Q2 2021 DigitalOcean Holdings Inc Earnings Call
Yeah.
Thank you for standing by and welcome to the digital Oceans Q2, 2021 earnings Conference call.
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I would now like to hand, the confidential, but to your speaker today, Rob Bradley Vice President of Investor Relations. Thank you. Please go ahead Sir.
Thank you and welcome everyone to digital Oceans earnings call today, we will be highlighting our results for the second quarter of the fiscal year 2021with me on the call today is Yancey Spruill, our Chief Executive Officer, and Bill Sorenson, Our Chief Financial Officer.
And as we did last quarter, we will begin with commentary from Yancey and Bill and then we'll answer questions. We received from our analysts.
Our goal as always is to help investors understand our business model on outlook and the most efficient way possible. After we address those questions. We will turn the call over to the operator to manage an open Q&A period.
Turning now to our Safe Harbor statement and I'd like to remind everyone that during this conference call, we will be making forward looking statements, including our financial outlook for the third quarter and full year of 2021 as well as statements about goals and business outlook and industry trends and market opportunities expectations for future financial performance and similar items all.
All of which are subject to risks uncertainties and assumptions you.
You can find more information about these risks and uncertainties in the risk factors section of our filings with the SEC.
We remind everyone that our actual results may differ and we undertake no obligation to revise or update any forward looking statements.
And finally, we will be discussing non-GAAP financial measures today reconciliations between our GAAP and non-GAAP financial results and discussions of the limitations of our non-GAAP financial measures can be found in our earnings press release, which was issued earlier this morning.
With that let me turn the call over to our CEO Iezzi spool.
Yancey thanks.
Thanks, Rob Good morning, and thank you for joining us today.
We are excited to review our strong second quarter results with you.
A quarter in which we saw acceleration across all key metrics.
We see continued opportunity to accelerate revenue growth and as important we believe we will sustain a 30% plus growth rate in the near to medium term.
Now, let's turn to our second quarter results simply put it was an outstanding quarter.
Total revenue was just under $104 million and grew at 35%.
A 1000 basis point improvement year over year, and 600 basis points sequentially.
<unk> was up 36% to $426 million, a 200 basis point improvement year over year, and 600 basis point improvement sequentially.
And importantly was higher exiting the quarter pointing to continued growth acceleration in the second half.
We generated $31.4 million of adjusted EBITDA, which represents a 30% margin and continues to highlight our ability to generate strong margins, even as we invest to accelerate growth we.
We will continue to drive operating leverage in adjusted EBITDA, while continuing to make targeted investments to sustain our strong growth rate.
I'd like to share some insights into our revenue performance as well as highlighted customer example that demonstrates how we enable entrepreneurs to build their businesses on digital ocean.
3 pillars to accelerating and sustaining our business trajectory, our customer growth net dollar retention and average revenue per customer.
Like to walk you through the progress, we're making on all 3 pillars, beginning with customer growth.
In Q2, we increased total customers by 9% year over year to 600 in 2000.
We see customer growth as key to setting the table for robust long term growth as we bring in thousands of customers per month, who start relatively small in terms of revenue, but the test and learn and over time, they grow and when they get lift off on their idea and build the business rapidly on digital ocean.
Having a healthy and steady supply of customers is a very good indicator of the sustainability of our high growth expectations.
We were working deliberately to engage our customers early as they joined digital ocean to ensure that they have an excellent experience and stay on our platform.
Historically, the overwhelming majority of our churn occurs within the first 12 months and a customer's journey with digital ocean and within that first year. The first 90 to 120 days.
We have focused our teams very specifically on improving the on boarding experience of customers. We are leveraging data science and proactive measures in order to identify improvement opportunities and.
And how and when.
And the frequency with which to interact with newly on boarded customers.
We are pleased with our progress increasing customer growth. However, we are focused on managing customer growth to 10 per cent or better year over year on a sustained basis.
Next I'd like to turn to net dollar retention a critical.
Indicator of the value proposition, we offer our customers and durability of our higher growth rate targets.
