DigitalOcean (DOCN) Q3 2025: Eight-Figure AI Contracts Propel 72% Growth in Largest Customer Cohort

2025-11-05 | By EarningsIQ Research

DigitalOcean’s unified agentic cloud strategy delivered a record quarter, marked by surging AI-native demand and the signing of multiple eight-figure committed contracts. Customer expansion and product innovation are driving accelerated growth, with management raising both near- and medium-term outlooks and pulling forward its 2027 revenue targets by a full year. Execution focus now shifts to scaling capacity and sustaining momentum in a rapidly evolving competitive landscape.

Summary

• AI-Native Demand Surges: Eight-figure contracts and inference workloads are anchoring durable, high-visibility expansion.
• Unified Cloud Drives Upsell: Largest customers are scaling rapidly, with cross-platform adoption blurring AI and core cloud boundaries.
• Capacity Investments Accelerate: Management is pulling forward growth targets, betting on continued customer ramp and infrastructure buildout.

Performance Analysis

DigitalOcean posted its strongest organic incremental ARR in company history, propelled by a 16% YoY revenue increase and accelerating adoption of its agentic cloud platform. The company’s largest customers, defined as those with over $1 million in annualized run rate, grew a remarkable 72% YoY and now represent a growing share of the revenue base. AI-native revenue more than doubled for the fifth consecutive quarter, and general-purpose cloud products also saw their highest incremental ARR since Q2 2022, signaling balanced demand across the portfolio.

Profitability metrics outperformed guidance, with adjusted EBITDA and adjusted free cash flow margins both exceeding expectations. Equipment leasing was introduced to better match capital outlays to revenue, supporting a robust 21% trailing 12-month adjusted free cash flow margin. The company’s balance sheet was further fortified by repurchasing most of its 2026 convertible note, using a mix of new debt, existing credit, and cash. Customer expansion, new product adoption, and the successful shift to committed contracts with AI and digital native enterprises are driving visibility and confidence in further growth acceleration.

• AI Revenue Momentum: AI-related revenue has doubled YoY for five consecutive quarters, now becoming a material growth lever.
• Customer Upsell Drives Growth: Customers with $100K+ ARR grew 41% YoY and now account for 26% of total revenue.
• Product Innovation Impact: Over 35% of large customers adopted new features, with measurable acceleration in their growth rates post-adoption.

The combination of direct sales, product-led growth, and new AI-native customer wins is reshaping the revenue mix and supporting a more predictable, durable growth trajectory.

Executive Commentary

Strategic Positioning

1. Unified Agentic Cloud as Differentiator

DigitalOcean’s agentic cloud platform, which unifies AI infrastructure, general-purpose compute, and orchestration, is now the centerpiece of its growth strategy. The company is intentionally blurring the line between traditional cloud and AI, as most large customers leverage both sides of the platform. This unified approach is proving especially attractive to AI-native firms running inference workloads, as well as established digital native enterprises seeking to consolidate infrastructure and scale globally.

2. Direct Sales Motion Targets High-Value Contracts

The addition of a focused direct sales effort complements the company’s historically product-led growth engine. This shift is translating into larger committed contracts, including multiple eight-figure deals signed post-quarter. These contracts are primarily with AI-native and digital native customers, increasing revenue visibility and supporting long-term expansion. The company is also seeing migration from hyperscalers, aided by recent outages at larger competitors and the rollout of advanced networking and storage features.

3. Capacity Buildout and Capital Allocation

To meet surging demand, DigitalOcean is aggressively expanding its data center and GPU footprint, securing 30 megawatts of incremental capacity for 2026 and beyond. The introduction of equipment leasing provides capital flexibility, while the repurchase of convertible notes has reduced near-term debt overhang. Management is prioritizing disciplined investment, only scaling where durable, differentiated revenue is likely, and maintaining strong free cash flow margins even as operating expenses rise with new capacity.

4. Product Innovation Anchors Retention and Upsell

Rapid feature releases—such as cold storage, storage autoscaling, and expanded AI model support—are driving measurable increases in customer retention and expansion, especially among large accounts. The company’s AI Partner Program further amplifies its ecosystem, making DigitalOcean a go-to platform for startups and enterprises seeking simplicity and scalability without hyperscale complexity.

