Q1 2021 DigitalOcean Holdings Inc Earnings Call
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Good day, and thank you for standing by.
Welcome to the Ocean.
<unk> first quarter 2021 earnings conference call at this time, all participants are in a listen only mode. After the speaker presentation. There will be a question and answer session to ask a question. During the session you will need to press star one on your telephone.
Please be advised that today's conference is being recorded if you require any further assistance. Please press star zero I would now like to hand, the conference over to your speaker for today.
Rob Bradley.
Spreads net of Investor Relations. Please go ahead.
Thank you and good morning, and welcome to the digital Ocean <unk> first quarter 2021 earnings call today Digital Ocean will discuss the quarterly financial results that were distributed earlier this morning.
Statements on this call include forward looking statements, including future financial results Good day.
Our goals and expectations regarding future revenue growth profitability, and our ability to generate and sustain positive free cash flow our ability to achieve profitability on an annual basis, and then sustained profitability.
Investments in our business, our anticipated capital expenditures and our estimates regarding our capital requirements, our ability to acquire new customers are successfully engage and expand usage of our existing customers.
The cost and success of our marketing efforts and our ability to promote our brand our reliance on key personnel and our ability to identify recruit and retain skilled personnel our ability to effectively manage our growth our ability to compete effectively with existing competitors and New York and entrance in the growth rates of the markets in which we compete.
These statements are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those projected or implied during this call.
In particular those described in our risk factors included in our form 10-Q for the quarter ended March 31, 2021, and the risk factors that will be included in our form 10-K for the year ended December 31 2021.
You should not rely on our forward looking statements as predictions of future events. All forward looking statements that we make on this call are based on assumptions and beliefs as of today and we undertake no obligation to update them, except as required by law.
Our discussion today will include non-GAAP financial measures. These non-GAAP measures should be considered in addition to and not as a substitute for or in isolation from our GAAP results.
A reconciliation of GAAP to non-GAAP results may be found in our earnings release, which was furnished with our form 8-K filed today with the SEC and May also be found in the supplemental investor materials posted on our Investor Relations website.
Investors digital Ocean Dot com.
I would now like to turn the call over to digital Oceans, Chief Executive Officer, Yancey Spruill Nancy.
Thanks, Rob.
Morning, everyone.
Thank you for joining us for digital Lotion's first earnings call as a public company.
We have entered the next phase in digital auctions evolution in which we are accelerating into the $100 billion plus annual opportunity to certain software developers entrepreneurs and smbs.
We are excited to review our strong Q1 results with you in the context of our strategy to grow faster.
ROE smarter.
And grow together.
Before taking your questions I will turn it over to bill to provide details on our financial results for Q1 and provide our financial outlook for the year.
Last month, our IPO is an incredible milestone as we achieved our long standing goal to become a publicly traded company.
It is a true testimony to the hard work dedication and focus of many many people and their passion for our customer opportunity.
Taking an idea nurturing and developing it.
<unk> numerous peaks and valleys as a wild journey requiring fate.
<unk> and perseverance.
Digital Ocean live this journey over the past decade and.
And we would not have been able to reach this milestone without division of our founders.
Tireless efforts of our employees and the support of our customers and our investors.
One thing couldnt be clearer to us today.
There is an incredible opportunity in front of us.
And with the more than $700 million raised in the IPO.
We are excited to put it to work to build towards our full potential to realize this opportunity.
I thought it would be helpful to share the key elements of our business strategy that some investors might be newer to our story.
Digital auction was founded with a mission to simplify cloud computing, so developers and businesses can spend more time, creating software that changes the world.
To understand the importance of that mission when individual developers and entrepreneurs are just starting out they want and need to focus on building their applications and growing their business.
They don't have the time expertise or capital to address the complexities of managing it infrastructure.
They want technology to work for them simply intuitively.
And when it isn't and they get stuck.
<unk> documentation and support to help them get unstuck.
The workflow of our customers is fundamentally different than that of larger businesses.
And our commitment to simplicity community.
The port and open source software are key ingredients to enable their success.
Digital Ocean is purpose built as a compelling alternative for developers startups in F&B to enable their journey of turning ideas into reality.
Focusing on the specific needs of our customers in just 10 years, we have earned the right to serve 600000 customers in nearly every country across the globe and have grown the business to nearly $400 million.
And we are just getting started.
Now I'd like to speak to our Q1 results we are off to a strong start in 2021.
