Q1 2022 DigitalOcean Holdings Inc Earnings Call
Our topline guidance once again.
We are maintaining our previous revenue outlook for the full year of 2022.
While there is some near term global economic uncertainty.
Especially in eastern Europe .
We have a number of initiatives that give us confidence that we will manage through near term macro challenges and have another strong year of growth and free cash flow.
Bill will walk you through those details in a few minutes.
But first I want to address some of the key developments from the quarter.
We're pleased with our Q1 performance as we continue to see exciting developments and product.
We released the beta version of service function in customers' hands and are on track to make it generally available release to all customers very soon.
We saw a dramatic increase in unique visitors to our website with visits up over 70% year over year in the first quarter. That's before the recent acquisition of CSS tricks, which will significantly boost monthly visitors as we move through this year.
As I will share and the customer story, shortly bringing developers and businesses onto digital auction early in their journey is a vital component to our strategy to drive sustainable growth.
In website visits are strong proxy for the health of that part of our customer acquisition strategy.
FICO customers that come through this channel is presenting us with modest near term revenue, but a highly valuable option on their eventual uplift and in the meantime, we nurture them on their journey.
Finally, we continue to make progress building, an inbound and outbound sales capability, which contributed three percentage points of revenue in Q1 up more than 200 basis points from Q1 of last year.
This area is a complement to our self service revenue motion because these customers start substantially larger roughly five to $6000 per month in revenue relative to our self serve customers at 15 to $20 per month day one.
This sales sourced <unk> is also up 180% year over year, a strong demonstration of the potential for this route to market.
Revenue in the first quarter was $127 $3 million up 36% year over year, and a 700 basis point improvement compared to Q1 of last year, when we grew 29%.
We ended the quarter with $524 million in IRR, which is up 35% year over year.
500 basis point improvement from Q1 of last year.
Net dollar retention and revenue per customer are both significant contributors to our top line growth.
Once again, <unk> improved and was 117% in the quarter.
1000 basis points increase from Q1 of last year.
Importantly, the churn portion of MTR has been stable at roughly 10%.
For consecutive quarters now.
We continue to invest to improve the entire customer experience in order to help our customers develop build grow and scale on our platform.
This investment in the customer experience, along with targeted product and infrastructure investments that ensure a relevant and growing set of capabilities. We will continue to be essential to sustaining and Dr. At current levels or.
Better.
<unk> was up 28% in Q1, driven by our customers' own organic growth.
And we accelerate their spend by providing them other offerings beyond core infrastructure that they consume as they scale, including managed databases and Cooper <unk> server list in our marketplace.
Operating margin and free cash flow improvement were also reflected in our Q1 performance our non-GAAP operating margin was 11%.
In Q1 in line over the prior year.
Our operating margins are typically lowest in Q1, given certain typical frontloaded costs, such as benefits and related taxes.
And we will deliver ramping margins progressively through this year as revenue growth sequentially throughout the balance of 2022.
We are committed to generating positive and ramping free cash flow in Q1, despite seasonal challenges was no different.
We believe that a defining differentiator of the digital Ocean investment thesis is our ability to grow fast while generating free cash flow.
In the past, we have referred to the company, becoming a free cash flow machine and are confident that we are on track to delivering on our 20% or more target of revenue in the next couple of years.
Approach and exceed our first $1 billion of revenue.
In Q1, we generated free cash flow is 4% of revenue or $5 million. This was a strong performance as our team is managing our capital spending very well both in terms of generating operational efficiencies and better management.
Similar to our operating margin profile, we expect free cash flow to ramp through the year.
And margins to increase significantly by year end.
Finally customer additions were also a key contributor to our Q1 growth.
Added fourth we added 14000 total customers and more than 3000 of those were our customers that are spending more than $50 per month.
This higher spending cohort now numbering 102000 in total grew 20% year over year and their revenue represented 84% of total company revenue.
Okay.
Even better the revenue grew 43% year over year much faster than overall company growth.
We believe there are many more customers that fit this heightened customer spend profile that we can attract and cultivate.
This year and in the years ahead.
We breakdown customer size, because it's a more relevant indicator in terms of what is fueling our revenue base.
We simply don't have an average customer.
Cost of our customer start at 15% to $20 a month in over time and at their own pace.