Key Considerations

DigitalOcean’s Q3 signals a decisive inflection in its growth trajectory, with durable AI-native demand, a unified product offering, and a more predictable, contract-driven revenue base. Investors should weigh the following:

Key Considerations:

• AI-Native Inference Workloads: The shift toward inference, rather than training, workloads is creating more predictable, sticky revenue streams, reducing historical volatility in AI customer usage.
• Visibility from Committed Contracts: Multiple eight-figure, multi-year deals signed post-quarter materially increase revenue backlog (RPO) and support confidence in accelerated growth targets.
• Migration from Hyperscalers: Recent outages at AWS and Azure, combined with DigitalOcean’s enhanced networking and storage, are catalyzing workload migration from larger cloud providers.
• Capital Flexibility and Balance Sheet Strength: The introduction of equipment leasing and convertible note repurchases positions the company to invest aggressively without overextending leverage.
• Customer Mix and NDR Dynamics: While large customer cohorts are expanding rapidly, the overall net dollar retention (NDR) is still weighted down by churn in the long-tail of small, experimental customers—a dynamic management is considering addressing in future metric disclosures.

Risks

Execution risk remains high as DigitalOcean ramps new data center capacity and GPU infrastructure to meet demand from committed contracts. Competitive intensity is rising, especially from hyperscalers and emerging “neoclouds” with overlapping AI and cloud offerings. Customer concentration risk could grow as large contracts become a bigger share of revenue, and any delays in capacity deployment could impact growth momentum. Capital allocation discipline will be tested as the company balances aggressive investment with margin preservation.

Forward Outlook

For Q4 2025, DigitalOcean guided to:

• Revenue of $237 to $238 million, implying 16% YoY growth
• Adjusted EBITDA margin of 38.5% to 39.5%
• Non-GAAP diluted EPS of $0.35 to $0.40

For full-year 2025, management raised guidance:

• Revenue of $896 to $897 million, up 15% YoY
• Adjusted EBITDA margin of approximately 41%
• Adjusted free cash flow margin of 18% to 19%
• Non-GAAP diluted EPS of $2.00 to $2.05

Management highlighted:

• 2026 revenue growth of 18% to 20%—achieving its 2027 target a year early
• High 30s to 40% adjusted EBITDA margins and mid- to high-teens free cash flow margins, even as new capacity comes online

Takeaways

DigitalOcean’s Q3 marks a pivotal transition from a product-led, developer-centric cloud to a platform of choice for scaling AI-native and digital native enterprises.

• AI and Cloud Convergence: The agentic cloud vision is validated by rapid customer expansion, with AI-native and core cloud workloads increasingly intertwined.
• Contracted Revenue Base: Eight-figure, multi-year deals provide visibility and durability, reducing historical volatility tied to experimental AI projects.
• Execution Watchpoints: Investors should track the pace of capacity buildout, customer ramp, and evolving NDR disclosures as the business mix shifts toward larger, more predictable accounts.

Conclusion

DigitalOcean delivered a breakout Q3, signing major AI-native contracts and raising growth targets as its unified agentic cloud gains traction. The company’s ability to scale capacity and maintain disciplined capital allocation will determine the sustainability of this inflection. Investors should monitor execution on large deals and the evolving competitive landscape as DigitalOcean seeks to cement its leadership among next-generation cloud providers.

Industry Read-Through

DigitalOcean’s results underscore a broader shift in the cloud infrastructure market, where AI-native workloads—especially inference—are driving a new wave of durable, high-visibility demand. The move toward unified platforms that blend AI and general-purpose compute is becoming table stakes, with product innovation and ecosystem partnerships critical for differentiation. Hyperscalers face rising migration risk if they cannot match the agility and customer-centricity of focused players. Investors in cloud, data center, and AI infrastructure should watch for similar patterns of committed contracts, rapid product cycles, and the blurring of AI and traditional cloud boundaries.

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