I'm going to speak to our execution on the broader context of our three key imperatives to grow faster growth smarter and grow together.
We've put these imperatives in place because they speak to the core value creation elements. During this phase of the company's life.
We want to grow faster because we have a massive opportunity in front of us and given our value proposition. We believe we should grow faster than the growth rate of our addressable market.
We grow smarter by improving our processes infrastructure and systems to enable us to build efficiently to not only support our robust revenue growth plans, but also deliver adjusted EBITDA and capex leverage so that we are able to generate significant free cash flow.
Finally, we will grow together a digital auction as we invest in our people and our talent processes to ensure that we all scale and our jobs as our business growth through our first $1 billion of revenue as.
As we approach the middle of this decade.
So how did we do.
In Q1, we generated $94 million of revenue, a 29% increase over the previous year and annualized revenue run rate or <unk> was $388 million, a 30% increase over Q1 of last year.
We're pleased with our progress but remain focused on continuing these accelerating trends as we progress through 2021.
The key levers driving accelerated growth can best be viewed through the core measures of customer growth net dollar retention and revenue per customer and I will share some thoughts on our progress to date against each.
First customer growth, increasing the rate at which new customers joining stay on our platform are important indicators of our long term growth potential.
There are over 100 million smbs globally, with 14 million new businesses added each year.
We are relevant to all those seeking a digital presence and growth in our customer base is a strong proxy for sustained growth acceleration.
Our unique self service go to market model is ideally suited to attract and onboard massive numbers of customers at low cost.
And we are making significant progress in making that engine ever more efficient to fuel our growth.
Additionally, we are adding a sales capability to focus on larger SMB customers, whose needs are a little too complex for onboarding via self serve.
In Q1, we made good progress as customer growth accelerated to 7% year over year.
Second net dollar retention or <unk> is an important driver of the quality and sustainability of our growth.
We are focused on improving it from recent years and the 100% area.
In Q1, <unk> was 107% a 600 basis point improvement over Q1 last year.
This metric is a strong indicator of the quality of our service to our customers and their willingness to stay and expand with us.
We remain focused on specific initiatives to improve fulfillment of customer needs on our platform and believe they will deliver improving MBR as we progressed through 2021.
Third revenue per customer or <unk> is an indicator of our ability to drive growth within our customer base.
And as reliant both in our ability to continue to add new products and capabilities to our platform as well as our success in adding larger smbs through our nascent sales effort.
Our product initiatives enable us to more deeply embed in the evolving workflow of existing and new customers in Q1, <unk> improved by 20% to $53 68, as new products and better expansion and new customers growth continue to drive.
Better economics per customer.
We are laser focused on continuing to make progress on these three measures and as we do so we.
We will be able to achieve and then sustain a higher growth rate than we are reporting today.
To help illustrate the power of these trends I'd like to highlight a customer that migrated to digital ocean in Q1.
The customers are social networking and live streaming platform that caters to more than 200 million global users with.
With a customer base of that magnitude a major portion of their cloud spend is on bandwidth.
As this scales with one of the larger cloud players their costs became unpredictable they found customer support lacking and contract terms owners.
These pain points led them to digital Ocean.
We invested the time to understand their requirements and one their trust through a personalized onboarding approach involving their internal team and ours.
As a result, they migrated in Q1 and are currently running over 200 droplets across multiple data centers that host their production workflows.
Better yet in the coming months, they plan to migrate their core infrastructure over to digital ocean as well.
The initial migration was completed in about 90 days and demonstrates how the combination of our robust capabilities with compelling price could result in digital auction supporting larger smbs.
In Q1, we generated $30 7 million of adjusted EBITDA, which represented 33% margins.
This was a 740 basis point improvement as compared to Q1 last year.
We're focused on sustaining consistent operating leverage as we accelerate revenue growth by prioritizing our activities to those that generate the highest benefit to customers and deep prioritize activities that are below threshold.
In Q1, we drove capex down to 25% of revenue versus 44% in Q1 2020, an improvement of 19 100 basis points.
We are better matching our customers' utilization of our platform with the growth in capital we deploy to serve them.
Our team is working on a number of initiatives that puts us on a path for a sustained reduction in capex intensity in 2021 and beyond.
Importantly on the way down to our longer term target margins.
We will be managing our capex spend with a narrow range as to avoid lumpiness.
Very encouraged about the path ahead to materially reduce this important measure of the fundamental economics of our business.