They grow to greater than $50 per month, which is a point, where we typically see lift off this unique focus on supporting our customers through a journey is a defining differentiator for digital ocean in the marketplace.
As you can see the businesses on firm footing, and we are well positioned to continue to grow into.
Into this immense market opportunity.
I'd like to turn your attention to some specific steps, we are taking in product development and marketing to continue to execute against our ambitious growth objectives.
One of the many growth levers that we have is expanding our product set to better serve our customers' changing needs as they experienced their own organic growth.
Key asks from our customers as a service offering and that is why we acquired <unk> last year in Q1, we introduced the beta version of our service offering and it will become generally available in a few weeks.
<unk> is a rapidly growing adjacent market opportunity that extends and complements our infrastructure and platform offerings.
And is foundational to our functions as a service strategy.
Our service product is cloud native and allows builders to create and manage applications without having to allocate time and resources to server selection geography and performance instead.
Instead builders and developers can elect for digital Ocean provision service to meet their needs based on consumption and other factors, while they can focus on coding and development.
This has been one of our top product launches for 2022 and service should help propel customer acquisition ARPA growth in MBR, while also laying the groundwork for future product expansion plans.
Efficient customer acquisition has always been one of the hallmarks of our business.
Best evidenced by low sales and marketing costs.
Few companies in software growing their top line, 36% with sales and marketing expenses as low as ours.
In Q1, non-GAAP sales and marketing spend was only 12% of revenue.
And yet our largest customers grew 20% in their revenue grew 43%.
Expanding our community content is an important element of our customer acquisition strategy. We use this content to drive millions of people to our website each month.
In Q1, we made an acquisition at significantly increased our content library.
We also re launched a refresh of our brand to be more balanced in our positioning to who we serve across developers through smbs.
In March we acquired CSS Trek, So learning site with 6500 articles videos guides and other content focused on front end development.
This nicely complements our existing library of content furthering our reach with both front end and full stack developers.
We now have over 7000 tutorials to complement the 32000 other documents on our site.
Which all contribute to the rapidly growing website visits.
And will allow us to sustain an efficient customer acquisition motion as we continue to scale the business.
When we went public a little more than a year ago, we were averaging Russell roughly 5 million unique visitors to our website each month.
Thanks to leveraging thanks to leverage we are realizing from significant changes in our self serve marketing motions.
And the addition of CSS tricks Q1.
We delivered an average over 9 million unique visitors.
In the quarter, which represents over 70% year over year growth.
We will continue to look for high quality content sites that are that can expand the top of the funnel to increase the base of potential customers.
And enhanced the deal brand around the world.
With respect to enhancing our strong brand, which supports increasing organic traffic, we launched a new campaign in Q1 targeting the customers that can build their businesses on deal leverage the product portfolio we offer.
And increased their spend as they scale.
We want to be the cloud platform of choice for innovative digital smbs anywhere in the world and.
And our branding will help promote deal to that growing audience.
Next I'd like to highlight one of our 102000 high spend customers, who drive 84% of our revenue.
Which provides yet another demonstration of the organic tailwind is driving our business.
Customer's mission is focused on delivering an engaging experience for people to meet online.
They do this via video chat platform that makes virtual introductions interactions more human.
The company started only two years ago and has experienced exponential growth and now has more than 10 million people using their platform.
The online platform caters to individuals teams and companies more than 10000 teams have adapted their platform for virtual office space and they have hosted over 20 professional events, including job fairs academic events conferences and media releases.
Company was started by a group of friends. After they graduated from college.
We're aware of digital Osha due to our vast library of tactical tutorials.
And selected deal for our simplicity and pricing.
As a startup they needed an easy way to build and test ideas quickly and with minimal overhead.
Our low cost outbound data transfer is incredibly valuable for network intensive loads, which rely heavily on streaming video to large numbers of users.
They started on digital initiated in May 2020, as part of a startup or startup accelerator, we call hatch.
Received infrastructure credit and dedicated technical support to build their business.
Once they completed the hatch program, they decided to continue to build their business on digital Ocean.
When they started on digital is in their monthly recurring revenue was just under $300.
As of March of this year their monthly spend has jumped to more than $190000 or over $2 million.
<unk>.
As we have seen time and time again this dramatic growth in spend has been paired with the adoption of additional products in our portfolio.
