On August 4, DigitalOcean (NYSE:DOCN) reported second-quarter results that make its AI-cloud pitch look like more than a slide deck. Revenue climbed 29% year over year to $281 million, the fastest pace the company has posted in years, and management used the report to raise its full-year outlook. The number that jumps off the page is remaining performance obligation, which swelled to $894 million from just $71 million a year earlier. That kind of jump usually means customers are locking in for years, not just renewing month to month.
Customers Are Signing On For Years Now
The clearest evidence of that shift sits in AI Customer ARR, which grew 212% to $234 million. Management also disclosed that 85% of that AI revenue now comes from inference and core cloud workloads rather than bare metal, a mix that suggests the business is moving up the stack rather than just renting out servers. Early customers of the newly launched Inference Engine pushed their token consumption up roughly 30 times over just 60 days, an adoption curve most cloud vendors would envy. DigitalOcean also signed its first nine-figure annual commitments during the quarter, which stretched the weighted average contract life from 1.6 years to more than 3.
The company added a record $93 million of incremental ARR, up 191% from a year ago, and its largest customer tiers are growing fastest: accounts spending $500,000 or more grew 35%, and revenue from $1 million-plus customers grew 214%. DigitalOcean also locked in another 20 megawatts of data center capacity for 2027 and 2028, bringing total committed capacity to about 155 megawatts, and picked up a spot in the Russell 1000 Index along the way.
Profit Growth Isn’t Keeping Up
The strain shows up below the revenue line. Net income attributable to common stockholders fell 4% to $35 million, and the net income margin slipped to 13%. Operating income dropped 18% to $29 million, pushing operating margin down to 10%, even as adjusted EBITDA margin held near 40%. Cash generation tells a similar story. Net cash from operating activities rose in dollar terms to $110 million, but the margin on that cash narrowed to 39% from 42% a year earlier, and adjusted free cash flow margin fell to 22% from 26%.
DigitalOcean also used the quarter to repurchase roughly $472 million of its convertible notes due 2030, funding the buyback with a concurrent stock offering intended to retire about 500,000 shares. That move trims future debt risk, but it adds shares to a diluted count already expected to climb toward 123 million by year-end.
Wall Street Sentiment Is Turning Cautiously Bullish
Hedge fund ownership rose to 53 funds from 47 last quarter, a modest but real uptick in institutional interest. Short sellers have not backed off, with 8.74% of the float sold short, enough to reflect a genuine skeptical camp rather than background noise. The stock’s forward P/E of 59.17, as of September 4, shows the market is already pricing in a lot of that acceleration DigitalOcean just delivered. Rising fund ownership alongside stubborn short interest and a rich multiple is the market talking out of both sides of its mouth at once.
Growth Is Real, But So Is The Cost
DigitalOcean’s quarter leaves two things true at the same time. Revenue is accelerating, RPO is exploding, and the company’s biggest customers are committing for years instead of months. But net income, operating margin, and free cash flow margin all moved in the wrong direction even as the top line sped up. For the bulls, the case rests on inference workloads and nine-figure contracts eventually pulling margins back up as they mature.
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