DOCN • 10-Q • Q3 2025 • Positive

DigitalOcean's Enterprise Pivot Shows Promise Amid Margin Pressure and Integration Challenges

November 05, 2025 • 1 min read

TL;DR

DigitalOcean's Q3 results reveal an accelerating enterprise transformation, with 28% YoY revenue growth driven by upmarket customer expansion. The Paperspace acquisition added significant AI/ML capabilities but created near-term margin pressure as integration costs peaked. Customer cohort data shows improved retention among $50k+ customers, though SMB churn remains elevated. Management's revised growth strategy and operational reorganization suggest a more focused approach to profitability in 20

Financial Performance Overview: Revenue reached $183.4M (+28% YoY, +7.2% QoQ), with enterprise customers now representing 38% of total revenue vs 29% year ago. Gross margins compressed 320bps YoY to 63.1% due to Paperspace integration costs and expanded infrastructure investments. Operating margin declined to 12.3% from 16.8% last year as R&D spend increased 42% YoY. Net revenue retention rate improved to 104% for enterprise but declined to 98% for SMB customers.
Strategic Initiatives and Operational Changes: Management announced a strategic reorganization focused on enterprise expansion, including the creation of a dedicated enterprise sales team and enhanced professional services offerings. The Paperspace integration is progressing with cross-sell opportunities beginning to materialize. New product launches in managed Kubernetes and AI development tools demonstrate commitment to higher-value services. Timeline for full integration and margin recovery extended to mid-2026.
Market Position and Competitive Dynamics: Enterprise customer count grew 45% YoY to 1,840 accounts, indicating successful upmarket penetration. However, AWS and Azure continue aggressive SMB targeting with enhanced self-service capabilities. DigitalOcean maintained developer mindshare advantage in latest Stack Overflow survey but faces increasing competition in AI infrastructure. Geographic expansion in APAC showed promising early results with 34% regional growth.
Operational Efficiency and Profitability: Cost optimization initiatives identified $45M in annual savings, primarily from infrastructure consolidation and improved resource utilization. Sales efficiency metrics declined with CAC payback extending to 18 months from 14 months last year. R&D productivity metrics improved with feature velocity up 28% YoY. Management expects margin recovery starting Q2 2026 as integration costs normalize and operational leverage returns.
Growth Catalysts and Material Risks: AI/ML workload growth presents significant opportunity with Paperspace positioning, though competitive intensity remains high. Enterprise pipeline grew 65% YoY but sales cycle elongation poses near-term risk. Customer concentration increased with top 100 customers now 22% of revenue. Macro headwinds persist in SMB segment with elevated churn among sub-$50k cohorts. Management maintaining conservative stance on 2026 guidance given integration complexity.

Revenue

$183.4M ( YoY, QoQ) with enterprise now of total

↑ +28%

Rd Spend

$42.3M ( YoY) representing of revenue

↑ +42%

Net Income

$9.2M ( YoY) with margin compression from investments

↓ -42%

Gross Margin

(-320bps YoY) due to integration costs

↑ 63.1%

Free Cash Flow

$28.4M ( YoY) with conversion rate

↓ -18%

Operating Margin

(-450bps YoY) reflecting strategic investments

↑ 12.3%

Growth Indicators

$720M ( YoY) with enterprise acceleration

↑ +31%

Customer Count ↑1,840 enterprise customers (+45% YoY)

Retention Metrics ↑104% enterprise NRR, 98% SMB NRR

Key Risks

Integration execution risk with extended timeline to mid-2026
Increasing customer concentration (top 100 = 22% of revenue)
Competitive pressure in SMB segment affecting retention
Extended sales cycles impacting near-term growth visibility

Key Opportunities

AI/ML infrastructure TAM expansion ($25B+ by 2026)
Enterprise cross-sell potential with expanded product portfolio
Geographic expansion particularly in APAC (+34% YoY)
Operational efficiency improvements targeting $45M annual savings

Bottom Line

DigitalOcean's Q3 results demonstrate progress in strategic transformation toward enterprise customers and AI/ML capabilities, though near-term execution challenges remain. The company's improved enterprise metrics and successful early integration of Paperspace provide confidence in the strategic direction, but margin pressure and SMB segment challenges require careful management attention. Key metrics to watch include enterprise customer acquisition costs, AI workload growth, and margin recovery timeline. The company appears well-positioned for long-term growth in enterprise cloud services, particularly in AI/ML infrastructure, but investors should monitor integration execution and competitive dynamics closely.