Started with droplets and have now added our manage kubernetes are managed databases at platform.
Spaces and volume block storage.
Our load Balancers in our container registry projects across five of our global data centers to deliver great experiences to their customers.
This customer offers another example of the journey that businesses take on digital Ocean.
Demonstrates how and why we cultivate a large universe of developers and early stage businesses.
Even if at lower dollar values initially.
And reap the benefits as many of them get lift off in experienced rapid growth, while using an increasing mix of our products and services.
Last but certainly not least I want to share an exciting recent development that highlights our mission to grow together with our customers and the broader development developer community.
When we went public last year, we pledged to contribute 1% of our evaluation at the time of the IPO or $50 million to charitable initiatives over the ensuing decade.
Last month, we announced the cornerstone of that initiative.
No impact.
A global social impact program aimed at empowering technology innovators through the donation of digital ocean infrastructure philanthropic grants and employee voluntary.
We are supporting organizations that we believe are having interesting and important impacts such as facilitating technology literacy to communities, who haven't historically been part of the broader tech ecosystem.
Efforts that helped tech enabled nonprofits better use technology to support their missions and many other specific use cases.
Supporting innovation like this is core to our mission to simplified cloud computing, so builders can create software that changes the world.
I'm very proud of this effort because it expands access to cloud computing technology.
Creates more opportunities for people around the world.
And we'll be a feeder for digital oceans business over the long term.
We look forward to expanding our deal impact program in the coming years.
We truly believe that our community is bigger than just us.
<unk> impact Ron's, how we live our values and will be an important element of our company as we continue to grow and achieve our first $1 billion of revenue in 2024.
In summary.
We're off to a good start despite the global challenges, we all find in 2022.
I am proud of our team for their accomplishments.
I would like to thank each of them for their efforts on behalf of our customers. We are well positioned for continued and durable growth along with ramping free cash flow generation across the balance of this year.
I would now like to turn the call over to Bill Sorenson, Our Chief Financial Officer, who will provide details on our financial results in Q1, and our updated outlook for this year.
Thanks, Nancy good afternoon, everyone and thanks for joining us today to discuss another quarter of strong results that produce revenue and free cash flow that exceeded expectations.
Anti captured much of the positive momentum, we're seeing across the business. So I'll keep my remarks fairly brief.
I'm going to focus on some top line numbers customer dynamics free cash flow and Capex, along with our financial outlook before turning it over to the operator to take your questions.
For the first quarter revenue grew 36%, which represents our fourth consecutive quarter of revenue growth greater than 35%.
This was driven by a 117% net dollar retention the highest ever reported as a public company revenue per customer that grew 28% and 20% growth in the number of high spend customers with total customer growth of 6%.
We also had healthy cash from operations of $30 million and free cash flow that was 4% of revenue once again, our results demonstrate digital ocean superb product market fit digital oceans combination of customer growth or <unk> growth and high teens MBR are proving to be a valuable mix.
And continues to be the foundation for durable, 30% plus revenue growth.
Providing some more context on our customers, we see ongoing success in attracting and Onboarding high spend customers or those who spend more than $50 per month with digital ocean.
This cohort is now more than 102000 strong and grew by 20% year over year up from 85000 in Q1 'twenty one.
In many regards these customers, which typically use multiple products and services have been critical to the improvement in MTR that we've experienced over the last two years in.
In Q1 revenue from these customers grew 43% and now represent 84% of our total revenue up from 80% last year.
Increasing percentage of revenue indicates their value to our financial performance as their revenue is growing faster than the company. Overall, we are pleased to add 3000 of these customers in Q1, and we're very focused on deliberate strategy to increase these customers both by nurturing our very large base of smaller customers as David.
Sales scale their businesses and by bringing in higher spend customers at the outset.
Fritz include targeting potential customers in specific verticals and use cases that are good fits with our platform offerings and pricing model, including video streaming media managed service providers and web agencies. Additionally, we are working to increase our top of funnel as you heard from Nancy.
Our unique visitors have grown by over 70% year over year at.
At the same time, we are continually improving our funnel dynamics to activate and convert the potential higher spend customers more rapidly.
Lastly, we also have sophisticated data analytics triggers to help us facilitate these customers being offered and purchasing additional products from us as they scale.