Dr measures revenue efficiency across customers that are part of the 1 year and older cohort, who typically represent more than 80% of total revenue in any given period.
We are managing specific initiatives to improve retention and expansion and we saw excellent progress in Q2.
India on the quarter was 113%, which was an improvement of 100.
1100 basis points year over year, and 600 basis points sequentially over Q1.
The expansion of existing customer spend and the improvement in churn were the key drivers of the significant improvement that we saw quarter over quarter.
<unk> speaking more than 80% of the 1100 basis point improvement we saw in and Dr was driven by customers expanding their spend with us.
And nearly 20% was attributable to a reduction in churn.
While we are extremely proud of the progress we have made in improving N. D. R. We still see near term opportunity to meaningfully improve from the level reported today.
The final pillar supporting our revenue growth acceleration is average revenue per customer or our pool.
<unk> is driven by organic growth inherent within developer startup in SMB customers, who are early in their lifecycle and they are realizing significant growth on.
Also influencing growth is our introduction of new products to capture increasing share of our customers' evolving workflow.
We are also adding day, 1 larger our pool SMB customers through our nail nascent sales effort.
We saw a robust increase of 25% in Q2, resulting in our pool of $58.7.
In summary across the 3 major pillars of revenue growth, we are near our minimum target of 10% for customer growth and see a path to get there. We've made enormous progress on ADR improvement and still see more meaningful near term growth in N D. R.
And we are in our targeted range for our pool growth.
Collectively delivering on these metrics gives us confidence that we will sustain a 30% plus growth rate for the rest of 2021 and in 2022.
At our recent deploy conference we announced the launch of managed Mongo DB, a new fully managed database as a service offering in partnership with and certified by Mongo DB.
<unk> is 1 of the most popular and fastest growing no SQL database technologies used by developers startups and Smbs today.
And we are proud to be part of a very small set of Mongo DB certified cloud providers offering Mongo day bass in the market today.
This new product offering is consistent with our strategy to routinely enhance our core infrastructure and managed services offerings to provide relevant choices for our customers as their businesses evolve.
Now I'd like to share a customer story to highlight how we are a destination for developers and entrepreneurs to learn to grow and.
And to ultimately launch their idea their dream into a business.
This customer is a global online education platform that is both free and open source, serving both K through 12 educational institutions and higher Ed universities.
And they have been a customer of digital ocean since 2013.
They were on our platform for many years testing and refining their ideas.
Ultimately leading to the launch of their business, which began ramping a few years ago and is growing rapidly today.
When the pandemic kicked in their business experienced hyper growth and with it their usage of digital oceans infrastructure.
This is a great example of a customer starting out small while testing their ideas on our platform.
And generating a low level of revenue for a period of time.
And then a catalyst occurs there idea gets traction and their idea becomes a business that experiences rapid growth.
Our platform is fully capable of supporting the early phases of discovery and the later phases of rapidly scaling businesses.
So why did they stay with us for so long before seeing lift off.
It's because of our simple easy to use technology, it's because we provide documentation and support to help them get unstuck when they get stuck it's.
It's because we support open source software. So we never force their technology decisions and enabled them to have flexibility to build their applications and finally, we are competitively priced.
We are able to support customers in their yearly periods of formation through their dramatic scale.
This customer is passionate about fulfilling their mission to educate people and they are trusting digital ocean to help them fulfill that mission.
I can't think of a better example of why we are differentiated from others in the marketplace. We love. These customers they are fundamental to what we do there.
They are the very essence of our company.
That is to say, we are a place for developers and entrepreneurs to test their ideas build their businesses and realize their dreams.
In summary, it was an outstanding second quarter and first half of 2021.
So proud of our entire digital ocean team for our accomplishments so far this year.
We are poised and excited for additional growth acceleration in the second half of this year, coupled with accelerating free cash flow.
I am confident in our ability to create a durable high growth and highly profitable business, serving developers and entrepreneurs throughout the world.
I'd now like to turn the call over to Bill Sorenson, Our Chief Financial Officer, who will provide details on our financial results in Q2.
And our updated outlook for this year.
