Q4 2021 DigitalOcean Holdings Inc Earnings Call
Good day and thank you for standing by welcome to the digital Ocean Q4, 2021 earnings conference call.
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I would now like they had a conference you'll break your speaker today, Mr. Rob Bradley Vice President of Investor Relations. Please go ahead.
Thank you and welcome everybody to digital oceans fourth quarter and full year 2021 earnings Conference call. Joining me today is Yancey Spruill, our Chief Executive Officer, and Bill Sorenson, Our Chief Financial Officer before we begin I want to cover our Safe Harbor statement.
During this conference call, we will be making forward looking statements, including our financial outlook for the first quarter and full year as well as statements about goals and business outlook and industry trends market opportunities and expectations for future financial performance and similar items, all of which are subject to risks uncertainties and assumptions.
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.
Finally, we will be discussing non-GAAP financial measures today.
Reconciliations between our GAAP and non-GAAP financial results 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 Yancey Spruill Yancey.
Thanks, Rob Good morning, and thank you for joining us I'm excited to share some insights about the incredible year, we had in 2020 one as well.
Well as preview our plans for 2022.
We are fortunate to be able to serve the large and growing market of developers startup entrepreneurs through small and medium sized businesses collectively per IDC. They spend roughly $70 billion annually today on infrastructure and platform as a service and this spend is projected to grow to over 100.
<unk> $40 billion in the next few years.
Our customer base reflects this large global trend of individuals' building software for any sort of application.
And given the low cost and high performance of cloud computing launching businesses that enable them to pursue a dream of entrepreneurship.
Digital Ocean is purpose built to serve this opportunity with global infrastructure and software services that leverage offerings that are relevant for the early testing of ideas to the needs of scaling and F N b.
Warner framed the review of the strong year that was 2021 within the context of transformation.
Not only did we transitioned from being a privately held to a publicly traded company in 2021, but we also executed on the transformation of our business across every key indicator <unk>.
Resulting in growth accelerating profitability improving.
Capital intensity declining, which cumulatively have resulted in shipping our first year of positive free cash flow.
Let me share a few details on just how much we have improved our positioning to capture this limitless opportunity.
Beginning with our topline revenue growth in 2020 was 25%.
And today, we are reporting full year 2021 revenue growth of 35% and.
And we exited the year growing even faster with Q4 at 37% growth.
Our growth acceleration was driven by an 1100 basis point improvement in net dollar retention and 900 basis point improvement in ARPA growth importantly.
Importantly, both endear in our pool were much stronger exiting 2021 than entering 2021.
Which sets us up to sustain robust revenue growth in 2022.
We have dramatically improved how we engage service and build relationships with our customers.
And this results in fundamentally altering the level of N D or we can achieve and the durability of our overall revenue growth rate.
ARPA growth acceleration from 20% in 2020% to 29% today is also raise the floor on our sustainable growth rate as our customers are demonstrating they have a long runway to evolve their ideas to businesses on our platform.
In many cases growing from just 10 to $15 in their first few months to tens of thousands of dollars per month as they scale an idea into a business.
Another exciting transformation that we have made over the last years, how we've radically altered our capex intensity.
Where we drove a decline from 38% of revenue in 2020% to 26% of revenue in 2021.
This enabled us to generate $24 million in free cash flow or margins of 6%.
As compared to negative $58 million or negative 18% margins in 2020.
That's a 2400 basis point improvement in free cash flow margins in a single year.
We are actively working on further improvements across our business that will enable us to drive higher operating efficiencies, coupled with lower capital intensity to drive significant free cash flow leverage in 2022 and beyond.
We're focused on driving free cash flow margins to 20% or better in 2024, when we expect to achieve our first $1 billion of revenue.
This year, we will take a big step towards that objective as we target free cash flow margins in the high single digits and approaching 10% for the full year.
And the world of cloud software the standard for efficient growth is a combination of 40 or better for revenue growth rate plus free cash flow margin.
Well in a single year, we've transformed our business from 7% on that score in 2020 to 41 in 2021 eight.
A 3400 basis point improvement.
Although we are very happy with our progress we arent done with further improvements and are very focused on driving efficient growth over time.
And to exceed 50% on growth rate in free cash flow.
As you can see up and down the scorecard, we have fundamentally transformed the economic profile of our business.
And are now set up for sustained high growth and free cash flow generation.
We are still early to realize the potential of this incredible business and we are just getting started.
A key foundation for the growth acceleration has come from customer mix and specifically a subsegment within our 609000 paying customers that are driving digital auctions overall growth.
In Q4 customers that spent more than $50 per month grew 24% year over year as compared to total company customer growth of 6%.
Their spend represented roughly 83% of our total revenue in Q4.
And that revenue grew 44% year over year, well above the company growth rate.
In other words customers start small as they are vetting and testing an idea with the aspiration of turning this idea into a business.
As you can see they are succeeding at rapid rates as thousands of customers graduate on our platform.
We fueled this customer journey on our platform by providing a simple easy to use service that has a high degree of support and access to documentation and tutorials to help our customers be successful.