Our goal is very straightforward, we want to significantly increase the number of high spend customers drive their endear higher through customer success best practices and grow their revenue faster than the company average.
We think in our massive and growing market opportunity. There are many more high spending customers that we can attract convert grow and retain our continued focus on customer support targeted sales outreach and our product efforts in areas such as server list will help us accelerate the growth of these customers.
Q1 is the first quarter, where we report solely on non-GAAP operating income as a measure of profitability versus adjusted EBITDA, which we had used historically for.
For the quarter. This metric was $13 6 million, reflecting 11% of revenue, which fell short of our guidance target previously provided of 12% to 13%.
The primary driver of this variance were payroll taxes related to stock based compensation that were previously forecasted over the course of the year, but that had a greater impact in Q1 without that impact we would have met guidance as we continue our focus on operating efficiency, while at the same time increasing spend in March.
Hitting and customer success.
We remain solidly on track to improve profitability over the course of 2022 driven in part by continued improvements in gross margin and overall spend efficiency and are confident in our full year guidance, which I will address shortly in my remarks.
Next I want to share some exciting news on our expanding global footprint, which we believe will help us accelerate our growth and an important geography for US. We are on track to open a new data center in Australia in Q4 of this year.
As we've shared previously we plan and manage our capital expenditures with a six to eight quarter horizon. The launch of this new data center was planned within our continually improving capital expenditure targets as a result, even with this investment we expect to deliver a further reduction in capex as it <unk>.
<unk> of revenues. This year, we still project the Capex will be approximately 22% of revenue for calendar year 'twenty, two and remain confident that we can lower that further into the teens over time.
This capex improvement over the past few years is one of the changes we are very proud of as it is a tremendous improvement from Q1 'twenty. When capex was 44% of revenue and even last year's Q1, Capex of 25% of the revenue, which allows us to drive growth and free cash flow.
Free cash flow is the beneficiary when you prioritize efficient growth and manage capital expenditures and we are very pleased to deliver $5 million of free cash flow in Q1 or 4% of revenue.
Especially considering that Q1 is usually our most modest in terms of free cash flow as we have a number of significant cash outlays at the start of the year the largest being the bonus payments to our employees we.
We expect to build our free cash flow as we progressed through the year and we are maintaining our outlook for 8% to 10% of revenue for 2022.
As you know back in February our board approved a 300 million share repurchase program.
During Q1, we used $150 million of that approval to repurchase two 6 million shares as yancey shared on our previous call. We view. This buyback is a commitment to our investors that they will not experience dilution from any equity we may use over the next few years to attract and retain our best in class employees.
We expect to repurchase the remaining $150 million in Q2.
Now I'd like to provide our Q2 and full year outlook.
The war had minimal impact on our Q1 results and while we do not have employees or operations in Russia, or Ukraine, we do have customers, who do business in these countries.
Historically revenue from Russia, and Ukraine combined had been approximately three 5% of our total revenue, but we have seen a marked decline in our Russia source revenues over the last three months, which is not surprising given the financial sanctions that hinder payment processing.
And while sanctions are not impacting payment processing in Ukraine.
Chips and disruption from the war may affect some of our customers there.
While we are maintaining and are confident in our full year revenue guidance. We also need to be prudent with our Q2 outlook to take into account the potential for disruption to revenue that is directly exposed as a result of this conflict.
For the second quarter, we expect revenue to be in the range of $133 million to $135 million, which.
Next the potential loss of approximately $3 million of revenues from Russia, and Ukrainian customers. We expect Q2, non-GAAP operating margin to be in the range of 10% to 11% as we complete the bulk of our 22 2022 hiring by the end of Q2.
For the full year, we are maintaining our revenue guidance to be in the range of $5 $64 million to $568 million.
Which at the midpoint is 32% growth.
Please keep in mind that at the time, we issued that guidance, we had not factored in the impact of the war.
However, even with the potential loss of between eight and $10 million of revenues related to Russia, and Ukraine. We are still confident in achieving that revenue growth due to the number of efforts underway that will offset the potential war related.
Losses, the continued outperformance of our outbound sales efforts further improvements in the funnel to drive self serve revenue ahead of plan and the launch of our new Soho was product in a few weeks and lastly, we see opportunities around the way, we package and price our product portfolio, which we have discussed with all of you.