Thanks, Nancy and good morning, everyone. We appreciate you joining us today as we review our strong second quarter performance and our first full quarter as a public company.
We continue to be pleased with the progress, we're making against both our 2021 plan and our medium term objectives at.
Digital Ocean, we're convinced that the strength of our offering is perfectly suited to address the needs of the developers and SMB users of the cloud and we look to capitalize on the massive global market in front of us.
To that end I want to elaborate on some of the key points within Emc's remarks, and share with you additional detail on the progress we're making in the key areas of our company on.
All of us to do are highly focused on accelerating our business capturing market share and ensuring the durability of our topline growth efficiently and profitably.
So how are we doing at.
Digital Ocean, we track our progress by focusing on the key indicators that Nancy mentioned.
Our R N D R and <unk>, along with free cash flow.
In each of these key metrics, we've made material improvements and see continued improvement ahead.
And Deo annual recurring revenue <unk> is the leading indicator of the company's trajectory.
In Q2, <unk> grew 36% year over year up meaningfully from the 30% growth from the prior quarter and 24% growth in Q2 of last year.
True another lens on a sequential dollar perspective.
<unk> increased $38 million from Q1 looking back over the last 2 years. This is by far the largest sequential dollar increase we've had in the next closest was the prior quarter, where we added $31 million.
This means we saw a 23% increase in the amount of <unk> that we added in just the last 3 months.
Key to the acceleration and they are is another important indicator net dollar retention and Dr.
N D. R. In Q2 was very healthy and similar to <unk>. We saw continued acceleration in this metric.
In Q2, we reported MBR of 113%, which was meaningfully higher than last year and last quarter. In Q2 of 2020 net dollar retention was 102% and last quarter was 107%.
Driving this improvement our customers expanding their utilization of digital ocean.
As these customers grow like the 1 yancey mentioned earlier to increase their workload with D. O. Both in terms of our base cloud infrastructure as well as the use of our newer products and platform capabilities, such as database management and kubernetes.
Our customers increased infrastructure use plus their expansion into our other offerings both benefit net dollar retention.
While driving adoption of our core and newer products are critical Torre M D or improvement continued retention of our customers as they grow is critical as well in.
In the areas of on boarding and support our teams at <unk> continue to make improvements addressing customers' questions and needs in order to make <unk> easy to work with.
In this area, we've made progress as well as we saw further reduction in churn and an improvement in our service levels and response times.
We're very pleased with the progress we have made in India, particularly when considering the SMB market that we service. We aim to continue to drive this metric higher by a continued focus on customer service and introducing new products such as our recent announcement of managed Mongo DB buy.
By adding products such as Mango D O is able to grow along with our customers as they grow.
<unk> will continue to be a key indicator on our management dashboard and is critical to our objective of durable revenue growth in the mid thirties.
Another clear indicator of the progress being made with our customers is the continued growth in ARPA average revenue per user which reached $58.7 in Q2 and was up 25% as compared to the second quarter of 2020.
Driving <unk> higher as the aforementioned customer usage growth in conjunction with broadening our product set and retaining those customers as they grow as.
As we aim to have durable, 30% plus revenue growth, we will look to continue to drive <unk> higher to our ongoing emphasis on simplicity and service at an affordable price.
And finally, while accelerating revenue growth is our primary goal. These mission critical that we have the ability to fund that growth and to do so efficiently.
To that end, we've maintained our adjusted EBITDA margin at 30% and have identified opportunities for further improvements in the year ahead.
On the investment front, we're increasing the efficiency of our Capex investment through improved procurement initiatives and at the same time, increasing the utilization of our server fleet, allowing us to drive more revenue per server.
The impact of the 2 is clearly evident in our capex as a percentage of revenue in Q2, which was 25% well down from the 40% in Q2 of last year.
As we previously discussed in the longer term, we see this percentage continuing to go lower with a target of mid to high teens as a percentage of revenue.
The combination of improved procurement capacity utilization along with growing EBITDA has allowed us to become cash flow positive.