We believe that growing faster with higher margins and free cash flow generation are not mutually exclusive.
In fact, as we are demonstrating their complementary.
Our recent IPO is a testament to our company coming together to execute better.
Since I joined in the summer of 2019, we have implemented a lot of change up and down and across the business in terms of people processes and prioritization.
With a goal to grow faster and improve efficiency to growth smarter.
Not to mention in the last year, we all did this remotely due to the pandemic.
I couldnt be prouder of our entire team for driving improved execution in the midst of this change.
This is a great Testament to how we grow together.
Finally, I want to touch on something that is foundational to the spirit of digital Ocean and demonstrates our commitment to our values. The first of which is our community is bigger than just us.
Last spring, we launched hub for good to donate our infrastructure to individuals and organizations that were helping their communities during the COVID-19 pandemic.
Since then we have expanded the breadth of the program to include over 1100 projects across a variety of use cases.
There are so many heartwarming examples of digital ocean being used for good it has been inspiring and a great encouragement to both our customers and employees during this challenging time.
In connection with our initial public offering we joined the pledge, 1% movement, and we will be allocating 1% of our valuation at the IPO over the next decade to expand our hub for good program.
Just before our recent IPO one of the founders of hub for goods suddenly passed away.
She was a beloved member of our digital Ocean family and to honor her legacy to our company and.
And our commitment to community, we have renamed hub for good to Holly's up for good.
We're proud to continue Holly's legacy.
As we leverage our capabilities as a force for good because our community is bigger than just us.
In sum it was a strong quarter that has set us up for an even stronger 2021.
We are excited for this next phase as we continue to focus on our mission to simplify cloud computing, so developers and businesses can spend more time, creating software that changes the world.
I would now like to turn the call over to our Chief Financial Officer, Bill Sorenson, who will provide detail on our financial results in Q1, and our outlook for the balance of this year.
Thanks, Nancy and thanks to all of you for joining US this morning for digital Oceans first earnings conference call.
This is an exciting day for the company as we share with you the progress that we're making against all the key operational metrics. We discussed with many of you during our recent IPO process and that clearly demonstrate the company's improving performance in the air.
Already important category digital Ocean showed progress through Q1, we saw continued acceleration of revenue growth improving profitability as measured by our adjusted EBITDA margin and increasing free cash flow potential by reducing capex as a percentage of revenues to just 25%.
I'll keep my remarks brief today, but wanted to elaborate on the key metrics that I mentioned above book.
Driving those improvements and the actions we're taking to continue to drive further improvement after that we'll open the call to take your questions.
Enhancing mentioned revenue growth accelerated to 29% year over year up from 26% just last quarter.
An important driver of the acceleration was a substantial improvement in net dollar retention or <unk> to 107% up 200 basis points from Q4, and 600 basis points year over year as.
As we detailed as our customers grow their usage of our offerings grow alongside them.
<unk> usage of our original offering of compute storage and bandwidth and increasingly the adoption of new products launched over the past several years, such as <unk> and manage databases as well as our recently introduced high performance profit types.
Expanding our product set along with the continued focus on 24, seven support and customer service are key components of how we can drive better customer retention and further revenue growth acceleration.
We continue to invest in each of these areas in people systems and processes to make <unk>. The go to service for today's developers and small businesses.
We believe that all of these efforts will help us retain our customers long into the future.
Along with revenue growth acceleration digital should continue to drive greater profitability as reflected in our adjusted EBITDA margin, which increased to 33% in Q1, that's more than a standard 100 basis point improvement year over year.
Contributing to the year over year change were higher gross margins continued efficiency in our marketing spend and execution and focus on all operating expenses across the organization.
We also saw a 200 basis point reduction in bad debt expenses year over year.
An additional contributing factor was it higher than what is behind our internal plan.
That said as we ramp new hires during the year to help with our growth objectives. We expect some moderation in adjusted EBITDA margin from our current levels, but the companys profitability will still be materially higher than the prior year.
Improving EBITDA has also led to a healthy increase in cash flow from operations, which reached $20 million or 21% of revenue in the first quarter. This was a meaningful step up from the first quarter of last year and an encouraging signal of the potential for our business.
The final pillar of our operating focus is increasing the efficiency of our capital expenditure investments through improvement in our procurement muscle and our technical capabilities is managing utilization of our capacity for.