Before with all of these efforts we are very confident in our full year revenue outlook. Despite the near term macro uncertainty and also believe these efforts will provide a material carryover benefit into 2023.
We expect full year non-GAAP operating margins to be in the range of 13% to 15%, which is also consistent with our previous guidance.
Lower margins were anticipated early in the year as we have made a number of investments, particularly in people that will impact profitability in the first half of the year.
Margins will improve over the second half of the year as revenue growth will outpace spent.
As I mentioned, a moment ago in 2022, we expect free cash flow as a percentage of revenue to be in the range of 8% to 10% the.
The combination of continued revenue growth and increasing cash flow generation put us on track for the continued achievement of the rule of 40.
That can concludes my remarks, now lets turn it over to Q&A.
At this time I would like to remind everyone.
Ask your question.
Please press Star and then number one on your telephone keypad.
Yes. The first question comes from local China.
Keybanc capital markets.
Your line is open.
Hi, This is Billy on for Michael.
It's good to see customer adds get back to the mid teens level I guess, how should we think about the sustainability of that mid teens level to drive customers' growth to your goal of 10%.
Thanks.
Well.
Longer term target remains 10% for year over year net logo adds customer ads and we're making very good progress we talked about the growth in our.
Website visits our conversion rates have been good where the net new customers. We're adding has been very strong as has the dollar per revenue out of the box as we've talked about and then we're complementing that with our sales efforts. So we feel very good about where we are today.
In terms of customer additions, we're going to continue to invest in that and as we as Bill noted we are outperforming our initial plans. This year in this area and we're going to continue to to have this be a principal area of focus so.
10% is our longer term goal, we should start to edge up to that over time and.
And we're very pleased with the performance in the first quarter and our current outlook for this part of our customer acquisition motion.
Great. Thanks.
Your next question comes from Mark <unk>.
J P Morgan.
Yes, thank you very much.
So E&C.
Europe is the big question on everyone's mind.
No you've factored into your guidance I'm curious outside of your any kind of kind of direct exposure into Russia, and Ukraine, but how would you characterize the activity kind of elsewhere in Europe , just in terms of business confidence.
Usage trends and retention rates when you when you do see impact.
How is that kind of manifesting for you and I have a quick follow up.
Yes.
We talked about in the outlook and sort of the impacts we're seeing.
This 60 70 days since this unfortunate.
Situation.
To put it mildly star.
Started.
Clearly, we're seeing some impacts.
In the areas we've talked about.
I think there is broader uncertainty, but in terms of our business trajectory I would say, we're largely per expectation.
To this point.
Obviously things could change but.
There is no doubt that.
What we saw a couple of years ago, when we went into a pandemic and.
And our signet a severe recession was our customers hung in there and we were able to execute acquire customers lower churn et cetera. So the SMB marketplace is very resilient.
And so that's been demonstrated time and time again through financial crises disruptions et cetera, also I would point folks to Forrester issued a report in the first quarter, citing.
200% IRR.
Returns at.
That customers get when they use digital ocean. So the reality is.
We're a very cost efficient efficient solution for people.
<unk>.
Where we show up in the income statement of our customers as cost of sales.
And we are a vital aspect to them turning on their service and so it's one of the last areas for them to turn it off.
<unk>.
When you look at the value proposition sentiments of the relative cost we tend to be two ish to 5% of Cogs for our customers.
And that they have with US we're just an incredibly efficient.
And highly performing capabilities. So we feel like we've demonstrated resiliency during the pandemic or at least the first two years of this pandemic and so feel good about the value proposition we feel good about the additions, we're making to the platform.
To provide even more value for customers.
For example, our service functions.
Coming online here in a couple of weeks.
But in terms of what we're seeing.
About what we expected and.
And we'll see how things progress as we move through the year.
Okay, I think I will leave it at that thank you very much for taking my questions.
Thanks.
Okay.
Your next question comes from Raymond Leung chat with Barclays.
Hi, Ed.
Hey, Thank you.
Could I ask on the <unk>.
Just to remind us.
New products like server list.
You had mom would it be year cycle with an extra service that you launched.
What are the price points, there and how big do you think those extra.