For the quarter, we had cash flow from operations of $40 million up from $20 million in Q1, and Capex of $26 million and as a result, we were free cash flow positive in the quarter and expect that trend to continue as we work through the balance of this year.
I will note that we did receive a VAT reclaimed from the Netherlands in the quarter of roughly $6 million, which was a benefit to operating cash flow, but even after adjusting for we remained cash flow positive for Q2.
Now I'd like to share our Q3 and full year outlook.
For the third quarter, we expect revenue to be in the range of $106 million to $109 million, we expect adjusted EBITDA margin to be in the range of 30% to 31%.
For the full year, we expect revenue to be in the range of $419 million to $423 million, we expect adjusted EBITDA margin to be in the range of 30% to 31% and we expect capex as a percentage of revenue to be between 25 and 26%.
I want to thank you all for your continued support and for joining US today and now I'd like to turn it back over to Rob who will take us into Q&A.
Thank you Bill and thank you all for joining US again today as we go over this strong second quarter performance and similar to our last earnings call. We asked in advance for some questions for analysts on some of the larger themes and longer term.
Objectives on the Hill Ocean and after these and then we'll turn it over to the operator.
Conduct.
A more standard Q&A, but to begin our first question is from Tim Horan Oppenheimer and he asked to know more about <unk> typical customer and how that is changing and some of the details on how we grow our pool as well as an update on the success that we're having adding in.
Retaining larger customers.
Thanks, Tim for the question.
Couple of points first we had thousands of customers per month through our self serve channel and our sales effort typical is hard to characterize given that we don't target industries and geographies.
But I'll characterize typical up with debt and quotes with 2 types.
About 80% of our customers by logo are early in the journey. There are similar to the customer example, we cited earlier in the script, they're testing their learning their spending low levels of dollars, they're consuming our infrastructure et cetera, trying to get lift off.
On their idea they represent under 20% of our revenue.
And the key to our businesses, having a steady supply of them because it's an optionality on.
On the few that become larger customers over time, and then about 15 or percentage of our customers by logo.
They've been on the platform they are exactly like the customer we just cited and the case study.
And they've been on for a number of years.
They are growing now very rapidly as they've evolved to running and managing and scaling a business on.
Digital ocean, they represent about 85% of our revenue.
And the important thing is our business is built to handle the lifecycle of a customer from a developer from an entrepreneur startup entrepreneur into the larger scale business. So.
That's typical for us as customers in the lifecycle through SMB.
On the smaller customers the earlier stage customers tend to concentrate mostly consuming infrastructure the storage compute access to the Internet and then as they grow they consume more of that as they are building customer basis on our platform and then they also use managed services.
Like a database coover that ease as their teams grow as their workflow evolves. So that's typical for deal with supporting developers through their journey to become entrepreneurs and leading businesses.
In terms of our sales effort, we're making very good progress.
In terms of the contribution that they are providing to our revenue growth. They tend to bring in much larger customers that are SMB or business day 1.
So they have a higher ARP, who theyre multi product obviously, they're much stickier.
That was about 2% of revenue last year coming from direct sales will be over 3% of our total revenue. This year, we are investing and adding capabilities across the globe. Both in terms of direct sales the support the solutions engineers et cetera that debt.
Help our customers onboard and existing business. So we're investing there very optimistic about the ability to see a lot of leverage and much more contribution as a percentage of our overall growth and revenue portfolio overtime.
Great. Thank you very much and the next question is from Brad Reback at Stifel and he asked what percentage of <unk> revenue comes from premium products and if we can provide a sense of how much larger this can become on a percentage basis over the next few years.
Well if you look at our total revenue today about a little over 90% of it comes from our core infrastructure as a service our compute network and storage tools.
And the multiple variance that we have on that.
And then just under 10% and growing very rapidly come from our managed services things like our app platform or <unk> as a service or database as a service.
Our marketplace and and so collectively.
Those are contributing to a much higher growth rate, but we also it is important to note that customers that are ramping on the platform are businesses that are using some of our managed services. There is also a significant pull through and growth of our infrastructure. So collectively we see over time.
Our mix more like 80% infrastructure and 20%.
