DigitalOcean raises 2026 guidance after Q3 earnings beat | Magica
DigitalOcean raises outlook as growth accelerates and equipment obligations climb
Editorial Team
••📖7 min read
DigitalOcean raised its 2026 revenue forecast to $1.208–$1.211 billion after third-quarter sales grew 40%. Larger customers are driving the expansion, while falling operating margins and rising equipment obligations complicate the earnings beat.
Third-quarter revenue rose 40% to $321 million; adjusted earnings of $0.45 a share beat the $0.32 analyst estimate.
DigitalOcean now forecasts 2026 revenue of $1.208–$1.211 billion and adjusted earnings of $1.60–$1.62 a share.
Higher-spending customer groups account for more sales, while operating margins narrowed and equipment obligations increased.
DigitalOcean, a publicly traded provider of cloud computing services for building and running applications, raised its annual outlook on November 3 after third-quarter revenue grew 40%. The company built its business serving smaller businesses and startups; its push into AI now coincides with a growing share of sales from high-spending customers and larger infrastructure financing obligations.
Revenue for the quarter ended September 30 reached $321.2 million, up from $229.6 million a year earlier, according to the company's results. DigitalOcean said this was its fifth consecutive quarter of accelerating year-over-year growth. Growth had been 29% in the second quarter.
Non-GAAP diluted earnings of $0.45 a share exceeded the $0.32 analyst estimate in the earnings comparison. Revenue also exceeded the $306.5 million S&P analyst consensus cited in a separate analysis.
DigitalOcean now expects full-year revenue of $1.208–$1.211 billion, approximately 34% growth, and non-GAAP diluted earnings of $1.60–$1.62 a share. Its fourth-quarter forecast calls for $348–$351 million in revenue, growth of 44%–45%, and adjusted earnings of $0.30–$0.32 a share. The new annual revenue range is above the $1.170–$1.180 billion forecast issued in August; the midpoint rises by $34.5 million, or about 2.9%. Annual adjusted earnings guidance previously stood at $1.35–$1.40 a share. These are management forecasts.
The earnings beat does not mean profit increased from last year. Adjusted diluted earnings fell from $0.54 a share. Under generally accepted accounting principles, DigitalOcean recorded a $42.6 million net loss, or $0.37 a share, including a $57.1 million induced conversion expense associated with repurchasing part of its 2030 convertible notes.
The year-earlier GAAP comparison also benefited from a $48.4 million debt-extinguishment gain and a $68.1 million income tax benefit. Operating income, which precedes those items and the conversion expense, fell 27% to $33 million. Its operating margin narrowed to 10% from 20%; adjusted operating margin fell to 23% from 30%.
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Editorial Team
Adjusted EBITDA rose 45% to $144 million, but that measure excludes depreciation and amortization, which more than doubled to $75.1 million, as well as other costs.
Underlying delivery costs also rose faster than sales: cost of revenue increased from $92.7 million to $160.1 million. Dividing gross profit by revenue puts gross margin at about 50.1%, down from 59.6% a year earlier. The release does not break out AI product margins or establish a like-for-like cost advantage over competing clouds.
DigitalOcean’s company-reported revenue shares for its overlapping $100K+ and $1M+ customer categories, based on monthly spending classifications. Source: DigitalOcean second-quarter results.
Larger customers reshape the cloud business
DigitalOcean now describes its platform as integrating graphics processing units (GPUs) and conventional CPU infrastructure with inference—the use of trained models to produce outputs—data services and managed agent orchestration, and says it serves more than 680,000 customers globally.
The AI expansion has a history: in July 2023, it acquired Paperspace for $111 million in cash, a provider of GPU-based cloud infrastructure, to broaden its AI offerings for smaller businesses and startups. Paperspace already supported deploying large language models, fine-tuning foundation models and automating training.
DigitalOcean said its $100,000-plus customer category generated 41% of quarterly revenue, with revenue from that group up 133% year over year even though the customer count rose only 11%. Its $1 million-plus category accounted for 30% of revenue, with revenue up 273% and customer count up 96%. In the second quarter, the two groups represented 35% and 23% of revenue, respectively. The categories overlap and cannot be added together; these figures do not disclose individual customer concentration.