For the quarter, we had a meaningful reduction in capex as a percentage of revenue to just 25% of revenue down from 44% of revenue in the first quarter of 2020.
As we continue to pursue revenue acceleration, we intend to manage our expenses.
And as possible with the goal of driving our Capex investment lowered this combination should be beneficial for cash flow generation and as such we expect to be cash flow positive as we go forward.
As we discuss Q1 results clearly reflect the improvements we are making in the operating performance of digital Ocean as you pursue this $100 billion market.
Opportunity and we're really excited about the journey ahead.
Exciting milestone correctly note is that during the quarter. We did indeed achieve long term objective of becoming a public company. This achievement provided the company with access to a new group of long term shareholders as well as capital to help us pursue our goals. Our sale of 16 5 million shares were resulted in protein.
Leads to digital ocean of over $700 million.
Using those proceeds we reduced all outstanding borrowings to zero, but still retaining borrowing capacity if needed under the terms of our revolver. However, given the improvement in our cash generating capability, we anticipate that we will fund our capex requirements from internal fronts.
Finally, let me share with you, our Q2 and full year outlook share.
The second quarter, we expect revenue to be in the range of $97 million to $99 million.
We expect adjusted EBITDA margin to be in the range of 30% to 31%.
Fully diluted weighted average shares outstanding will be in the range of $117 million to $119 million, which reflects the impact of new shares issued during the month of March.
For the full year, we expect revenue to be in the range of $405 million to $409 million, which represents 28% growth at the midpoint we.
We expect adjusted EBITDA margins to be in the range of 30% to 31%.
For the year, we project, our Capex as a percentage of revenues to be between 25 and 26%.
And finally, the fully diluted weighted average shares outstanding will be in the range of $115 million to 117 million weighted average shares outstanding are lower for the year given the impact of the timing of the IPO at the end of Q1.
Thank you all for your continued support and for joining US today and now let's turn our attention to the questions that we've received from our analysts.
Thanks Bill.
Thank you for joining us today.
As Bill mentioned, we collected questions at a time and we will answer those first and then time permitting we'll have a few minutes to that other panelists ask questions. So the first question came from Chris Merrill Lynch.
Oldman Sachs asked how are things going with the cross sell motion are you continuing to see improving attach rates for your database and manage kubernetes offerings, particularly among higher spending customers.
Thanks, Chris.
And good morning, everyone.
We continue to see adoption of.
Our past products. If you will our coover Daddy is our database as a service our marketplace for our recently launched App platform.
Approximate 10% of revenue, they're growing materially higher four to five times higher than the total company's growth rate.
That's 10% of revenue was up from about zero 10 years ago. So we continue to see our cohort adopting more revenue we see.
Focus on Harpoon, as we talked earlier, and having ARPA growth, 20% as well as our net dollar retention seeing that six to 700 basis point expansion. Those are the best proxies and our view of the long term potential of our multi product adoption that we're seeing across our cohort.
And we're very pleased with the progress we've had a number of issues.
Initiatives.
That we go back into our cohort using digital tools using data science using different engagement models with our teams to engage with our customers and we're really encouraged by the progress. We've seen early in this journey and we think thats driving growth acceleration that we're taught.
About here today.
Great. Thanks, TMT and Taiwan Ravens at JMP Securities asked about Capex, along with many others can you walk us through the main drivers of your Capex spend how should we think about how you would lower it as a percentage of revenue over time.
Bill.
So capex for US is a major focus area.
Tremendous platform that we have built over the past 10 years, allowing us to deliver our service to 185 countries around the world. We've made materially material changes in terms of how we acquire capex previously as a young company. There was very much a just in time focus.
Given capital constraints today, we've taken a longer term view looking at capital investment Capex investment over the next six to eight quarters, which has allowed us an opportunity to work with our major suppliers in order to drive the cost of those to a much lower level and we continue to work in that area continuing to push on price.
We can but also as part of this is better understanding of our customers and how we can maximize the utilization of our server fleet and Thats been a major area of focus for our technology team and we will continue to be so we're very confident that this year, we will be able to maintain our capex investments in the.
Mid 20%, 25% to 26% of our revenues, we have a long term view again, which allows us to plan well in advance of our expectation. So we will not see any lumpiness, there and given the numbers that we're forecasting and accelerating growth, we think that 25% to 26% allows us plenty of.
The runway to basically provide for that growth, but we will still look to drive that down towards our long term goal for medium to long term goal of 20% sub 20% over time.
