DigitalOcean Holdings Inc. today posted better-than-expected financial results for the third quarter and raised its full-year sales guidance.

The solid earnings weren’t enough to impress investors, who sent the cloud provider’s shares tumbling more than 13%. It’s unclear what caused the selloff, though its fourth-quarter outlook fell a bit short of some estimates. Wall Street also might be concerned about DigitalOcean’s user count and net dollar retention rate, which both missed the consensus estimate by a hair.

DigitalOcean operates an infrastructure-as-a-service platform of the same name that competes with the major public clouds. The platform’s simple interface and competitive prices, which start at under $5 per month for basic compute instances, have made it popular among developers. DigitalOcean also provides storage capacity, managed databases and an array of related offerings.

The company’s cloud platform is powered by 16 in-house data centers. They’re linked together by a private network that reduces the need to move user traffic over public internet infrastructure, which improves connection reliability. When a network link experiences technical issues, an automated routing mechanism redirects the flow of data to avoid outages.

DigitalOcean’s revenue grew 12% year-over-year, to $198 million in the third quarter. The company’s customer base stood at 638,000 users, slightly missing the consensus estimate, and its net dollar retention rate fell short as well. But those misses were offset by a 11% increase in average revenue per customer, which helped DigitalOcean exceed analysts’ sales forecast for the quarter.

About 18,000 of the company’s customers spend more than $500 on its platform per month. According to DigitalOcean, those users accounted for more than half of its revenue as of September.

DigitalOcean is investing in artificial intelligence to maintain its revenue growth. During the third quarter, the company launched a new series of instances equipped with Nvidia Corp.’s H100 graphics processing units. Customers can equip each instance with up to eight chips.

DigitalOcean also introduced a suite of AI development tools called the GenAI Platform. It provides access to a set of open-source large language models, as well as features for optimizing those models to perform specific tasks. A RAG, or retrieval-augmented generation, tool enables the LLMs to incorporate data from external sources into their prompt responses.

“We continued to accelerate innovation, releasing 42 new product features across our core Cloud and AI platforms in Q3, that directly meet the needs of our larger customers,” said DigitalOcean Chief Executive Officer Paddy Srinivasan.

DigitalOcean’s revenue momentum helped boost its profitability. The company posted adjusted EBITDA, or earnings before interest, taxes, depreciation and amortization, of $87 million, up 14% from a year earlier. That translated to adjusted earnings of $0.52 per share, well above the $0.4 that analysts had expected.

DigitalOcean expects to end the fiscal year with adjusted earnings of $1.70 to $1.75 per share on between $775 million and $777 million in revenue. That’s up from the $770 million to $775 million it forecasted in August. 

Photo: DigitalOcean