Built by Claude FableDOCN | Financial Trends: 2/10
Bottom line: Revenue growth is accelerating hard (11.9% in Q1'24 to 28.6% in Q2'26, guided 32% to 34% for Q3'26). That is the only rubric box DOCN checks. Margins are compressing (GAAP gross margin down 487 bps YoY, GAAP operating margin down 584 bps YoY). GAAP operating income has now declined YoY for two straight quarters. Reported FCF has collapsed from about $96M TTM a year ago to $15M TTM. GAAP diluted share count rose 25.8% YoY after the $888M Q1'26 equity raise. The company is trading near-term cash flow and shareholders' share of the business for capacity-led growth, and the rubric scores that harshly.
Source note (read first): Daloopa is NOT connected in this session (OAuth not authorized; see company_resolver.json), so no daloopa.com/src/{id} citations are possible. Every reported figure below comes from SEC-derived FMP /stable statements: income-statement, cash-flow-statement and balance-sheet-statement, quarterly and annual, pulled 2026-10-16. Raw files are in dim1_data/ in this run folder, and they are cited as [FMP-IS], [FMP-CF], [FMP-BS]. Company-defined non-GAAP metrics (adjusted EBITDA, adjusted operating income, adjusted FCF, ARR) come from the earnings call transcripts in transcripts/, cited as [T-FYyyyyQn]. Before this score is published, re-run it against Daloopa once the connector is authorized.
Quarterly metrics (8+ quarters)
| Quarter | Revenue ($M) | Rev YoY | GAAP GM | GM YoY (bps) | GAAP Op Inc ($M) | GAAP OM | Adj. Op Margin* | Adj. EBITDA M | FCF ($M) | FCF M | Diluted Shs (M) | Shs YoY |
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Q1'24 | 184.7 | 11.9% | 59.1% | +261 | 11.5 | 6.2% | 18.6% | ~40% | 21.5 | 11.6% | 93.8 | -1.9% |
| Q2'24 | 192.5 | 13.3% | 59.3% | -103 | 22.3 | 11.6% | 22.9% | ~42% | 39.5 | 20.5% | 93.8 | -2.5% |
| Q3'24 | 198.5 | 12.1% | 60.2% | -10 | 24.6 | 12.4% | 24.0% | 44% | 13.6 | 6.8% | 102.6 | -0.1% |
| Q4'24 | 204.9 | 13.3% | 57.1% | -173 | 32.5 | 15.9% | 27.0% | 42% | 24.2 | 11.8% | 94.4 | +2.6% |
| Q1'25 | 210.7 | 14.1% | 61.4% | +235 | 37.6 | 17.9% | 27.1% | 41% | -0.9 | -0.4% | 102.3 | +9.1% |
| Q2'25 | 218.7 | 13.6% | 59.9% | +57 | 35.6 | 16.3% | 25.9% | 41% | 59.2 | 27.1% | 100.6 | +7.2% |
| Q3'25 | 229.6 | 15.7% | 59.6% | -55 | 44.9 | 19.6% | 28.2% | 43% | 57.3 | 24.9% | 103.0 | +0.4% |
| Q4'25 | 242.4 | 18.3% | 58.7% | +156 | 38.8 | 16.0% | 24.3% | 41% | -108.1 | -44.6% | 105.3 | +11.6% |
| Q1'26 | 257.9 | 22.4% | 56.1% | -532 | 36.6 | 14.2% | 22.9% (co: 25%) | 41% | 2.2 | 0.8% | 111.9 | +9.4% |
| Q2'26 | 281.2 | 28.6% | 55.0% | -487 | 29.4 | 10.4% | 30.1% (co: 24%) | 40% | 63.5 | 22.6% | 126.5 | +25.8% |
| Trend | Accelerating | Compressing | Declining YoY 2 qtrs | Compressing | Mixed | Flat to down | Declining (TTM) | Diluting |
Sources: revenue, gross profit, operating income, diluted weighted shares [FMP-IS]; FCF = operating cash flow minus capex [FMP-CF]; adjusted EBITDA margin [T-FY2024Q3] through [T-FY2026Q2]. Q1'24 and Q2'24 adjusted EBITDA are backed out from the "100 bps higher/lower than prior year" comments in [T-FY2025Q1] and [T-FY2025Q2]. *Adj. Op Margin = GAAP operating income plus SBC [FMP-CF], used as a proxy because DOCN only started disclosing adjusted operating income in Q1'26. "co:" is the company-reported figure [T-FY2026Q1], [T-FY2026Q2]. The Q2'26 proxy is inflated by an SBC spike to $55.2M (vs about $20M per quarter run-rate), so use the company's 24% figure.