Great. Thanks Bill.
Virtually all analysts asked this but Michael tourists at Keybanc and got it in first and then said you've shown improving net expansion rate could you talk about what's been driving that improvement, what's still to come and what could that mean for your potential to accelerate revenue growth.
We're really excited about the progress we've made driving net dollar retention up from roughly a flat, 100% a year plus ago to what we're reporting today are 107%.
You expect to be continuing to see that metric accelerate and importantly, what is driving that is expansion. We have made progress on churn, but I would say the ratio between what's driving the aggregate number of higher it's about three to one expansion over churn.
Have a number of initiatives across our teams.
In that first year, the Onboarding phase.
First year is where we see the vast majority of customer churn in our business.
Are both small and large customers. If they are on our platform per year award essentially the churn is de minimis. So we've been focusing on that first year.
Of the life of the.
Customer.
Using data science, using digital tools to engage customers to help.
It helps to make sure that they're onboarding experience that they get optimized on the platform early they have a good experience like a lot of software products you typically see people stick with it if they don't share shucking and move on and so a lot of our initiatives are around that first year and then also going back into the cohort after a year.
We see a lot of customers, who are growing and scaling their workflow is becoming more complex as their business picks up and their use case starts to evolve their business. They are the number of employees. They have the number of customers. They had a number of products. They have and we've been using propensity analysis digital tools.
Two.
Identify customers, who might be candidates for upgrades or deferred product use cases, and we've been driving engagement with them and we've just scratched the surface of this but we see it pretty significantly.
SaaS rates with those customers and so that's what's driving the expansion as we just proactively we've always had a commitment to support that's always been a value differentiator for for digital Ocean, what we have changed over the last year.
Plus is turn that around where we're not just waiting for a <unk>.
Paul is to support or ex success teams or actually engaging proactively. We're early in this journey, but as you've seen we've had pretty significant improvement in this metric and we're not done we've not landed.
At 107, we think that we have a lot more runway and we are optimistic and looking forward to reporting and discussing that with you overtime. During the course of the share.
Great and competition has been a big focal point for investors and Timothy Horan Oppenheimer asked Microsoft seems to have very similar products and services as you do for SMB that are free can you discuss how you compete with this.
Yes.
Thanks for the question.
Thanks.
It's worth noting first off it's a massive market there are data side, we're at $50 billion today go into over 100, so it's growing 27%.
And our annually, but it's just a massive market we don't want to leave it as a winner take all market, we take other cloud markets, where the big cloud players Theres an opportunity to serve SMB and we think we're no different I think the 600000 customers $400 million sort of run rates speaks to the fact that we can carve out a very interesting niche here.
And how we do that how we differentiate is focusing on simplicity. When you think about our customers and you talk to our customers.
The CEO of <unk>.
Their dev ops their marketing they are doing the coding and so their experience on our platform is that they are working multiple jobs they really need.
Our service to work they need simplicity and when it doesn't work I need help our documentation and the quality of our documentation or support experience are being personalized regardless of the size of the customer whether you're an early journey customer or one of our largest customers everybody get support that matters to them because they just don't have the time.
One P. One at Bank of America asked can you talk about the opportunity across pass vs. Eyes are most of the larger spend clients looking for additional past services in any examples would be great.
Yeah. So.
Well if you could the question.
Again, there is a level so that we're roughly 90% of our revenue comes from the core compute network and storage solutions that are typically called infrastructure as a service.
10%, our <unk>, our database and service our marketplace.
And our App platform and.
Got that piece of the revenue highest growing student significantly higher than ours.
Overall growth rate and that reflects the fact that we have a growing customer base.
Building in their business, they're getting lift off per was the initial testing an idea to building a business and as they grow and scale they need more services their work flow evolves. They go from two per cent team to a 20 person company from two people writing software development two two individual teams of 8% to 10%.
We're writing software and as a result of that increasing complexity. They go from no customers to hundreds of thousands of customers and they need more services to manage that so that's where databases service helps people with their own customer analytics and managing our customers are coover Daddy's, our app platform helps with the work flow on software deployment as.
Customers growing scale from individuals to larger organizations and we see that adoption and the volume metrics increase with that that's what's driving are cool.
What's driving net dollar retention and that's a core fundamental aspect of our strategy to helpful. But you also see in Q1, we're also making the core infrastructure better and innovating there with our premium droplet, which has had significant adoption.