We combined now with an evolving set of <unk> capabilities and pads applications that are tailored to the needs of developers and entrepreneurs who are earlier in their lifecycle of testing code and launching and scaling their business.
These pass application support scaling businesses by enabling them to do more of their evolving workflow on digital Ocean. In addition to the natural growth in infrastructure, they realize from their organic growth and building their business.
We have roughly 100000 customers in this camp today and.
And we are adding to that cohort four times faster than our overall, 6% customer growth rate.
We expect to continue to see improvements in N D R&R, who as a result of our customer mix evolution.
For customers that spend greater than $50 per month with digital ocean are driving our revenue growth and acceleration.
At the same time, those customers spending less than $50 per month give us an incredible option on their future success as so many of these customers will launch an idea that they test on digital ocean and ultimately turn it into a thriving and rapidly growing business.
Our strategy works, because we have an incredibly efficient customer acquisition model, where the vast majority of our customer self serve.
Onto the platform this.
This unique go to market model enables us to manage best in class sales and marketing spend it's still add tens of thousands of new customers. Each month, the sufficient flywheel customer acquisition engine, coupled with our highly efficient infrastructure enables us to sustainably generate meaningful free cash flow while generating.
Growth above 30%, even while incubating the majority of our customers at low ARPA as they seek to build a future business on our platform.
I'd like to share a customer example that highlights a typical customer journey that nearly 100000 customers have taken on digital ocean today.
This customer started on digital Ocean in 2013, as an eight person startup.
And today is one of the world's leading web data platforms with more than 400 employees.
They have graduated onto our platform and perfectly demonstrate the nature of our model for attracting and incubating early stage ideas.
And then enabling lift off and scaling of them as they get traction.
Initially their spend with US was $25 per month and grew over time to average about $20000 per month for several years up to 2019.
However, like so many businesses this customer saw meaningful traction due to the pandemic and their business began growing rapidly along with their usage of our platform.
They currently spend $170000 per month with us a $2 million a customer that started day one when they just had a tweak in their eye.
This is one of thousands of examples we could share about the high spend customers driving our topline growth.
Began their journey on D. O is an idea that ultimately emerged as a high growth SMB.
We continue to see rapid adoption of our managed Cooper net he's managed databases app platform and marketplace services in.
In Q4, they represented 17% of revenue up from 15% in Q4 2020.
Adding to that new product acceleration as our managed Mongo DB offering launched in late June of 'twenty 'twenty. One uplift has been very strong and will start to materially impact our growth rate as we move through this year.
Customer adoption has been similar to our other managed database offerings and we have more than 3000 customers actively using our managed mongo DB as of Q4.
Our managed database services exited 2021 with north of a $26 million in Q4 and.
And it's growing several times the growth rate of our overall revenue growth rate.
We expect managed Mongo DB to be a strong pillar in our managed DB strategy.
And a material contributor this year.
Our service product acquired to the NIM Bell acquisition in Q3 last year is now in beta and we expect it to be generally available in the first half of this year.
Service has been one of the top requests of customers to add to our platform and we expect to see rapid adoption and contribution to growth in the second half of this year and beyond.
Product innovation that is relevant to our developer in SMB ecosystem is our highest priority.
Broadening our product portfolio is a critical aspect of our strategy to create the set of services most needed by developers to test their ideas and early stage businesses to rapidly ramp their growth.
We expect to leverage both organic and inorganic investments in new products to build our portfolio and are excited to leverage both to be able to have the right philosophy to help sustain our high growth targets.
I'm also excited to share that we are going to invest further in our outbound sales motion this year.
This is an exciting opportunity we know that we are in the earliest stages of this incredible opportunity to supplement our highly efficient high volume self serve model.
Self serve generates large numbers of customers earlier in their journey.
Tens of thousands each month it.
It takes time for these customers at 15 to $20 per month to get traction on their idea and grow meaningfully on our platform.
Correct sales efforts, bringing customers that out of the box tend to be thousands of dollars of monthly revenue.
This presents an incredible opportunity to maximize our reach to include bringing existing smbs onto the platform day, one versus solely incubating future Smbs, who are early in the journey.
The traction on our sales efforts has been very good in the past two years since launch as they generated 3% of total revenue in our second full year <unk>.
Sales have contributed to revenue growth acceleration and the improvement in our N D R and ARPA growth and expect it to continue to accelerate these metrics during 2022.
And the first two years, we have been principally focus on upselling existing SMB customers through inside sales week.
We expect by adding more direct outbound calling effort in a channel partners efforts, we can capture more growth and can take our sales revenue mix to upper single digit percentages in the next two to three years importantly, our investment in continuing to build our sales capability is targeted to bring more existing smbs onto our platform.
Through an outbound calling effort that is regionally focused on use cases that will benefit from our platform.
Similarly, our investment in channel is also focused on bringing more smbs to digital's and leveraging the efficient network of a select group of partners.
We don't expect the build out of our sales capability to materially change.
Our sales and marketing spend margins.
Rather we will invest at or just above the rate of revenue growth and.