All of our managed services will continue to add new managed services at options will also add capabilities on the core infrastructure. So collectively will support our customers' journeys and we.
<unk>, an 80.20 mix overtime.
Terrific.
Josh Baer at Morgan Stanley asked a question about differentiation, which is obviously key to Azure lotion, yes faster time to deployment due to ease of use and platform simplicity seems very valuable for an SMB with limited resources.
Do you maintain this differentiation even as you add more features and products to your platform.
Thanks, Josh per question.
Definitely a balance obviously, we can't compromise on simplicity.
Our customers demand it is.
You point out they don't have the team.
To support they don't have on it or Dev ops capability typically and so simplicity means the product has to stand on its own and when it doesn't support documentation can help them along and so there's definitely a balance of adding more capability.
Debt technically.
It's more options and not and make sure that it is seamless experience for them. So simplicity is core and central.
2 the capability. So we focus on whereas where do we expect workflow to evolve given the early stage of our business customers and what are opportunities that are obvious like a database as customers grow their customer base, they need tools to manage that as.
They grow their engineering and deployment teams they need technologies.
These are our platform to help them manage them. So we were very focused on adding relevant and core functionality to early stage businesses and making sure that experience.
Of simplicity.
Consistent throughout.
Yes.
Excellent.
Next is Pat Walraven at JMP Securities.
He asked how should we think about your pricing strategy.
Especially as it pertains to newer product offerings like manage kubernetes managed database and your App platform service.
Well I think the key for us on pricing strategy is focus on our differentiation relative to the competitive landscape and so simplicity.
Ease of use simple easy intuitive service.
We call community, which is our strategy to provide documentation tutorials to everyone on.
All of our customers regardless of price point.
Support all of our customers get a support experience regardless of price point.
To open source software not locking in our customers' day to particular tech stack.
All of those support our pricing strategy and in fact.
Those enable us.
Investing in that broad set of capabilities and the experience for customers enable us to get a price premium to the smaller competitors, we compete with and.
And we get that because of that differentiation and that differentiation is also relevant against the hyper scaler, yet where price that a deep discount.
And so the breadth of offerings allows us to get a premium against the smaller and a discount against the larger players. So we think that.
That's core to our pricing strategy, we will add capabilities like managed services et cetera that allow our customers to do more.
But we'll also add capabilities to the core infrastructure and in fact, we are offered a storage optimized optimized storage option last fall that saw meaningful uptick we launched a premium chip.
First price increase if you will in the Companys history on core compute.
Allowed customers to have an option on an AMD or Intel higher processing power.
4 and took that price point from the basic up about 20% and we saw a meaningful uplift in people who didn't need to go to the next highest higher tier droplet.
Which doubles in price, but would pay a premium because the higher processing capabilities.
They're early stage use case this product was relevant we've seen significant uplift and non.
Not cannibalization in our core drop with so I think there are a lot of opportunities for us to add capability.
And then over time package that.
Like we just mentioned here on this premium chip offering so.
But core to the value proposition and the differentiation is central to how we think about pricing strategy over time.
Yes.
Thank you and investors often ask.
About churn and Pat also asks can you give us an update on customer retention and churn how should we think about those dynamics and what are the main reasons customer churns.
Well, obviously, we're excited with our results for the quarter across the board, but not the least of which is net dollar retention, which.
It was not too long ago was at 100 and is now in the 100 teens exited the quarter even higher.
Then.
And Dr was for the full quarter, so momentum there.
The vast majority of that improvement came from expansion as our larger customers are expanding on the platform, but we will continue to make progress.
In lowering churn in the cohort.
Bye.
Focusing on retention and expansion initiatives data analytics to do more proactive outreach to our cohort make sure that our customers are optimized on the platform and so churn is now down into the lower double digits and we still have some.
Movement to go but we feel very good with the nature of our customer base.
To be improving net dollar retention in total and have that come from a combination.
More expansion.
And lower churn.
That's.
That's exciting for a couple of reasons, we're serving our customers better.
Across the business.
