Businesses big and small are looking for ways to rein in costs as a tough economy fuels uncertainty. An easy target for these cost cuts is cloud computing. The mega-cloud platforms like Amazon Web Services (AWS) and Microsoft Azure have already suffered a sharp slowdown as customers optimize spending. AWS grew by 12% year over year in the second quarter, while Azure posted 26% growth.
DigitalOcean (DOCN -24.79%) focuses on serving developers and small businesses. While this makes its customer base fickler than the enterprise-heavy cloud giants, its customers likely have less fat to cut from their cloud computing bill. An enterprise customer spending millions each year with cloud resources spread across dozens of teams is more likely to have let cloud spending get away from it than a small business shelling out 90 bucks a month.
Even so, DigitalOcean is now starting to feel some pain. The company’s revenue grew by 27% year over year in the second quarter, but the real story was its guidance. DigitalOcean sees growth slowing way down in the third quarter, and it cut its full-year guidance to reflect weaker demand for cloud computing services.
A broad slowdown
DigitalOcean expects to produce revenue between $172.5 million and $174.0 million in the third quarter, up from $170 million in the second quarter. On a year-over-year basis, this guidance represents a growth rate of just 13%.
For the full year, the company cut its revenue guidance to a range of $680 million to $685 million. Previously, DigitalOcean expected revenue to come in between $700 million and $720 million. The new guidance range represents growth of 18% at the midpoint from 2022.
DigitalOcean is seeing growth slow across all regions and nearly every industry vertical. Expansion is the biggest problem for the company. Customers are becoming increasingly reluctant to boost spending, and that’s showing up in DigitalOcean’s net dollar retention rate (NDR). NDR was just 104% in the second quarter, down from 112% in the same period last year.
Contraction in customer spending is also acting as a headwind, although the company noted that contraction stabilized in the second quarter. This could mean that the impact of customers optimizing their cloud spending is largely in the past, although contraction remains elevated from before the downturn in the cloud computing market began.
One piece of good news was churn. DigitalOcean’s churn rate, which will naturally be higher than the big cloud platforms due to its dearth of sticky enterprise customers, is holding steady around the same level as before the downturn. While customers are optimizing spending and are reluctant to expand, they’re not leaving DigitalOcean.