And we expect it will yield sustainable growth acceleration, while maintaining our unique go to market economic model.
In summary, 2021 was a year of great transformation in the fourth quarter was a strong exclamation point as we saw excellent results across our key performance indicators I couldnt be prouder of our entire digital ocean team for fueling the change required to set our company up for during success.
We're excited to increase our outlook for revenue growth and to induce to introduce guidance for free cash flow a.
A measure that's core to how we manage this business.
We are building a unique business, serving the $70 billion plus market for developers and Smbs cloud infrastructure, we have momentum as we have transformed the fundamental economics of our business and are poised for sustained growth in free cash flow with a focus on achieving our first $1 billion in revenue in 2000.
24.
Before concluding I'd like to comment on today's stock buyback announcement targeted to offset dilution from internal equity grants over the next few years.
Given the strength of our operating model and balance sheet and our ability to generate significant free cash flow. This is an opportune time to manage dilution through a 300 million dollar share buyback. We view this as a way to create shareholder value by generating strong revenue growth and free cash flow, while managing common stock.
Elution from equity grants to employees overtime.
I'd now like to turn the call over to Bill Sorenson, Our Chief Financial Officer, who will provide details on our financial results and our outlook for this year.
Thanks Nancy.
Good morning, everyone and thanks for joining us today to discuss our strong quarter and finish to our first year as a public company.
Once again, we saw another quarter of strong performance in all of our key operating metrics in terms of revenue customer acquisition and retention cost management and free cash flow generation.
Investments, we've been making are clearly paying off and I'm pleased with the successes that we achieved in 2021, which set us up well on our path towards achieving 1 billion in revenue in 2024, and generating $200 million in free cash flow.
I'd like to begin my remarks with comments on our financial improvements in 2021, followed by some color on Kpis gains before turning to our financial outlook for this quarter and year.
As we've discussed in the past our key operating metrics total revenue growth.
There are N D R and <unk> formed the foundation of our balance scorecard, and we achieved high marks in 2021.
And while annual results were very encouraging the quarterly results and progression or what is particularly exciting and which clearly display the acceleration that we're seeing.
Revenue growth for the year was 35% and we exited 21 growing even faster at 37% for the second consecutive quarter.
Annual recurring revenue or a R. R grew faster than revenue for the full year and was up 37% for the year and the fourth quarter in total we added $133 million of new <unk> in 2021 versus $72 million added in 2020.
In addition to solid top line results. We have also continued to make progress in operating efficiency and profitability, while still making incremental investments in key areas.
As mentioned previously we've been focusing on reducing the cost of delivering our product by working closely with our key vendors and hardware datacenters and bandwidth.
At the same time, our infrastructure and engineering teams are improving the design and configuration of our service.
In order to increase revenue output.
Their efforts are really paying off as demonstrated by a substantial increase in our gross profit year over year to 60% up from 54% in 2020, we will continue to focus on driving this number higher in 2022 and beyond.
Driven in part by a higher gross margin combined with cost discipline and focused investment.
Adjusted EBITDA improved, notably with 160 basis points year over year increase from 30% to 31, 6%.
We were able to maintain sales and marketing at roughly 10% of revenues netting out stock based comp while still investing in the sales team that achieves stellar results last year, increasing their contribution to overall revenues by 100%.
These results continued to demonstrate the efficiency of our self serve model.
We increased R&D spend to focus on the key areas of server listen storage and were able to offset this by reducing our total G&A.
We continue to manage expenses carefully in order to achieve one of our management my entrees, which is to grow smarter.
Of note moving forward, we will be focusing the investment community on our non-GAAP operating margin rather than adjusted EBITDA as we believe it more closely aligns with how our peers report their results. This measure includes the impact of depreciation and amortization, but excludes stock based comp.
Session.
From my Vantage point, the most notable and exciting financial improvement in 2021 was becoming free cash flow positive.
Improved profitability combined with efficient capital investment has allowed us to achieve this important milestone.
In the year, we delivered 24 million of free cash flow or 6% of revenue.
This was a roughly $90 million improvement from the prior year and was a direct result of better management of our Capex, which decreased to 26% of revenue from 38% in 2020 each.
Even while growing the business of $111 million year over year and accelerating some investments originally targeted for 2022 into our 2021 spin we reduced our capex in absolute dollars by $10 million during that same period.
Clearly our focus on efficiency improvement is paying off and we will continue to make improvements as we drive towards our goal of sub 20% capex as a percentage of revenues.
This combined with continued improvements in profitability will drive our free cash flow yield towards 20%.
Turning to our other key performance indicators in 2021, we saw excellent improvement in our net dollar retention or <unk> and total customers, especially those in the higher spend cohort, which I'll touch on momentarily.
These three indicators have all been instrumental in our top line acceleration.
Net dollar retention for the full year was 113%, which is a 1000 basis point improvement even.
Even more exciting in Q4, it was 116% and higher than that in December alone.
Customers are expanding faster and churning less.