But it also gives us confidence about the durability and the sustainability of a materially higher growth rate, which we obviously demonstrated this quarter. We believe that is sustainable and we're focused on driving that higher growth rate in the sustainability of it overtime.
And we're able to offer those services at a competitive price and importantly, and maybe more importantly for our customers.
Is a predictable price.
So price transparency as part of simplicity and the predictability is people have.
The value of every dollar in our early stage business and the fact that they can predict their price and their bill at the end of the month based upon their consumption and the transparency. We offer them is as valuable as the service itself. So it's that combination of simplicity across the capability, but have it also.
Be highly performing want to make sure that that's clear it's not that simplicity is basic.
Subscale.
We enable highly performing capabilities and as we noted last quarter, we have huge volumes of customers doing streaming services et cetera. So our bandwidth intensive use case, we are highly competitive capability because of the performance and then the price and the <unk>.
Competitive to us and the predictability of that price that's core to our strategy around providing simplicity, yet high performance for our customers.
Great. Thank you very much and operator, if you could maybe open up to on the line for Q&A.
The instructions and we'll move to those who are in the queue.
At this time, if you would like to ask a question Press Star then the number 1 on your telephone keypad again at Star 1 on your telephone Keypad will force with just a moment to compile the Q&A roster.
Your first question comes from the lineup DJ Hynes from Canaccord Canaccord. Your line is open. Please ask your question.
Hey, Thanks, guys anti Bill congrats great set of numbers here.
Maybe this 1 for Bill Bill can you help me understand the delta between 25% <unk> growth and 113% net revenue retention I just wouldn't expect that GAAP.
Be that wide what drives that is at that new customers are landing that much larger or is it or is it something else going on there.
Good question DJ.
Reality, when Youre dealing with 600000 customers is you have a very very broad dispersion relative to what their pain. The thing that we are seeing now is in our higher spend customers. These are folks who are spending north of $200.300 a month.
We are seeing is a higher entry point and a higher spend level quicker than what we've seen in the past.
And that really we point to cash.
Contribution from the managed services.
Which not only as an individual driver by itself because if you look at our managed service numbers just those revenue lines alone Theyre growing multiples of our overall growth rate, but that also is driving the underlying consumption of our base infrastructure. So the combination of the 2 in terms of those higher <unk>.
Spend is what's causing the draft up but at the same time, we are still very happy to welcome new customers on the platform that are spending 5 to $10 a month.
So you really have to look across the total base of 600000 to get an idea of where the impact is going to be overall, but again, the encouraging trend for us as we keep adding new customers up and down the price points, but particularly in the higher spend categories, we are seeing more and more.
<unk> taken a higher level and a higher ramp than what we've seen historically.
Okay got it thank you guys congrats.
Thanks, Dan.
Your next question comes from the line of Michael <unk> from Keybanc. Your line is open. Please ask your question.
Sorry, Keith on for Michael Congrats on a strong quarter on acceleration. So just given the strong numbers on metrics you guys can deliver on thus far on you previously talked about a willingness to step up sales and marketing spend as a percentage of revenue. So just wanted to get your updated thinking on that and maybe what some of the areas Youre seeing good ROI on wed like to lean in more.
Thanks for the question so we.
We are investing in sales as you mentioned earlier.
Both to add regional capabilities.
So that we can support more directly and more volume from new customers as.
As we've added capability over time, both for the core infrastructure on our managed services it allows existing businesses.
<unk>.
We're very attractive to existing businesses migrate.
Over to us and so we're very focused on the as I mentioned, we expect sales from <unk>.
Zero percent of contribution.
Years ago to be over 3%.
This year and we think that that can go materially higher as a percentage of the overall mix.
Currently self serve.
People coming through the website generate the lion's share of our net new revenue, we expect that to be the case for many years, but over time as we build out the platform, we're going to build out and invest in capabilities to on the sales side.
We can complement and build the business across developers through through SMB. So we're definitely investing in sales we are increasing our sales spend.
As we move through the year and get more confident in the outlook and we will have on.
Optimistic about debt over time, and then we're also investing in more product innovation.
And we're excited to announce mongo.
