’ Revenue Share23% 24% 26%
$100k+ Cohort Revenue Growth y/y+41% +35% +41%
Non-GAAP Diluted Shares (guidance context)103–104 FY estimate 102–103 Q3 guidance 111–112 Q4 guidance
Adjusted Free Cash Flow ($USD Millions)($0.8) $57.0 $84.9
Net Cash from Operating Activities ($USD Millions)$64.1 $92.4 $95.8

Guidance Changes

MetricPeriodPrevious GuidanceCurrent GuidanceChange
Revenue ($USD Millions)Q4 2025N/A$237–$238 Initiated
Adjusted EBITDA Margin %Q4 2025N/A38.5%–39.5% Initiated
Non-GAAP Diluted EPS ($USD)Q4 2025N/A$0.35–$0.40 Initiated
Fully Diluted Shares (Millions)Q4 2025N/A~111–112 Initiated
Revenue ($USD Millions)FY 2025$888–$892 $896–$897 Raised
Adjusted EBITDA Margin %FY 202539%–40% 40.7%–41.0% Raised
Adjusted Free Cash Flow Margin %FY 202517%–19% 18%–19% Raised
Non-GAAP Diluted EPS ($USD)FY 2025$2.05–$2.10 $2.00–$2.05 Lowered
Fully Diluted Shares (Millions)FY 2025~103–104 ~106–107 Raised

Earnings Call Themes & Trends

TopicPrevious Mentions (Q1 & Q2)Current Period (Q3 2025)Trend
AI platform and inference focusGenAI/Gradient launched; 5,000+ customers, 8,000+ agents; AMD GPU collaboration; Gradient GA; AI/ML revenue more than doubled y/y AI revenue more than doubled y/y for 5th straight quarter; added multi‑modal, function calling, guardrails; 19k agents created, 7k in production; AI Partner Program; strategic FAL.ai expansion Strengthening adoption and breadth
Large-contract momentumEarly traction with higher-spend cohorts ($100k+); NDR 99–100% Multiple eight‑figure committed contracts post‑quarter; $1M+ cohort ARR >$100M (+72% y/y) Step-change visibility and scale
Migrations from hyperscalersPartner Network Connect; identity and networking enhancements Steady increase in migration workloads; customers attracted by unified features (VPC, Direct Connect, cold storage, autoscaling DBaaS) Improving competitive wins
Capacity and margin trajectoryNew Atlanta DC brought online; Q1 adj FCF negative due to DC costs ~30MW DC capacity secured; early 2026 ramp to support growth; near-term gross margin lumpiness acknowledged Investment inflection; near-term COGS ramp
Financing/FCF metricsNew credit facility (May) Repurchased ~80% of 2026 converts; added equipment leasing; disclosed unlevered adj FCF metric; Q3 unlevered adj FCF $85M (37%) Balance-sheet strength; clearer cash metrics
NDR and cohortsNDR 100% (Q1), 99% (Q2); ARPU increases; cohort mix effects NDR 99%; management evaluating including resilient AI inference in NDR going forward Stabilizing; potential metric expansion

Management Commentary

  • CEO: “Our unified agentic cloud platform is emerging as a preferred destination for AI and digital native enterprises… Direct AI revenue more than doubled year over year for the fifth consecutive quarter… we are raising both our 2025 revenue and adjusted free cash flow margin guidance.” .
  • CEO: “The demand for our Agentic Cloud has exceeded our supply… our momentum gives us confidence to increase investment to deliver our 2027 18–20% growth targets a full year earlier in 2026.” .
  • CFO: “Q3 adjusted free cash flow was $85M, or 37% of revenue… we entered into an equipment financing arrangement… Absent leasing, adjusted free cash flow would have been 25% of revenue in Q3.” .
  • CFO: “We expect to comfortably deliver 18%–20% growth in 2026… while maintaining mid to high teens adjusted free cash flow margins.” .

Q&A Highlights

  • Eight‑figure contracts and AI/cohort overlap: contracts tend to start with AI inference and spill into core cloud; workloads are durable/predictable; capacity being expanded to support scale .
  • Hyperscaler migration drivers: not single incidents; cumulative dissatisfaction plus DO’s unified features (networking, cold storage, DB autoscaling, VPC, Direct Connect) attract sophisticated workloads .
  • Capacity ramp timing: most DC capacity online in H1 2026; early ramp with NRCs followed by smooth revenue scaling across the year .
  • Competition and strategy: customer-obsessed vs competitor-aware; focus on inference and agentic workflows; rapid co-invention of features with customers .
  • Metrics evolution: considering inclusion of resilient AI inference in NDR as workloads resemble traditional production cloud growth patterns .
  • Margin mechanics: gross margin lumpy at DC turn-on; normalizes to steady state as utilization grows; leasing clarifications and impact on free cash flow metrics .

Estimates Context

  • Q3 2025: revenue $229.6M vs consensus $226.6M*; non-GAAP diluted EPS $0.54 vs consensus $0.49*; company adjusted EBITDA $99.8M vs S&P EBITDA consensus $89.6* (definitions may differ). Values retrieved from S&P Global.*
  • Q4 2025: consensus revenue ~$237.7M* and EPS ~$0.381*, broadly aligned with company guidance ranges. Values retrieved from S&P Global.*
  • Coverage breadth: Q3 EPS estimates (13), revenue (11); Q4 EPS (14), revenue (12).*
  • Target price consensus mean: ~$53.33*. Values retrieved from S&P Global.*

Key Takeaways for Investors

  • Execution beat: revenue and EPS topped consensus with accelerating adjusted EBITDA and record incremental ARR; underlying non-GAAP profitability solid even after excluding one‑time GAAP gains .
  • Narrative shift: unified Agentic Cloud is resonating with larger AI-native and digital-native enterprises; eight‑figure commitments create visibility and potential RPO step‑ups in Q4 .
  • Guidance quality: FY25 revenue and margin raised; EPS trimmed on financing/share effects—watch mix between leverage, leasing, and margin durability .
  • Capacity investment: ~30MW DC and GPUs coming online in 2026; expect near-term gross margin/OpEx ramp, with management reiterating mid-to-high teens adj FCF margins at scale .
  • KPI momentum: NDR stabilized at 99%; high-spend cohorts expanding (26% of revenue) with strong y/y growth; AI revenue doubling streak continues .
  • Tactical watch items: Q4 contract ramps, data center NRC timing, interest expense from new credit facility and converts, and potential inclusion of AI inference in NDR—each could influence estimate revisions and valuation .
  • Product/customer flywheel: rapid feature delivery (cold storage, NFS, DB autoscaling, multimodal AI) plus ecosystem partnerships (FAL.ai) underpin competitive differentiation vs hyperscalers and neoclouds .

Additional Source Documents Reviewed

  • Q3 2025 8‑K press release and full financial statements .
  • Q3 2025 earnings call transcript (prepared remarks and Q&A) .
  • Q3 2025 press release (Business Wire) .
  • Q3 2025 ecosystem press releases: fal partnership expansion .
  • Prior quarter materials: Q2 2025 8‑K and press release for trend and prior guidance ; Q1 2025 press release .