With a monthly recurring model achieving the endear of 116% is a testament to the strength of that model and its improvement over the past year and is central to our confidence in the durability of our long term growth.
<unk> is another key of our long term growth calculus, as we have broadened our product set to include a premium droplet a variety of the most popular database offerings and manage kubernetes service. Our <unk> growth has been very strong and average <unk> for the full year grew 25% and yet again.
We saw our fourth quarter growth exceed our full year rate at 29%.
We see ample runway for <unk> to continue to grow as our customers scale on our platform and we continue to expand our functionality for them.
We're encouraged by the early adoption of our new management Mongo database offering, which we introduced at the end of June and as he mentioned, we will be launching our service offering in the coming months from our acquisition of NIM Bella last fall. Both of these will help our customers grow on our platform and in kind kantar.
To <unk> growth.
Customer growth was another highlight that helped us deliver 35% revenue growth in 2021 for the year and the quarter, we grew total customers 6%.
As you've seen in our press release, we have provided additional detail on the performance of our higher spend customers, which is a key to our continued strong performance.
Customers, who spend greater than $50 per month or more than $600 per year represents 16% of our total customer base and drive 83% of our revenues.
This cohort grows much faster in terms of customer acquisition up 24% year over year to 99000, its revenue grow significantly faster up 44% in the quarter, they churn less and have a better and D are at 117.
And while total customer acquisition will continue to be an important metric for us as we attract the small developers of today, who become the SMB of tomorrow. It is these larger customers that point towards the future growth potential of the business.
Buying multiple products and consuming more of our infrastructure.
As we focus on our growth objectives going forward, we are prioritizing targeting developing and supporting this customer group as they have the potential to drive further acceleration in our growth.
We are pleased to have brought new sales leadership on board in recent months to help pursue these efforts and finding these customers as well as continued investment in our customer support to keep them once they join the platform.
Turning to page to 2022, I'd like to provide our first quarter and full year outlook we.
We are pleased to be raising our growth target for 'twenty two since we provided our initial outlook on our recent November earnings call. We are increasing our outlook for revenue growth from 31, 5% to 32, 5% at the midpoint of our full year guide.
As always we aim to exceed our outlook with our actual results.
Now for the first quarter, we expect revenue to be in the range of 126 to $126 $5 million as.
As mentioned, we are focused focusing investors on operating income for our profitability metric as we move forward and for the first quarter, we expect non-GAAP operating margin to be in the range of 12% to 13%.
For the full year, we expect revenue to be in the range of $564 million to $568 million, we expect non-GAAP operating margins to be in the range of 13% to 15%.
Lastly in 2022.
We expect free cash flow as a percentage of revenue to be in the range of 8% to 10% as we further increase our profit margin and manage our capex.
We're very excited about the continued progress we will make in 2022 and believe we are building a solid foundation to achieving our long term goal of 40% revenue growth and 20% plus free cash flow combining those two gives us our rule of 60.
That concludes my remarks, and now let's turn to Q&A.
Thank you.
As a reminder to ask a question. Please press star one on your telephone keypad.
Enjoy your question press the pound key.
Please standby, while we compile the Q&A roster.
Your first question comes from Tim Horan from Oppenheimer. Your line is open.
Thanks, guys can you update us on your thinking on value added services.
Maybe.
Whats the total percentage of revenues now and where can that go to.
How does that compare to those.
Oh, sorry, how the margins compare on that versus your.
Core products and then are there many other new products that you can kind of rollout on top of what you have now thanks.
Tim.
This is a huge area for us we talked about the growth of for example, our database as a service.
And then the mid twenties.
Ending last year.
Just two years and so.
Found is adding our database as companies go from.
They are scaling their businesses they need a database tool they.
They need as they go from their engineering.
Engineering head count they need deployment tools like Hoover daddies in surplus.
And then our marketplace also supplements.
The infrastructure.
To enable them to grow and scale their workforce and teams growth. So this is a core aspect of our strategy.
We exited the year approaching 20% of total revenue.
These services will continue to add targeted capabilities will serve to list will expand our surplus as we mentioned within the MELA tools coming online here available to customers now generally available producing revenue beginning in Q2.
Well there are other areas that we will look to invest in but it's important we will be adding relevant and sort of targeted capabilities given our customer basis early in the journey, we don't need this long.
Extended product list, but we do need some incremental capabilities for example in AI ml sort of tool is one that comes to mind. So we're looking to do that we'll have more to say as we move through the year on new areas and we'll look at both organic innovation.
Around new services as well as <unk>.
Leveraging the balance sheet and M&A.
So we can do more in the same period of time by move in parallel with both organic and inorganic so we'll prioritize it in that fashion, we would expect over time.
We get to that first $1 billion in a couple of years.
For these services to supplement the Ias part of the portfolio in the mid <unk> to upper <unk> would be a good target and thats, probably where we would land or longer term because as companies grow and scale they consume more infrastructure.
In addition to using the managed services. So they tend to work in a very complementary fashion and you've seen our growth acceleration hasnt just been as a result of adding these other.
Software platform services.
Our Ias growth rate has also accelerated.