We'll have more things to launch later this year and into next year and be on a more consistent cadence, but we're certainly investing ahead of 2021.
Product and sales.
So that we could support a durable high growth rate in 2022 and beyond.
Great Thanks, and congrats again.
Thank you.
Your next question comes from the line of <unk> from Bank of America. Your line is open. Please ask your question.
Yes. Thank you.
Yes. He can you share a little more color about this core droplet uplift from the premium chip offering what type of workloads are using this enhanced offering in and where are you in terms of penetration where the number of customers.
Use case that supports this.
What percent of those customers are currently using this and where do you think that can go over time I have a follow up.
Yeah. Thanks <unk> so.
<unk>.
What you see in there is such a diversity of use cases, it's hard to characterize 1 bucket or another.
But certain earlier stage companies will have the need for more processing than other.
It just depends on what the nature is I hesitate to even give an example, because theres. So many across the board, but just think some use cases need more processing than others, even at small scale and historically, we had a $5 drop out or you can upgrade to a $10 drop with some.
<unk> to $10 too much overall size and spend relative to the earlier stage use case and so the uplift to a $6 droplet with this premium chip allows somebody who is an earlier stage business.
Net from a volumetric in terms of customers is still small, but get the processing performance they need to be able to.
Execute for their customers so.
We've seen a very significant uptick.
That's almost a mid single digit millions in just a matter of months sort of size without at all cannibalizing other portions of the business. So I think what we're learning is as we study learn and observe the customer journey and the diverse.
City of the types of customers, we're learning a lot about how to optimize our capabilities to support the different use cases, and we've done a similar thing with the premium chip as we did with.
And optimized storage use case, we launched last fall that also has seen quite a bit of uplift without cannibalizing other aspects and so we're better matching the portfolio too.
2 the use cases.
In terms of the customer journey, and thats, allowing us to get uplift.
And as a result, when you see customers.
Buying other products.
It has a tailwind effect on things like share churn goes down dramatically.
For customers that buy multiple products.
On our on the platform longer so.
It's an incredible ecosystem that we're building it starts with understanding learning.
Customer <unk>.
We're investing heavily in that and that will inform product innovation in the pipeline of products that we prioritize and launch over time, both on the core infrastructure.
And our managed services.
Okay, that's helpful and Nancy and then as my follow up.
When you.
Reported your quarter. He showed some very strong acceleration in customer adds.
Would you say that there are some function of that correlated with your debt like how friends and do you still expect that pace to persist here as we look out over the next few quarters. Thank you.
Well we.
We're targeting 10% year over year customer growth.
We're at 9%.
That's from low double digits, a year or 2 ago. So we're seeing significant progress in <unk>.
Adding customers the big share of that comes from improving the outcomes of our self serve so we're bringing more people over $5 million a month come to our website and we're converting many many thousands more today than we were a year ago into paying customers.
And then.
So that's 0.1.
Supplementing that with the sales effort, which we've talked about the other aspect of that as we talked about this churn dynamic of the lion's share the vast overwhelming majority of customer churn happens in the first year with a disproportionate amount of that in the first 3 to 4 months of a customer's life with us and so.
We re factored a lot of our workflow support from our digital revenue marketing efforts, our data science teams.
To support customers more proactively through direct engagement digital engagement to better.
Help them have a better experience as they on board, that's allowing us to retain a lot more customers in that first year. So thats also a boost so we are bringing more people in but we're also focused on that first year experience and retaining them and the combination of those are what's leading the customer acceleration, obviously deploy and other.
Activities, we have to do outward engagement at larger scale.
Help to build awareness help to build brand helped to build community, which is foundational for us.
The customer growth is is from direct efforts around scaling up our self serve scaling up sales and then scaling up the fulfillment of customers once they put the credit card down and become paying customers.
Have them have a better experience in that first 3.4 months and first year, which is allowing us to retain enabling us to retain a lot higher customers.
Than we historically have that's contributing to the customer growth.
Thank you so much.
Yes.
Your next question comes from the line of Ryan Lynch Lense Chow from Barclays. Your line is open. Please ask your question.
