Will Digital Ocean use M&A for CDN or edge services power SaaS growth?

Will Digital Ocean use M&A for CDN or edge services power SaaS growth?

Cloud services provider Digital Ocean recently shared some insights and data points with investors about the state of the business recently at its Analyst Day event.

Digital Ocean is principally known for its cloud IaaS offering. It was only three years back that revenue came almost exclusively from raw infrastructure. The company posted $428.6 million in revenue for fiscal 2021, an increase of 35% y/y but now sees about 10% of overall revenue coming from non-infrastructure products. In terms of outlook, Digital Ocean hopes to get this number to 20% in the next few years.

Managed Kubernetes, Jamstack power SaaS growth

Growing SaaS offerings remains a key component of the company’s overall growth strategy. Digital Ocean is targeting long-term revenue growth of over 30% y/y and is aiming to reach $1B of revenue in 2024. The plan for gross margins is to hit about 70%.

To get there, one can look to SaaS products such as the managed Kubernetes service, which is growing at a rate of 47% y/y. For new products, Digital Ocean said its serverless product which was introduced in March has 1,800 customers using it. App Platform, which is for Jamstack applications, has seen the user base grow 120% y/y.

Analysis: CDN and edge an organic or inorganic growth opportunity?

Digital Ocean confirmed that 70% of customers are already using a CDN capability and this would validate the demand for edge scenarios. Management’s response to questions about the edge opportunity were vague. They will consider partnerships and look at how they can fill the gap potentially through M&A.

We have already seen a CDN plus cloud provider combination with the Akamai acquisition of Linode. Maybe a similar transaction, except this time around it would be the cloud provider buying the CDN. That is something that could make sense and there should be no shortage of candidates — platforms with slower growth, but reasonable network and footprints, and little value-add — that might make for a fit. This kind of acquisition could also help Digital Ocean with its global expansion plans while helping its customers in the developer community deliver applications globally as well.

Overall, there were interesting data points, but not a lot of surprises came out of the Analyst Day. Digital Ocean’s strategy has been clearly articulated on its earnings calls and the current management team has executed well and pushed things in the right direction.

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