Revenue YoY rate comparison (8 comparable quarters):
| Pair | YoY earlier | YoY later | Change |
|---|---|---|---|
| Q3'24 -> Q3'25 | 12.1% | 15.7% | +360 bps |
| Q4'24 -> Q4'25 | 13.3% | 18.3% | +500 bps |
| Q1'25 -> Q1'26 | 14.1% | 22.4% | +830 bps |
| Q2'25 -> Q2'26 | 13.6% | 28.6% | +1,500 bps |
Every pair is accelerating, and the size of the step-up is widening. Q3'26 guidance is $304M to $307M, or 32% to 34% [T-FY2026Q2]. FY26 is guided to about 30.5% with a Q4 exit at 35% or more, and management calls FY27 "50% plus" [T-FY2026Q2].
Company KPIs (transcripts):
| Quarter | ARR ($M) | Incremental ARR ($M) | AI customer ARR ($M, YoY) | $1M+ cust. ARR YoY | NDR | Adj. FCF ($M, margin) |
|---|---|---|---|---|---|---|
| Q3'24 | 798 | 17 | n/a (~200%) | n/a | 97% | 26 (13%) |
| Q4'24 | 820 | 26 | n/a (160%+) | n/a | 99% | 37 (18%) |
| Q1'25 | 843 | 23 | n/a (160%+) | n/a | 100% | ~0 |
| Q2'25 | 875 | 32 | n/a | 92% | n/a | 57 (26%) |
| Q3'25 | 919 | 44 | n/a | 72% | 99% | 85 (37%) |
| Q4'25 | ~970 | 51 | 120 (150%) | 123% | n/a | ~26 (11%, derived from TTM $168M) |
| Q1'26 | ~1,032 | 62 | 170 (221%) | 179% | n/a | ~3 (1%, derived from TTM $171M) |
| Q2'26 | ~1,125 | 93 | 234 (212%) | 214% | n/a | ~61 (22%, derived from TTM $175M) |
Sources: [T-FY2024Q3] through [T-FY2026Q2]. ARR for Q4'25 to Q2'26 is derived: ARR = quarterly revenue x 4, per the methodology change in [T-FY2024Q4]. Why growth is accelerating: the acceleration comes from AI inference. Inference services grew about 800% YoY and are now over 70% of AI customer ARR, and higher-spend cohorts ($100K+, $500K+, $1M+) are growing 98%, 160% and 214% [T-FY2026Q2]. Capacity is the binding input: 135 MW is committed after adding 60 MW in Q1'26 [T-FY2026Q1]. Why margins are compressing: new data center and GPU capacity carries start-up cost before revenue ramps, and AI revenue carries a lower gross margin. Management has explicitly moved investors off gross margin and onto operating margin [T-FY2026Q1]. The cash flow picture is worse than it looks, because company "adjusted FCF" is unlevered and leaves out equipment-finance principal. Finance lease obligations are already $578M on the balance sheet [FMP-BS, Q2'26]. FY26 adjusted FCF margin is guided to 9% to 12%, down from 19% in FY25, and FCF after lease principal is guided only "slightly positive" [T-FY2026Q1].
Annual metrics (5 years)
| FY | Revenue ($M) | Rev YoY | GAAP GM | GAAP Op Inc ($M) | GAAP OM | Adj. EBITDA M (co) | CFO ($M) | Capex ($M) | FCF ($M) | FCF M | Diluted EPS | Diluted Shs (M) | Total Debt ($M) |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| FY2021 | 428.6 | 34.6% | 60.2% | -11.2 | -2.6% | n/a | 133.1 | 109.1 | 24.0 | 5.6% | -0.18 | 107.2 | 1,463 |
| FY2022 | 576.3 | 34.5% | 63.2% | -25.7 | -4.5% | n/a | 195.2 | 120.2 | 74.9 | 13.0% | -0.24 | 100.8 | 1,635 |
| FY2023 | 692.9 | 20.2% | 59.0% | 11.9 | 1.7% | n/a | 234.9 | 124.8 | 110.1 | 15.9% | 0.20 | 96.4 | 1,656 |
| FY2024 | 780.6 | 12.7% | 59.7% | 91.0 | 11.7% | 42% | 282.7 | 186.5 | 96.2 | 12.3% | 0.89 | 94.5 | 1,695 |
| FY2025 | 901.4 | 15.5% | 59.9% | 157.0 | 17.4% | 42% | 309.6 | 268.5 | 41.1 | 4.6% | 2.52 | 105.3 | 731 |
| Trend | Decel then re-accel | Flat (peak FY22 63.2%) | Rising through FY25 | +2,000 bps FY22 to FY25 | Flat | Rising | Rising fast | Falling since FY23 | -1,130 bps from peak | Rising (FY25 has one-time gains) | Up since FY24 | Down (refi) |
Sources: [FMP-IS], [FMP-CF], [FMP-BS] annual; adjusted EBITDA margin [T-FY2024Q4], [T-FY2025Q4]. FY25 diluted EPS of $2.52 and net income of $259M include non-operating gains from the 2026 convertible repurchase. Non-GAAP EPS was $2.12 (+10%) [T-FY2025Q4].