The company classifies customers using monthly spending thresholds, including more than $8,333 for the $100,000-plus category and more than $83,333 for the $1 million-plus category. Customer counts are averages of month-end counts, and customers can move between categories within a quarter. The company recast earlier periods after changing its classifications in late 2025.
The company reported $376 million in AI customer annual run-rate revenue, up 288%. That is not a measure solely of sales of AI products: it includes other cloud services bought by customers using at least one AI or machine-learning offering. DigitalOcean calculates annual run-rate revenue by multiplying quarterly revenue by four. Its overall $1.285 billion run rate therefore should not be read as a year of contracted subscription revenue.
DigitalOcean also reported launching Managed Agents and related runtime, learning and data services at its October 13 summit. Those launches occurred after the September quarter ended. The release separately disclosed $3.4 million in charges associated with winding down its legacy dedicated bare-metal CPU offering, showing that the platform expansion also involves retiring older services.
Managed agents are an established competitive category. Amazon Web Services, Amazon’s cloud computing business, made Agents for Amazon Bedrock generally available in November 2023, describing a managed service that executes multistep tasks across company systems and data sources. DigitalOcean is competing in managed orchestration as well as computing capacity. Its earnings release supplies no comparative performance or pricing test.
DigitalOcean said it delivered all three of its 2026 data centers on time or early and secured another 20 megawatts of capacity expected in 2028, bringing total committed capacity to approximately 180 megawatts. Committed future capacity is distinct from capacity already operating.
To support expansion, the company secured a $785 million equipment lease facility. That facility size is not the same as the outstanding balance of equipment obligations. The balance sheet shows a redistribution of financing rather than a uniform increase in debt:
Balance-sheet item
December 31, 2025
September 30, 2026
Debt
$1,295.8 million
$461.6 million
Finance leases and equipment financing obligations
$130.5 million
$923.6 million
Operating lease liabilities
$274.9 million
$666.6 million
Each row adds current and long-term balances. Debt plus finance leases and equipment financing obligations totaled about $1.39 billion at September 30, slightly below $1.43 billion at year-end; that comparison excludes operating leases, which increased substantially.
DigitalOcean said it repurchased approximately $472 million of 2030 convertible notes during the third quarter using a concurrent registered direct share offering. Separately, its nine-month cash-flow statement records $887.9 million in net proceeds from a follow-on public offering, alongside $500 million in term-loan principal repayments and $120 million in term-loan borrowing. Equity financing is a material part of how the company has funded its balance-sheet changes.
Quarterly operating cash flow rose to $161 million from $96 million, while adjusted free cash flow reached $130 million, a 41% margin. But DigitalOcean explicitly excludes equipment acquired through financing arrangements, finance leases and future contractual commitments from adjusted free cash flow. The figure consequently does not capture the full infrastructure funding burden. Cash and cash equivalents stood at $666 million at quarter-end, with another $178.6 million in marketable securities. Availability of power, GPUs and data-center capacity remains among the risks identified by the company.
DigitalOcean’s company-reported remaining performance obligations and the included portion expected to be recognized over the following 12 months. Source: DigitalOcean second-quarter results.
The next test is converting commitments into revenue
Management said it expects revenue growth of at least 60% in 2027, compared with its August expectation of more than 50%. Delivering that would require another acceleration while the company expands capacity and manages its financing obligations.
Contracted future services offer one measure to watch, with qualifications. Remaining performance obligations reached $800 million at September 30, far above the recast $61 million year-earlier figure. Yet they declined from $894 million at June 30. Of the September balance, DigitalOcean expects to recognize $345 million over the next 12 months, compared with $366 million in the equivalent forward window at June 30. In August, it had reported its first nine-figure annual customer commitments and an increase in weighted average contract life from 1.6 years to more than three years. Those longer commitments help explain why backlog and current sales need separate readings.
DigitalOcean cautions that these obligations depend on contract timing, duration and consumption; moving customers from usage-based to commitment-based agreements can lift the total without incremental revenue growth. The next evidence needed is whether spending from those customer groups sustains the higher revenue forecast, how quickly contracted services become recognized sales, and whether gross and operating margins stabilize as the added capacity enters use.
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