And just the first two months of it's existence, we launched the premium storage option in queue for that has seen a lot of adoption. So we're taking the whole platform better in terms of the infrastructure.
Terms of flexibility and Optionality of the services security is critically important to us the liability and scalability and then also innovating with new platform applications.
Services.
Are also driving as growth because of the evolving work go over customer. So it's a two pronged strategy and it's really focused on the work flow and the how our customers have all that's how we choose which products to launch and we've been pretty successful over the last couple of years in doing so.
Great, Thanks, and Brad Reback as Stifel asked as you continue to bring a greater level of discipline, the sales and marketing efforts.
Can you highlight the success, you've had driving greater customer engagement and overall operational efficiency.
Again people consume support in a self serve model in that first 90, 120 days and to the extent, we can keep them with a great experience.
That drives expansion opportunities and we're excited about the operational levers that we're pulling and we're very early.
And I think that's what's exciting about this is there's a lot of runway here.
All across our sales our customer success, our support teams as well as our self serve we've been optimizing the whole self serve process not only increasing.
Top of funnel visits to our website from $4 million to $5 million over the last year, but also driving new customer additions every month, we're doing that through operational excellence.
And using much more metrics cross functional collaboration et cetera. So we're really early in the improved operational improvements and what's heartening is.
How much impact they are having despite how early we are in the process.
There were a couple of years ago. So we will certainly contribute to our accelerating growth trends.
Great and then the last.
Question, we collected before we go to.
Greater for it take additional ones with some Rheinmetall Lynch L at Barclays and could you give us an update on new product uptake.
All of the new products have been really strong again essentially appear infrastructure the service company.
Two years ago, now 90 per cent infrastructure, 10%.
The press has offerings cross proven Eddie's vs.
Gas or marketplace, our platform et cetera, where seeing significant adoption those are growing four to five times faster than the overall.
Company that was the case in Q1, but we also innovated around premium droplets, we went from a $5 Rockwell to $6 drop it with a premium intolerant A&D chip, we saw significant uptick in that.
1 million plus.
<unk>.
Six or eight weeks and so we saw similar dynamic y.
Providing a premium storage option back in queue for so we're gonna make the whole platform better.
Again, our customers are looking for anything that simple easy intuitive.
<unk>.
Drive productivity a day build their applications to build your business and we will continue to innovate.
As a as a as a driver of accelerating growth. In addition to the optimizations, we've been talking about on this call around or go to market and our marketing efforts to support.
Boarding for our customers.
And then.
As we talked about.
Operator, we're ready to take questions from the queue.
Ladies and gentlemen at this time, if you would like to ask a question. Please print star followed by the number one on your telephone keypad again in a star one.
You have a question from the line of Mark Murphy with J P. Morgan.
Yes. Thank you very much so UNC you're you're closing in on the 30% growth levels are low.
Lot sooner than we thought was going to be possible attacks, we thought it would take two to three years.
But you essentially there in Q1.
And so I heard all your commentary.
About the new initiatives, but when we see this kind of triple digit.
Net new growth.
What any do you think we are in with respect to this operational transformation in other words.
Wondering how much of that is structural and sustainable.
Due to the volume discounts and the [noise], the pretty buying and everything you've implemented.
Vs, maybe being just having been maybe a little more pretty loaded into last year or said differently like what what gives you the confidence that that's sustainable.
Great question, I think a couple of things relative to how we are approaching our customers. How we are fulfilling those customers who they are how they can use the platform.
You know historically the platform was out there for everyone to use it now we're spending time understanding what those use cases are and we clearly can see that in the combination of the new products that we've offered how customers are using those products pricing opportunities within those products also provided an opportunity for us to.
Drive additional margin and drive additional revenue against those servers. So what we're looking at is indeed, continuing to work as you would expect we would miss our major suppliers that includes the component manufacturers as well continuing to find ways, we can drive costs their lower but I'd say the park we're really.
Cited about is how.
How do we get more out of this platform how do we service our customers in way that we can provide them what they need at the same time maximizing the revenue opportunity our servers. They are paid back within a year and yet they live five or six years and we will continue to find ways that we can drive.
More revenue true those servers. They run 24 seven across the entire globe. So it allows us an opportunity to keep driving more revenue into that platform. So combination of procurement, we'll have to do but also the utilization of platform. We think provided us real exciting upset.
Okay. So that revenue per server continues to grow and the cost per server continues to decline for awhile as far as you could see that fur.