Margin moves from peak/trough
- GAAP gross margin: 55.0% in Q2'26, down 640 bps from the 61.4% peak in Q1'25, and down 820 bps from the FY22 annual peak of 63.2% [FMP-IS].
- GAAP operating margin: 10.4% in Q2'26, down 920 bps from the 19.6% peak in Q3'25. The FY25 annual figure of 17.4% was up 2,000 bps from the FY22 trough [FMP-IS].
- Adjusted EBITDA margin: 40% in Q2'26, down 400 bps from the 44% peak in Q3'24. Guidance is 38% to 39% for Q3'26 and 37% to 39% for FY26 [T-FY2026Q1], [T-FY2026Q2].
- FCF margin (TTM, CFO minus capex): 1.5% at Q2'26, vs 11.5% at Q2'25 and 16.9% at Q1'24, so down about 1,540 bps from the peak [FMP-CF].
Balance sheet / share count
- Diluted weighted shares were 126.5M in Q2'26, up 25.8% YoY. Basic shares were 104.6M, up 14.8% YoY [FMP-IS]. Q3'26 guidance assumes about 126.5M fully diluted, vs about 102 to 103M guided for Q3'25 [T-FY2026Q2], [T-FY2025Q2]. The causes are the $888M equity raise in Q1'26 [T-FY2026Q1] and the July 2026 equitization of $472M of 2030 converts [T-FY2026Q2]. Management says the convert shares were "already reflected" in the diluted count, but basic shares will step up again in Q3. Buybacks were $82M in FY25 and zero in 1H26 [FMP-CF].
- Total debt was $1,499M at Q2'26, down 15% YoY. Of that, $578M is finance leases, $312M is the 2026 converts (short-term) and $609M is long-term debt. Net debt is $732M [FMP-BS]. Debt fell YoY in each of the last 3 quarters, so the debt penalty does not apply. But sequentially it rose 23% in Q1'26 and 67% in Q2'26 as equipment financing scaled, against revenue growing 6% and 9% QoQ. If Q3 also rises it will trip the 3-quarter test on a sequential basis.
Scoring
- Initial score: 5/10. Revenue YoY is accelerating sharply, which is a 10-grade signal. Against that, margins are compressing by more than 100 bps on a GAAP basis (1-grade), the share count is diluting (1-grade) and FCF is declining (1-grade). Holding adjusted EBITDA near 40% keeps this from sinking to the 3 to 4 range on its own.
- Penalties:
- Negative FCF (-2): not applied. TTM FCF is +$14.9M and TTM adjusted FCF is +$175M. Q4'25 was negative (-$108M) and Q1'26 was near zero, so this is close to the line.
- Share dilution over 25% YoY (-2): applied. GAAP diluted weighted shares are up 25.8% YoY in Q2'26; basic shares are up 14.8%, so they would trigger the over-10% tier on their own.
- Revenue growing but operating income declining (-1): applied. GAAP operating income fell 2.8% YoY in Q1'26 and 17.5% in Q2'26 while revenue grew 22% and 29%.
- Debt growing faster than revenue for 3 or more consecutive quarters (-1): not applied (debt is down YoY).
- Final: 5 - 2 - 1 = 2/10.
Quality gate, positiveGrowingFcf: NO. FCF is barely positive on a TTM basis ($15M CFO minus capex, 1.5% margin) and is shrinking: down from $96M TTM a year ago, and FY FCF fell from $110M in FY23 to $96M in FY24 to $41M in FY25. Company adjusted FCF margin is guided down from 19% in FY25 to 9% to 12% in FY26, and that measure excludes lease principal.
Assessment: DigitalOcean's income statement is in a real growth re-acceleration. Revenue YoY has risen in every comparable quarter, from 12% to 29%, guided above 30%, with record incremental ARR of $93M and AI customer ARR up more than 200% on an inference-heavy mix. Financially, though, that growth is being bought. GAAP gross margin is down about 500 bps YoY, GAAP operating income is falling in absolute dollars, FCF has dropped to roughly zero on a reported basis, and the gap is being filled with off-capex equipment leases ($578M) and equity. Diluted shares rose about 26% YoY after the $888M raise and the convert equitization. Under the rubric, revenue growth alone is not financial strength: two penalties (dilution, falling operating income) take a 5 to a 2. The setup to watch is whether the 60 MW of 2027 capacity delivers the "50% plus" growth at about 40% adjusted EBITDA and "high-teens" adjusted FCF margins that management promised [T-FY2026Q1]. If it does, operating leverage could flip this trend score quickly. Until FCF and per-share metrics inflect, the financial trend is negative.