Products that are kind of slightly higher than your enrolment dropdowns could be over time as part of the whole organization. Thank you.
Yes, so those are modest uplifts.
In terms of depending upon the volumetric and the types of use cases that customers have they tend to be uplifts in terms of <unk> adds to existing customers.
What I would say is when we launch a product our expectation is that three plus years out we're going to get at least 300 basis points contribution to growth.
To give you a sense of the size and scale. It takes a while for those customers given that the nature of our revenue model subscriptions to offer the number of customers to build on the platform. We're now seeing mongo.
Getting into that critical mass that will be a material contributor at really high growth rates.
We'll expect server list to build during the course of this year contribute to revenue growth and be an outsized driver of pushing revenue supporting our 30% plus growth targets over time, and but we're targeting new products contributing 300 basis points.
Two three plus years out.
As a criteria for when and how we decide to launch.
What products.
Alright, congrats thank you.
Okay.
Your next question comes from Tim <unk> with Oppenheimer <unk> company.
Your line is <unk> thanks, guys.
Thanks, just two follow ups on the new products.
Could you maybe just talk about how many major new products do you think you can launch a year at this point and just maybe some color on what areas may make the most sense and then just following up on your comments on maybe.
Further thinking on what a recession might mean for you guys.
And.
Can you give any metrics what happened there two years ago. When we had a slowdown I know, it's a different world, but did you see much impact too.
Trends at all at that time.
Well, our sort of our recent cadence as sort of one major new product a year plus a number of feature enhancements on existing capabilities.
We've.
Obviously, you made some significant changes in our product and technology innovation capability over the last six months, we're starting to execute on change.
In the first half of this year, which I'm really excited about and the designation of changes to give us greater velocity, so we'd like to capacity.
And to do more than one major new product a year and more than a handful or a couple of handful of feature enhancements. So were in the motion here, where I expect in the second half of this year and certainly next year to ramp.
Significantly improve our velocity quality transparency.
Of our execution.
Because what we've what we've seen in the last two to three years is the launch of managed databases kubernetes are our first foray app platform and service obviously several functions coming this month, our debt our marketplace as we have substantially added to the revenue growth because per the.
The customer journey and the case, we just shared as customers build out there.
Their capabilities and their businesses, they consume more pads offerings, our SaaS offerings and to the extent, we give them relevant SaaS offerings, that's going to be a strong contributor to growth. So I am excited about the changes we've made the investments we're making in product and innovation is a huge fewer of our growth.
And of our reputation and relationship with our customers and so.
Very excited about increasing velocity here as we get into the back half second half of this year and into 2023.
In terms of the first question.
It was about a recession two years ago.
I hope, we all never see a more severe recession that we saw two years ago. This time.
As we got into this pandemic.
I'll say this.
Churn was approaching 20% when we went into the pandemic.
We said earlier, it's cut in half.
Obviously net dollar retention was just around 100, maybe just under.
It's in the mid to upper teens today.
Customer acquisition was relatively flat.
Single digits today growth was in the low <unk> mid <unk> in the mid to high Thirty's today. So I think we were able to endure.
Through a.
<unk> revamped and focus on our support going back doubling down on simplicity.
Doubling down on our support model, we've made significant investments in the tutorials.
Our digital content I think we went into the.
Pandemic with 253 million website visitors a month, obviously, we've tripled that.
We doubled down on the customer experience.
And the last I should say to last year as we entered the pandemic recession, we're going to continue to double down on the customer experience.
We've demonstrated that getting closer to our customers, we're intimate understanding our customers.
Serving this journey nurturing customers on this journey is a key differentiator for us and we think thats whats going to enable us to sustain 30% or better growth during <unk>.
Time of uncertainty.
That we're all sort of seem to be in right now.
Thank you.
Your next question comes from Jim Fish with Piper Sandler.
Your line is open.
Hey, guys. This is quentin on for Jim Thanks for taking my questions.
Maybe first just a quick one net large customers added in the quarter did see a slight downturn compared to prior levels.
Is there higher churn here or anything to call out that was kind of onetime in nature.
Or is this kind of 3000 level the way to think about it as a little bit more sustainable moving forward and then we do have a quick follow up.
I think the way to think about it as revenue growth was basically in line with where it was the last the prior quarter, so customer growth and adds each quarter can oscillate, a little bit but still.