That's true yes.
Thank you very much.
You have a question from the line of DJ Heinz with Kenacort.
Hey, thanks.
Congrats on the great start so what other questions I've been getting a lot is around customers, graduating off of D O to other.
Public cloth platforms as those larger user scales.
See that as a risk now how do you keep that from happening.
If a a when it does like is it wholesale replacement of deal or just incremental workloads that go to another cloud just any any thoughts along those lines would be helpful.
Yeah, so that day.
The day thanks.
So graduation, as a lingo even use a a good day on the ideal conversations customer so graduate from digital lotion as I mentioned earlier.
If we keep a customer over a year, whether it's a small customer or a large customer. The current is in minimis. After a year literally left the Napa per cent are certainly less than a percentage. So they don't leave us because of the infrastructure as we talked about earlier secure reliable scale it's true.
We're substantially cheaper than the larger cloud providers.
What you do see it almost every business that fit in the crowded people go multi cloud and we encourage multi cloud because it's part of simplicity and argue.
This isn't about the tech lock and so one of the reasons, we support up with our software is our companies are looking for speed and velocity and low costs and expenses for us to try to lock them in with our tech stack it would be counter intuitive and probably bad for the economics of our business and so you see customers that day.
Grow.
We we have an increasing product portfolio, sometimes it makes sense for for risk management supplier management vendor management et cetera.
Per customers to have multi filed in and you'll see that but we don't see people graduate off our platform and as I mentioned earlier in the script that customer example, b one.
We frequently see.
Medium sized growing smb's is still a relatively small in a in a big.
Honda of enterprise customers ex a little larger clouds come to us because we're cheaper.
We can fulfill their use cases in fact in that case that we mentioned earlier when they benchmarked against the player that they were against his orders of magnitude larger company than we are they actually said for their argues case and given the price point, we were a better value.
Without sacrificing performance. So we don't see graduation, we certainly see people go multi cloudy day growth scale and we embraced that we think that the tailwind to our business.
Historically of technology, it's about us versus them and I think that's been a barrier and people look.
Look at the risk profile of churn differently in in our business.
Serving customers well and if they want to go multi cloud for certain apps et cetera, we embrace it.
Very helpful. Thank you.
And you have a question from the line of Kris.
Thanks.
Okay. Thanks, so much for taking my question.
I wanted to ask you about the customer at the net very strong for the last couple of quarters here.
What what drove that function change and how should we think about.
A more steady state.
Of customer ads going forward. Thanks.
Yes, Hi, Chris Good morning, so the the acceleration in customer add this is a critical measure that's why we talked about it in the script <unk>.
In addition to it and Dr. Net.
Ah retention and <unk>.
Hi, relation with customer at and that's a really important.
Trick for us because the more people we get on the platform minutes. We've seen these early results of keeping them on the platform, it's set us up for.
Every.
Some percentage of those customer start businesses and they grow and scale. It. So it's really important for us to bring people on the platform. So.
We revamp ourself serve motion.
And not only are we focused on driving more community content tutorials and other aspects to drive on our website visitors and we've seen it a million dollars.
Website visits plus job over the last year. So that's part of it is carpal tunnel, but that also we've operationalized each phase of the jury from the initial website visit down to paint conversion and added a work flow step to focus on those first 90 120 days post sign up so we don't ring the bell just because.
Somebody and what's the credit card down we actually have integrated workflow across our teams focusing on that onboarding experience because a majority of our churn happens to that first 90 120 day. So we can drive a better experience for our customers.
That's going to lead a more and more of them just day. So I don't know about steady state and we certainly want to have it grew 7% year over year, our customer base, we want it to be that'd be double digits and that's in sight and hoping we'll be talking about being at that double digit, but I think the formula for US Mark asked earlier about the 30 plus percent growth rate.
And where there are essentially as of March.
If we can get a double digit growth rate on customers year over year.
Continue to see this accelerating net valerie tension beyond where we are today.
Today and again in the early a net acceleration and is <unk> in the mid to high teens 20 per cent area that is a formula for a 30 plus handle growth rate and again, we're very close if not there already and we're working those levers very actively.
Okay. Thanks, so much.
You have a question from the line of Tim Horn with Oppenheimer.
Thanks, a lot you answered just being in mathematics sounds like closer to 40 per cent, but maybe pressure on it.
Could you talk about your.
The product strategy, a little bit more how important partners are and what any are you in the Belgian products do you think.
