DigitalOcean (DOCN) Q2 2025: AI Revenue Surges 100%, Setting New ARR High
DigitalOcean delivered a standout Q2 with AI revenue more than doubling year over year, driving the highest incremental annual recurring revenue (ARR) in over three years. The company’s “twin stack” approach—integrating both core cloud and agentic AI platforms—continues to attract larger digital native enterprises and secure multi-year deals, prompting management to raise full-year guidance. Momentum in both product innovation and customer migrations signals a structurally stronger growth trajectory into 2026.
Summary
- AI-Driven ARR Breakout: Triple-digit AI revenue growth fueled record incremental ARR, reflecting robust demand for inferencing workloads.
- Enterprise Migration Acceleration: Large customers are increasingly shifting workloads from hyperscalers, validating DigitalOcean’s differentiated platform.
- Profitability and Guidance Upward: Strong free cash flow and raised outlook underscore confidence in sustainable growth and margin discipline.
Performance Analysis
DigitalOcean’s Q2 showcased a sharp inflection in both top-line and operational metrics, with revenue advancing 14% year over year to $290 million and adjusted free cash flow margin reaching 26%. The standout driver was AI/ML revenue, which grew north of 100% YoY, demonstrating tangible traction for the company’s Gradient AI Agentic Cloud platform. This AI momentum contributed to a record $32 million in incremental ARR, the highest since Q4 2022 and the strongest organic ARR in over three years. Scalar Plus customers—those with an annual run rate above $100,000—grew 35% YoY and now comprise 24% of total revenue, signaling increasing penetration into the digital native enterprise segment.
Profitability remained healthy, with gross margin at 60% and adjusted EBITDA margin at 41%. Notably, DigitalOcean’s core cloud business also accelerated, with new customer cohorts outperforming prior years and migration initiatives bringing in higher-spend clients. The company executed $20 million in share repurchases while maintaining a strong balance sheet, ending the quarter with $388 million in cash. Management’s raised guidance for both revenue and free cash flow margin reflects growing confidence in demand visibility and operational leverage.
- AI and Core Cloud Synergy: Both segments contributed meaningfully to ARR growth, with AI now a material revenue driver.
- Migration Motion Gains Steam: 76 workload migrations from hyperscalers were completed, indicating growing customer confidence in DigitalOcean’s platform.
- Large Deal Momentum: Multi-year, high-value contracts are increasing, as seen in the rising remaining performance obligation (RPO) balance.
Net dollar retention (NDR) held at 99%, reflecting a stable yet lagging metric due to the influx of new customers and the delayed impact of AI revenue on this calculation. The company’s ability to raise guidance while maintaining margin discipline signals a powerful combination of growth and operational rigor.
Executive Commentary
"We delivered continued product innovation and both drove improved performance in our industry-leading product-led growth engine and continued to get traction with our direct sales go-to-market motion, especially for AI."
Patty Srinivasan, Chief Executive Officer
"We are able to increase our free cash flow margin at the same time we are accelerating our revenue growth outlook, which speaks to the confidence we have in our ability to maintain attractive free cash flow margins while we accelerate our top-line growth."
Matt Steinfort, Chief Financial Officer
Strategic Positioning
1. Twin Stack Cloud Differentiation
DigitalOcean’s “twin stack” model—integrating a full-featured general-purpose cloud with a purpose-built agentic AI platform—sets it apart from both hyperscalers and niche AI clouds. This dual approach enables customers to run sophisticated AI-powered applications and traditional workloads side by side, driving both cross-sell and retention. The platform’s completeness is a key reason why larger AI-native enterprises are choosing DigitalOcean for inferencing at scale.
2. Product-Led Growth and Migration Engine
Product innovation remains central, with over 60 new features launched this quarter and rapid adoption among top customers. The addition of a dedicated migrations team has facilitated a surge in workload transfers from competitors, further expanding DigitalOcean’s footprint among digital native enterprises.
3. AI Infrastructure and Platform Expansion
The Gradient AI Agentic Cloud now spans GPU infrastructure, a platform for developing and deploying AI agents, and commercial AI-powered applications. New inference-optimized GPU droplets and partnerships with AMD (e.g., powering AMD Developer Cloud) are attracting marquee customers and enabling rapid deployment of AI workloads.