Concert.
And just a comparison I think you were it was closer to 10% of revenue a year ago and I think we were thinking maybe we can get to 20% of revenue.
So it seems to have ramped up much faster than expected or than I expected anyway.
Just to be clear again.
Tim just to be clear, there's two pieces relative to the revenue said, yes, you're speaking to which is the 20%. They are comprised of two areas. There is clearly the value added service element of it and there is the optimized elements of it. So if you looked at the value added to use your terminology that's running.
Around 11% or so in the other optimize which is more related to our core infrastructure processes, rather 90% to 10%. So we look at internally is something we call on the innovation index, which includes a little bit of both.
That's probably the reason for the confusion.
Look at that group of the sort of 10% to 11% that group as a whole.
Basically growing up towards towards 100%.
Thats the key piece that will be complemented with the additional focus that Nancy mentioned in terms of new product offerings.
Thanks for the clarification.
Your next question comes from DJ Hynes from Canaccord. Your line is open.
Hey, Thanks, Ian Kimbell, our good work on the quarter here.
So it seems like this cohort of 90.
<unk> 99000 kind of highest spend customers is really what's powering a lot of the companies ARPA expansion at our our improvement and obviously, it's fueling growth.
Talked a little bit about direct sales investments in product expansion can you just kind of double click on what you're planning to do to nurture and expand this group of customers.
Well.
We have multiple it's wanted to bring more customers.
Who are larger day one.
We're going to add to our sales capability and we've seen quite a bit of traction.
Over the last two years in doing so.
And expand that from just inbound mostly inbound our inside sales, while focusing on monetizing the cohort faster too.
<unk> also accelerating investment in outbound.
Bringing net new customers on the platform.
And also a partner Chad. So there is customer acquisition side of it or expanding sort of the product set really.
As relevant adding these new capabilities.
As for businesses, so the product strategy really supports.
Enabling customers to go from testing to launching and scaling businesses on the platform. The more other services, we have more runway they have and what we found.
As customers.
Customers were getting the lion's share of a lot of the cloud spend for most of most of these customers.
And what makes us attractive as the relevant capabilities are simple easy to use obviously competitive with price we offer great documentation tutorials to help them when they get stock we have a support model, which is another pillar.
In our value differentiation every customer gets supported in the larger customer several more customized support experience, which they highly value and thats a huge differentiation from alternative platforms.
A critical aspect to supporting nurturing the SMB customer on the platform so net new capabilities on sales.
And channel.
Our product strategy really supplements and it gives people a longer runway to do more on our platform as they are building. These businesses like the customer case study, we decided and then our support model is so foundational to the experience for customers.
Where they feel like they can get help and it has a partner.
And helping them build their business on digital auction.
Yes Super helpful, maybe as a follow up.
I'd love to hear if you have any thoughts on kind of Akamai entry in the space. Obviously, the bottler node I know that that business is less than a quarter of the size of digital ocean, but any thoughts on kind of.
Implications for the space, our digital Ocean specifically.
Well I think the validation of people putting capital in the sectors.
As always a validation of our thesis and the opportunity.
I think it couldn't have been clearer.
Their comments.
Intentions to pivot that infrastructure into the enterprise.
I think that was notable.
I also thought it was interesting that they quoted the growth rate of Lenovo being in the mid teens.
So you now have a couple of data points with <unk> cloud.
Note in the teens growth rate.
We've talked about our $70 billion space for SMB and developer cloud being 70 billion growing 27% and we're growing 37%. So we're growing faster in our segment of the market for cloud and you could see that being validated by some of the growth statistics that you see for all the Asian and Lienau.
So.
I think that it speaks to our strategy is working to capture share in the.
Part of the cloud infrastructure past market, where we operate.
And so I thought.
That was.
Interesting to note that.
From the court last week.
Yep Yep Yep Super helpful. Thank you guys.
Thanks P J.
Your next question comes from <unk> Mohan from Bank of America.
Yes. Thank you.
<unk> you mentioned this outbound sales motion focus.
So clearly youre going to be targeting.
Larger customers.
Our need for support.
And take some of this share from existing cloud providers. So could you give us maybe some early thoughts on how you intend to develop this pipeline and it wasn't clear to me why you're top of the sales and marketing intensity.
Want to increase or maybe I misunderstood that and I have a follow up.
Well at.
Current percentage of revenue, if we could keep it flat or.
It may go up a little bit that depends on.
Our ability to drive growth.
If we can see substantial acceleration and we obviously want to get this business into the 40% plus area.
And our sales.
Helping us do that will but we will take it up from current levels as a percentage of revenue, but not much because our customer acquisition model is so efficient on self serve.
But if we spent 37 gross spend at 37% it doesn't change as a percentage of total revenue grow a little bit more than 37% it might change a little bit so.
That was what the reference to was to not changing materially as a percentage of the overall sales and marketing spend.
But we're just focused regionally.
In terms of outbound, calling and we're getting traction both in the Europe Asia, South America and.
Again, we're focusing on small businesses.
And then in.