Hi, This is on the note on for Ryan now Thanks for taking my question.
Can you just talk about the trajectory for MTR going forward given the strong expansion you talked about and the improvement in churn do you see it rising north zone, maybe on 115% on a sustainable basis. Thank you.
So.
We are credibly excited about the progress we've made.
With net dollar retention.
And again as I just was talking about the on boarding efforts to focus on customer retention and expansion. The re factoring of our customer success and support models to be proactive targeting our data science and data analytics teams to focus on how to.
The.
Address churn risk as well as address upside opportunities for people.
Be better optimize on the platform that entire workflow.
Plus the sales effort, bringing in larger customers.
Is leading to greater expansion.
Yes.
And at the same time lowering our share now with the nature of our customer base.
No that will ever have enterprise type low single digit churn, but low double digit maintaining that creates a tailwind for net dollar retention. So that the expansion is customer stay on the platform again.
We have virtually zero churn after 1 year of a customer's life on our platform so getting them through that first year and beyond sets us up for significant expansion and youre seeing that and net dollar retention. So we're excited about it.
Can we be at $1.15.
I certainly expect so and we.
We will see more acceleration again net dollar retention is that we disclose is for the quarter. It was exiting at a higher rate than the $1.13 for the quarter, we will expect to carry that through in the second half of this year and then create durability around net dollar retention.
Higher than where it is today don't want to put a target on it but $1.15 or better we certainly do expect.
To be demonstrating that relatively soon.
Great. Thank you.
Your next question comes from the line of Mark Murphy from Jpmorgan. Your line is open. Please ask your question.
Yes. Thank you I'll add my congrats on P&C and.
In addition to that comment that you just made on the retention I think you emphasized as well that <unk> was higher exiting the quarter and I'm wondering.
What exactly is underlying that comment are you conveying debt the months of June and the trend into July were particularly robust or was there some other meaning there.
Well, if you look at our last 3 quarters.
Our higher than the quarterly total quarterly growth rate.
And as you see in the subsequent quarters the growth rate is higher.
Net net our numbers. So I think what we're saying is we are seeing acceleration.
And.
June was higher than the full quarter growth.
We expect that Q3 will.
Will be strong as well as the second half so we're accelerating.
I think that's very important for people to look at that trend historically and think about going forward now having said that our guidance.
We provided guidance for Q3 and the full year.
We intend to.
Set expectations that we would be but we are seeing acceleration in.
In our business.
For sure.
Understood and just as a quick follow up.
I think the slides.
The world is heading towards 45 million developers by 2030 and I'm just curious how many do you think you can address.
With the core platform, but also as you broaden out the portfolio with database and kubernetes and other types of platforms.
Yes, I think thats, a very important stat.
On a huge tens of millions of software developers globally.
Theres, a 100 million smbs businesses with fewer than 500 employees globally collectively.
It's a 50 ish billion dollar market Tam today go into over 100 billion.
By our data over the next several years.
Mass of opportunity.
On the SMB market in generals huge percentage of GDP, both in the U S and globally. So we think we're relevant to all of those software developers, who are looking to test and learn and launch applications. Similarly to smbs.
The capabilities, we have with our global set of infrastructure the incremental set of managed services.
Certain services, we expect to launch over time are highly relevant to all early stage business use cases as well as software developers. So we were playing in a very large market opportunity I think the growth acceleration. We're seeing is starting to reflect that our data says the market and SMB cloud is growing <unk>.
7%, we're now growing materially faster than that and we think we can sustain that with focusing on our differentiation enhancing the platform and enhancing the customer success and support.
Experience of our customers, while they are on our platform.
Excellent. Thank you very much.
Thanks Mark.
No further question at this time you may continue.
So we want to thank everybody for joining our call. This quarter. We're excited about the progress we're making.
And we look forward to continuing our conversation with each of you and we want you to know that we're working really hard to realize the incredible potential of this business. We hope you all enjoy the summer.
Look forward to speaking with many of you on the many upcoming investor events that we will be participating in over the next few months.
Have a great day. Thank you.
This concludes today's conference call you may now disconnect.
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