4. Enterprise and Multi-Year Contracts
Large, multi-year deals are becoming more common, as seen in the increased RPO and direct sales motion. While still a smaller portion of overall business, these contracts provide greater revenue visibility and validate DigitalOcean’s platform for high-value enterprise use cases.
5. Capital Allocation and Balance Sheet Focus
Management is prioritizing organic growth and debt management over share repurchases in the near term, with a clear plan to address the 2026 convertible debt and maintain financial flexibility for continued investment in growth and innovation.
Key Considerations
This quarter marks a structural step-change for DigitalOcean, as AI revenue becomes a material driver and the company demonstrates its ability to attract and retain larger enterprise customers. Investors should focus on the durability of ARR growth, the sustainability of high free cash flow margins, and the evolving mix of AI versus core cloud revenue.
Key Considerations:
- AI Revenue Quality: Most AI revenue is currently infrastructure-driven, but higher-margin platform and agent layers are gaining adoption, promising future margin upside.
- Lagging NDR Metric: Net dollar retention remains below 100% due to the delayed inclusion of AI customers and the nature of new cohort ramp, but is expected to improve as AI workloads mature.
- Capacity and Pricing Dynamics: GPU utilization is robust, with price/performance now a greater customer focus than raw throughput, allowing for flexibility in resource allocation.
- Large Deal Volatility: While multi-year contracts boost visibility, management cautions that deal flow may be lumpy as both DigitalOcean and its customers adapt to new AI scaling patterns.
Risks
Material risks include continued capacity constraints in GPU supply, the unpredictability of large AI deal ramps, and potential margin pressure if AI infrastructure outpaces higher-margin platform adoption. The evolving customer mix and the need to maintain product innovation velocity also present execution risks, particularly as DigitalOcean scales its enterprise sales motion and navigates competitive responses from hyperscalers and specialized AI clouds.
Forward Outlook
For Q3 2025, DigitalOcean guided to:
- Revenue of $226 to $227 million (approximately 14.1% YoY growth at midpoint)
- Adjusted EBITDA margin of 39% to 40%
- Non-GAAP diluted EPS of $0.45 to $0.50
For full-year 2025, management raised guidance:
- Revenue of $888 to $892 million (14% YoY growth at midpoint)
- Adjusted EBITDA margin of 39% to 40%
- Adjusted free cash flow margin of 17% to 19%
- Non-GAAP diluted EPS of $2.05 to $2.10
Management cited robust AI demand, stronger new customer cohorts, and growing migration activity as drivers of increased confidence, while emphasizing a conservative approach to forecasting large deals and continued focus on maintaining margin discipline.
- Visibility into customer usage patterns and AI pipeline supports raised outlook
- Large deal ramp remains a potential source of upside, but is not fully reflected in guidance
Takeaways
DigitalOcean’s Q2 marks a decisive pivot toward AI-led growth and larger enterprise engagement.
- AI Inflection: AI revenue is now a meaningful and rapidly growing part of the business, with infrastructure pull-through likely to accelerate core cloud adoption.
- Enterprise Upside: Migration and multi-year deal momentum validate the platform’s appeal to higher-value customers, supporting improved revenue visibility.
- Margin and Growth Balance: Raised guidance for both revenue and free cash flow margin signals operational discipline and confidence in demand durability.
Conclusion
DigitalOcean’s Q2 results demonstrate the early success of its twin stack strategy, with AI revenue growth and enterprise migrations driving record ARR and prompting a guidance raise. The company is well positioned to sustain growth as AI adoption matures and larger customers scale their workloads on the platform.
Industry Read-Through
The acceleration in AI infrastructure demand and the shift toward inferencing workloads highlight a broader trend across cloud providers: differentiated stacks that combine general-purpose and AI-native capabilities are gaining favor among digital native enterprises. DigitalOcean’s migration success and growing multi-year contracts suggest that customers are increasingly seeking alternatives to hyperscalers for specialized AI workloads, especially where price/performance and ease of use are paramount. Competitors in both the cloud and AI infrastructure space should note the rising importance of platform-level integration and the operational leverage possible when AI and core cloud services are tightly coupled.