Trying to leverage a partner channel as well to go after that opportunity with a very differentiated sort of message to customers to come onto this platform. So thats really the strategy is targeted and focused on our segment of the market. It will be regional in nature, it will be sort of outbound direct and.
Channel.
<unk>.
We're excited to make those investments and are optimistic they're going to continue to see the traction in sales has gotten about 3% of total revenue last year, we expect to move that into the upper single digits as a percent of our total revenue and that'll be a tailwind on the growth rate as we move forward.
Okay. Thanks, and then if I could follow up your overall customer growth decelerated.
And I appreciate the segmentation details that youre, providing here, but I think last quarter you called out.
The deceleration is a function of some.
Some bad actors.
Fully didn't want on your platform.
What are the dynamics there and do you think that that overall number can still get back to a call. It a high single digit growth rate.
Given that that's still acts as part of the pipeline.
Of customers that you incubate and eventually scale.
Yes, well our growth rate for customers last quarter is in line with what expectations. We set at the last call with some of the headwinds we talked about in Q3. So.
And we expect it to sort of start to lap that and outgrow it as well.
Through this year certainly into next year. So we certainly expect to be back in the upper single digits.
We still have a target longer term to get to sustain 10% or better.
And again.
Relevance and importance of that that number is that that sets the table for our customers for the smaller customers.
The vast majority of customers, we onboard the platform are in that $10 $15 $20, a month area, where they sit and we nurture we debate them. If you will and the more of those customers we get on the platform.
The more option value, we have on them graduating into an SMB like the case study we cited on the call. So we haven't we still expect.
To get back to upper single digits, hopefully double digits over time.
And thats going to be a big tailwind supporting our long term growth objectives that we have and but our customer growth last quarter was in line with.
What we expected.
Sure.
We expect to be in that sort of range near term and then I think as we get into the back half of this year, we'll start to see some lift.
From that however from those $50 or above which essentially drive the economics of the business, we expect to see growth rates in the ranges.
Experiencing recently.
Excellent I appreciate it.
Thanks, Bob.
Your next question comes from Michael <unk> from Keybanc.
Hey, guys.
Good morning, Craig some great metrics one one question one thing it was interesting.
<unk>.
<unk> seemed to accelerate a little bit more.
And then revenue and you also commented that NRI seem to do really well in December so anything in particular that seem to be having happening more positively towards the very end of the quarter that might be indicating even stronger growth into next year.
Net.
<unk> was.
Roughly the same as revenue growth in the quarter. So.
Looking at obviously just for the month. It was slightly ahead of where we're at yes.
We see acceleration in <unk> over time.
Net dollar retention.
Was very strong.
<unk>.
I think it creates a great floor.
Did take our growth expectations up on this call from the last call.
We are seeing a stronger business.
And outlook and certainly over the year.
We're seeing our business growing much faster today than it was.
As we were about ready to go public this time last year. So.
I don't think there is and thats coming from this cohort of of Smbs or scaling on the platform they have more tools.
Invest and add more tools this year that will fuel that <unk> and.
An expansion of those customers on our platform.
And we will hope to add other capabilities that will capture more share.
As they grow and expand so that's the strategy and.
And then adding those smaller customers the more we get on that platform.
They graduate and so.
Those are all working right now and we're excited to get into this year and continue to drive the business growing well into the <unk>.
Yes.
And Bill just on Capex.
Most of the missed this did you give a capex target for 'twenty, two as a percentage of revenue.
If you are able to help us with maybe making sure we're defining as the right way.
Yes, what we're doing this quarter Michael is we're moving away from some of the other metrics that we have done before which is trying to.
Sort of equate to the terminology that a lot of folks look at in terms of comparing performance other companies companies in.
The technology space, So we're moving more to sort of the non-GAAP operating income less.
<unk> capex to get us to a free cash flow margin. If however, you wanted to look at it in the traditional way Capex. This year as a percentage of revenue is probably going to be down around low 20% 21, 22%. The continued progression youre going to see in that number which is going to allow.
US to continue to improve free cash flow.
The other thing I think worth calling out.
If you look at our margins.
Youre going to start seeing the benefit of the efficiencies not only in terms of the overall capex, but when you look at our GAAP, our GAAP profit margins.
Youre seeing those in Q4 move above 60% Youll see a steady progression of that margin up towards 70.
Lower lower cost relative to the servers were acquiring is lowering our DNA and we're also continuing to get traction on our efforts to increase monthly revenue per server, which is a key metric for us and drives our payback periods, which I know you've heard us say before we produce to down to around eight to nine months.
<unk> down from around 15 previously so.
So.
Youre a simple straightforward question, probably 'twenty, one 'twenty, 2%.
But then a number of other factors that are working to improve overall free cash flow margin up towards 10% as Nancy mentioned earlier.
Thanks, Bill that's helpful and just to clarify you said.
GAAP gross margins it sounds like heading steadily up towards 70% at this point from where we were.
That's correct and as you saw that clearly in Q4, where we crossed over 60% youll see that continuing to improve in the year ahead.