Still very strong I think what's important to note is that we expect it to be materially higher than the overall company growth rate because like the customer example, we just shared with you thousands of those people every month or going into the higher dollar categories. They get lift off on their business.
So that's a key aspect of this and then we will also see more of those new customers as we continue to ramp and see strong performance in our inbound and outbound and partner channel efforts our sales efforts. So.
So.
Without.
I wouldnt necessarily focus on the 400 basis point change quarter over quarter I focus on the revenue growth and the percentage of revenue contribution also.
Ticked up and Thats a trend those three things customer growth will be higher in this $50 up revenue growth will be higher than the overall company and percentage of revenue mix will continue to expand I think those are the three things to focus on and then the quarter to quarter variability in some of those metrics.
But the thematic will hold consistent.
In the near term as we see it.
Got it yeah that makes a ton of science and then and then maybe touching more on the launch for the server list can you talk about your strategy here is the goal kind of in Q2 and Q3 to drive.
Adoption first and then monetization kind of in the back half of the year.
Or is it kind of my explanation along with adoption, maybe any any sense of kind of how that go to market motion is going to move would be helpful. Thank you.
Well, we won awareness and adoption.
That's going to lead to.
As those customers ramp.
We want monetization.
We launched the product because it's interesting for customers and it will be interesting to support topline revenue growth goal.
Goals of 30% or better so that's how we see it.
But it builds right.
It's the nature of adding a customer you get 112th of an annual revenue each month, so we'll be driving customer growth, we focused on month over month trends in terms of.
Customers adds how they're using the product.
Are they testing serious or what have you and we expect to see Super high growth rates in the near term on customer adds and revenue.
That'll be a meaning as those dollars become material to obviously start to materially impact overall growth and that will be the case here for the next several years on our way to.
300 basis point contribution to overall revenue mix.
The next two to three years for service.
Your next question comes from Ramsey El <unk> with Bank of America.
Your line is open.
Yes. Thank you.
My question is on the revenue trajectory youre coming in slightly below 30% at the midpoint on to Q.
But your comps really start to get tougher again.
They are tough until Q, but theyre also tougher in <unk> and <unk>.
Can you help us think through what are the incremental tanks that can get you back about 30% growth.
And in <unk> do you get back first of all about 30% growth in <unk> based on your full year guide you should be tracking there either.
A big acceleration in <unk>. So how should we think about sort of the trajectory based on your new product introduction to new initiatives as we think without ramp and I have a question on operating margin after that.
Well.
Ill, let bill address operating margin I think.
I think it's quite simple our jobs are to set expectations that we meet and beat.
I know theres a lot of gamesmanship on the beats in the game what the guide all of this we've just set expectations, we intend to be.
That's the point.
As we said there is some near term and we're taking the brunt of sort of the near term impact from Russia, Ukraine et cetera. This quarter.
So we're taking a little dip this quarter as we pull revenue out of the outlook, we will start to normalize against that because of the outperformance. We're seeing in our go to market motions on sales and self serve which we've talked about.
The launch of <unk>.
And some packaging and pricing.
Modernization initiatives.
We're taking a very hard look at right now so that's how we lap that.
Youre right.
We were accelerating through last year.
And.
That creates quote unquote tougher comps.
At the same time, we have other initiatives this year to help us offset the impact of that to continue to support a 30% or better growth rate.
And we also set expectations that we intend to be so I think thats how to think about.
Our approach to how we set expectations the guidance, we just discussed.
<unk> discussed and our plans for where we see opportunities.
To continue to deliver strong growth in the business.
Okay. Thanks, Nancy and Bill maybe on the operating margin and free cash flow commentary I think you guys said Q1 is typically at a bottom and then you sort of build from there both for operating margin and free cash flow.
But I think you called out some hiring initiatives in Q2, that's going to pressure operating margin sequentially.
Here into Q2, so as we think about the free cash flow profile as well how should we think about the cadence of that and and then you guys actually.
<unk> did have a slight miss on your operating income that you called out in the quarter as well so the ramp to the second half profitability is that all just revenue leverage coming on on higher revenues or is there anything else happening on the cost line as well. Thank you.
Well its a variety of things, but first one other thing on the revenue Onesie, we took $3 million out of Q2, and if you didn't take $3 million out of Q2, 32% plus so.