Well Prada.
Product innovations really critical for us and think about that broadly defined if you bought a droplet.
The infrastructure is just so much better than it was when we first and once the company is more secure it's more reliable less downtime more robust.
Many different data centers et cetera, So we're investing in that experience because that is foundational to our customers and then the the software services.
In the marketplace I think are critical the tension that we're going to find is we want to make sure that we maintain simplicity.
So I don't think you're going to see us innovating with thousands of apps like some of the other folks and cloud because our use case of these early states businesses are pretty simple.
And and so we'll want the venn diagram to overlap highly with what their work flow is and I think the databases service the growth in the adoption of that is a great Testament. So it will be very targeted on the products that we enter day, we have we're focused.
Areas that low that we're looking at right now and then the market places an incredible opportunity for us to have best of breed apps.
Across the ecosystem integrated with our platform and give our customers choice. So I think.
Marketplaces, clearly a big partnership angle. So we're early there.
Partner.
Some vendors to help us with our diverse tools.
And then we'll alone some of those inorganically develops there'll be a combination of both.
Early in the jury again, where.
We talked about our first billion by the for the middle of this decade, but this is a massive tan.
Low market going over 100 billion and so for us to have the size and scale. We have today, we think there's a ton of runway and new product innovation, making our core capability better.
And more reliable secure et cetera are going to be the formula and then getting really good.
Better where we are in a customer acquisition, both ourself serve in sales.
And that that would be the foundational elements to driving sustained.
Growth and as we're talking about today higher margin growth.
And higher free cash flow as we dramatically reduce capital intensity here and then.
Thank you.
You have a question from the line of <unk>.
With bank of America.
Thank you and.
Results here.
Yeah.
$5 billion in cash how are you thinking about the volume at.
At the outset, you said.
I can help you accelerate the business.
How exactly are you thinking about deploying if they're going to be M&A is there data center footprint increases adding capacity what what do you think is currently maybe a little constraining growth, maybe a little bit I mean, obviously, you're you're showing tremendous growth is there.
That you view in particular that deploying this capital can drive even further acceleration. Thank you.
Good morning, and thank you for the questions.
So I think it's two prong M&A is certainly going to be part of the program and we've already done some M&A. So it comes in two varieties wanted to supplement to give us more velocity on product innovation. So the app platform.
Products that we launched about six months ago came from an acquisition two years ago of a smaller.
Startup maybe nanobots.
And we took that IP, an integrated with our platform.
Seen significant adoption.
True and cost on that platform I think that's a recipe for what we're focused on now I think we'd like to be a little bit larger company. So maybe by displaying $30 million per revenue. So already has a product market fit but.
Could benefit from the distribution of our large networking customer day. So we will want to continue to do more of that and we've invested in the team internally around to.
To put the capabilities to.
Right faster velocity of course, we also.
Have acquired for tutorials to supplement or organic ability to write tutorials and publish and.
Big reason that we had that million plus Jonathan and website visits over the last years by accelerating community content. So that's another area. So they are not big deals, but they're certainly.
Hopefully bigger than what we have done recently on the product side.
Be a big focus of ours is more products and innovation velocity using corcap to supplement of what we can do organically.
And then on on data Center, where Gardner we're free.
The cash flow positive if you will and certainly will be driving the business that way this year and well beyond.
So we'll funded from the economics of our business. However, the cash will enable us to be more aggressive potentially lining up and adding data centers will have more to say about this and subsequent day, where we are doing a lot of analytics around the existing footprint is wells, where we will add data center infrastructure.
And having a strong balance sheet is going to enable us to be able to work well.
Quickly when we make those decisions that will communicate about where we want to add and how we want to add.
Hi, Kathy.
That is all the time, we have questions for today I would now turn it over to UNC cleaning remark.
Thank you thanks, everybody for joining us we're really excited too.
To have our IPO earlier this year.
Excited about updating you on our progress and we appreciate your support as we take on this next phase had digital Ocean is a publicly traded company.
We're delighted to share the progress we've made and we look forward to these conversations over the coming quarters and years as we work really really hard.
We have a massive opportunity in front of US. This is an incredible business and our business is all about enabling software developers and an entrepreneur successor ideas build their businesses and realize their dreams and we look forward to updating your overtime about how we're doing against the opportunity. Thanks have a great day.
This concludes today's conference call. Thank you for participating you may now disconnect.