Thanks, a lot guys.
Thanks, Mike.
Your next question comes from Mark Murphy from Jpmorgan. Your line is open.
Yes, Thank you and I'll add my congrats on a nice finish to the year. So you can see digital Ocean has always been known for a very attractive pricing you. You've had these prices that can be 20% to 50% lower than AWS at times.
Im wondering philosophically how do you.
Roche pricing in this environment, which is extremely inflationary.
And do you sense at all that your customers.
Perhaps would expect.
To be seeing some price increases actually win win.
They are seeing their own salaries.
Rising and real estate costs kind of rising all around that.
Well I think our core premise of the cloud is about inflation is about productivity.
Deflation, but I think our price is staying competitive on price and creating a compelling alternatives.
Two more complex larger platforms is a real value lever for us, especially as we add services to the platform and robustness to our infrastructure.
I think thats the core value proposition at the same time it allows us to stay at a modest premium to the Lenovo ulcers.
<unk>.
At the smaller end of our segment of the market.
So our differentiation around simplicity community our support model our commitment to open source are actually real Differentiators and.
I think being competitively price reinforces that.
We view pricing as <unk> grown.
Growing in the upper Twenty's work consumption based model, a big aspect of ARPA growth as our customers growth organically and then we're able to supplement our turbocharge that growth with the other services. They can buy as their employees base grow their work complexity grows and they can do more of that on our platform. So I think thats.
Foundational to how we grow and sort of out Ron if you will the macro.
And we've seen opportunities like our launch of our premium droplet last year.
At a 20% price uplift through.
Through the lever of packaging or giving more alternative use cases through product and packaging.
As a pricing lever if you will and you would expect to see some of that over time, but.
I think being competitively priced creates a compelling.
Value proposition for us and as you can see where free cash flow positive today, and we're driving leverage in this macro environment and we're able to do that from operational efficiencies.
All the things, we do to manage the business and and do it in this environment successful.
Okay.
And as a quick follow up you had commented that the Mongo DB offering.
I'll start to materially.
The growth rate. This year can you just give us a quick version of why is that particular database products scaling quite so rapidly and I'm not sure. What's your threshold for materiality is but.
Are you, saying that that could.
That could give you a tailwind of a point or two maybe of growth in the next year or two.
Definitely going to be a tailwind on the right and.
That material is real and many millions of dollars.
This year, so that's what I meant but it's going to be a material driver of the database capability is growing several times.
Our overall growth rate as it is a foundational.
Somebody goes from having their first customer 10th customer 50 customers you can manage that on a napkin excel spreadsheet, but at some point to start having more sophisticated tools in a database is a foundational next level capabilities for an early stage business thats ramping and so thats why youre seeing such incredible adoption.
Of that and so Margo just supplements that we will look to add other services, we won't have dozens of database capabilities because of our customer base doesn't need that expansive of product set but long ago as one of the more popular certainly for digital businesses and we're seeing that uplift in traction and.
<unk>.
Why we have decided to launch that and partner with long ago last year.
Excellent. Thank you.
Thanks Mark.
Your next question comes from Raimo <unk> from Barclays. Your line is open.
Okay. Thank you can I can stay on that.
I'll take the.
If I think about <unk>, it's obviously a very popular.
Database, offering et cetera, but it's only one with a database, but lots of other things that we could think about can you just talk a little bit about that.
How are you.
It's evolving between adding more products to increase the optical versus kind of shying away from becoming a complex as AWS. That's my first question.
Second question is more on the Felix effort I'm, just trying to understand that better if I look at other guys like folks like a bundle. They used it does serve as to kind of get the customer base than they used to steal efforts to kind of target dose in.
Isn't that kind of peak customer.
Customer base that you have to see those are real customers.
Would benefit from adding them upsell cross sell them better.
You would probably look more like this is one getting new customers can you kind of elaborate a little bit.
But the confusion to me, thank you and congrats great numbers.
Thanks very much.
Have to re ask the second question, but on the first question.
We will add.
A couple of other databases that.
Our typical profile of a customer might use that we don't have.
But theres not fit right. When you look at enterprises, so complex in terms of the industry scope and scale geographies and business models.
The bigger platforms, we will have more alternatives because their customers are more complex our customers tend to the venn diagram overlap of our businesses customers tends to be pretty tight. So we can add one or two other databases over the next year or two but we don't need much more than that.
And so that's what I was mentioning.
The second aspect to your question is fundamental.
Simplicity is core simplicity may be the most valuable attribute of our platform in that it's simple easy to use the experience across the products. The integration of the products the ease at which customers can onboard is grow in scale and test and grow it alone is foundational as a valley.
New proposition and so what our product team.
Sure.
Across our business when we think about the customer experience simplicity is in the middle of the room.
Elephant in the room, all the time, so that's and that's why I say.
We'll add more database engines over time, but it's a small handful that a lot and what will be critical as maintaining simplicity and the and the experience for the customer having documentation tutorials support experience that's integral it also reinforces.
Simplicity and of course, we'll be open source tools that reinforce the entire experience for our customers. So we will not.