What we have is a near term hit from some macro factors that we're going to outgrow as you move through the year in terms of the margin.
We do see sort of a flat margin in Q2, and that's largely because we're doing the vast bulk of our hiring by June 30.
And after that we don't see any incremental ramp in spend through the year and as you know Q3 and Q4, our two largest quarters of the year. So spending growth will basically be substantially slower and you will see.
Our margins up into the mid to high teens as you move into Q3 and Q4.
Even with lower profile, even in Q2 were around 10 or 11% from a guidance perspective, we're still forecasting positive free cash flow and as we move through the year and again the profitability margins get bigger you'll see be bigger.
Bigger contributions in the 4% or so that we had in Q1, but we expect to be progressive in terms of our capex generated per quarter, we will continue to grow quarter on quarter.
Okay. Thank you so much.
Your next question comes from James Breen with William Blair Your.
Your line is open.
Yeah.
Got it thanks for taking the question.
Can you talk about <unk>.
117, and how you think about that moving up as you add products and given the existing growth in your customer base. Thanks.
Yes.
So as we look at net retention.
Absolutely going to have a challenge in Q2.
$3 million of revenue coming out of the top line for US as a result of what's going on in Eastern Europe is clearly going to have a near term impact on <unk>.
We see though as we move forward in the back half of the year moving back up to the high teens and the question that we continue to work on is where can we drive it to our goal would be to drive it over 120%. We have an enormous customer base as you know a part of what we're doing is to focus on those five.
50% $50 and greater those folks who are demonstrating 117% to 118% and Dr. So after a tough comp in Q2, our expectation is that youre going to see <unk> move back up towards that 116, 117 range and our hope as we've already.
<unk> seen historically I mean last year in particular are massive.
Keep in terms of R&D are launched with new products as new products are coming on and customers are buying more products, which in turn is driving incremental usage of the base infrastructure. So we think the service server list launch is another step to us driving greater and greater.
In greater and greater and Dr from our customers, particularly those bigger than $50 a month.
Great. Thanks.
Your next question comes from Josh Baer with Morgan Stanley .
Your line is open.
Thanks for the question.
Two quick ones I know the CFS tricks content is and will remain free and open but was just wondering if theres any advertising or other revenue streams associated with that acquisition.
Nothing that's material nothing that's meaningful.
Okay, Great and then I was hoping you could talk a little bit more about the brand relaunch.
Wondering what were some of the changes that were made and why and what you were looking to achieve thanks.
Okay.
Well, if you look historically at.
Digital Ocean.
We have this dynamic where.
500, plus thousand customers generating 15% of our revenue.
And <unk>, which we put more on the developers are early stage startups.
And we spent a lot of our effort.
On the brand there, but 15% of our customers a 100000.
2000 last quarter or generate nearly 85% of our revenue, we werent spending a proportion of the model.
<unk>.
Effort and communicating and speaking to that constituency and so I think where it's more balanced and is more speaking to the journey.
Come grow with us and so I would say that was thats. The principal focus is to make sure that were aligning.
Who we serve how we serve them over what stages that we serve them.
In our messaging.
And that's especially important as we've been.
Not just nurturing the customers like in the case study that we just showed and discussed on this call and previous earnings calls. It is also increasingly important as month after month with our outbound selling effort, we're seeing lots of customers come from Hyperscale.
And the reason that they come to US is because we have a highly performance set of capabilities at half the price.
We wanted to make sure that we broadened our brand to speak to people and resonate with them as they are considering alternatives from being underserved at other platforms.
And that's what we're trying to accomplish as a part of.
A repackaging of the brand.
Great. Thank you.
Okay.
And I'll take questions at this time I'll turn the call over to Steve for closing remarks.
I want to thank you all for joining us as you can tell we're very excited about our Q1 results and despite the uncertainty that we face we feel confident.
<unk> and our ability to plough through given the assets the brand. The team we have here at digital Ocean, we look forward to continuing our conversation with you.
Our investors in the weeks months and obviously in the years ahead, and we're working hard to realize the limitless potential.
Digital Ocean. So thank you so much and have a great rest of the day.
Yes.
Thank you. This concludes today's conference call you may now disconnect.
Yes.