That's the benefit I think of being able to focus on this SMB developer ecosystem. They demand simplicity. So even if we sort of wanted to get out.
Do something beyond that that's not interesting to them and so we're going to stay very focused on them and true to our roots while simplicity. So.
No no need to worry that adding.
To the products that we've been able to do that over the last few years, and obviously see significant revenue uplift and traction because we're making it easy for customers to adopt new capabilities on the platform. If you can repeat I wasn't clear what your second question.
Yes.
Can you talked about more and more direct you will do more investments in pedal fabric sales.
I'm just wondering.
It would be kind of all.
Back into your installed base and kind of trying to upsell and kind of work those customers that that was just kind of it.
Additionally, new customer effort.
Yes, okay. So.
The 3% of sales over this first couple of years that we launched a sales capability. The predominance of that revenue mix has been.
Inside sales sort of using data analytics tools to go into the cohort and help them get optimized on the platform. For example, you see a customer who may start at 10% to 15 Bucks.
Quickly go to 50 or 60, and we will then use some triggers to then engage with them, whereas we might have just waited for them to call and the support we have more proactive effort.
So that inside sales effort and we've been very successful at helping customers get better optimized some of these early stage businesses when they get lift off there they're growing so fast.
That they can use to help and we found really good innovative ways to engage with them and that's been a big driver of that 3% direct outbound that we're adding to that.
Back half of last year this year and our partner is to go out and hunt for existing small businesses, either leveraging partners or other tools sourcing tools and engage with them about bill.
Building their business on our platform.
Yeah, Okay. Thank you very much.
Thank you.
Your next question comes from James Breen from William Blair. Your line is open.
Thanks for taking the question just on the overall so the growth strategy I think previously you'd sort of edge growth tool free cash flow and earnings breakeven level and given sort of the increase that youre seeing the leverage in the business and increases in free cash flow yield.
Is that sort of still the plan to sort of just plow it back in and in that case do we see growth accelerate from current levels. Thanks.
Yes.
<unk> will be to obviously grow as fast as we can we'd like to be growing a little bit faster than where we are.
And we're investing to do that.
And we've been successful at driving growth acceleration and we will continue to invest at the same time, we think that we can manage growth acceleration and also drive operating leverage free cash flow leverage and so I think this year is sort of emblematic of what you could expect from us in a typical year, where we're going to invest it.
A faster growth rate.
And prioritize that across certain areas of the business. This year, we're certainly investing heavily in sales we will see leverage in other parts of the business.
And obviously in capital intensity as Bill referenced.
You could see a couple of hundred basis points.
Operating free cash flow leverage while investing.
A lion's share of our growth rate back into new capabilities up and down across the business to drive top line and sustain 30%, obviously better over the long haul.
Maybe a little bit better than that obviously in the near term.
Great. Thanks.
Your next question comes from Brad one of the reasons trend JMP. Your line is open.
EMEA at CN team, congratulations on running at tight business and getting the memo on what.
The new environment needed to see.
Yes, it's a hard question, but I think we got to ask it anyways. So obviously tragically. This morning, Russia invaded the Ukraine, So I think all of our.
All businesses sort of need to look at.
The situation and the risks and the customers and any employees and partners and I. Just wondered if you guys have given thought to that ahead of time and if there are any key points you can make for investors.
Well.
In terms of revenue and we do have.
A small amount of revenue.
In the Ukraine and in.
And in Russia.
But it's very small percentage of revenue.
So not really material in the broader context.
What we're generating today.
And.
Obviously, our business helps us help people through the pandemic.
And I expect that.
Our cloud offering will help people.
The unfortunate circumstances, we have.
And the war zone there so.
Thats part of our mission, we help individuals get creative and I'm sure in a difficult circumstances that were finding themselves there.
People need to be creative and will enable people to collaborate and work together on whatever will be helpful. So.
But in terms of relevance and materiality of the business it's not.
Not material I would say to the overall revenue pie and we're not seeing or haven't been seeing any.
Dislocation and even that small amount of revenue.
Recent months. This this has built up to what was.
Happens kicked off today.
Okay. Thank you.
And that concludes the question and answer session.
I'd now like to turn the call over back to Yankee Squeal for any closing remarks.
Thank you and thank you all for joining US I know this is a very tough day for humanity. So it's not lost on us that fact.
I do hope it's obvious though that we are incredibly excited about the progress we've made in transforming this business.
We look back at where we were a year ago and where this business is today, it's in a fundamentally different place.
And we are set up.
To continue to be a rapidly growing business into a massive market opportunity to serve the entrepreneurs and developers.
The cloud.
And what you're also seeing a window is this going to be a free cash flow machine.
So we are solidly on track to generate our first $1 billion of revenue.
2024.
We look forward to continuing this conversation about our business.
In the weeks and months ahead.
We're working really really hard to realize what we believe is limitless potential of this opportunity.
Digital Ocean. So thank you so much and.
Have a great rest of the day.
This concludes today's conference call. Thank you all for joining you may now disconnect.
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