Q4 2023 DigitalOcean Holdings Inc Earnings Call

Operator: Ladies and gentlemen, good afternoon. My name is Abby, and I will be your conference operator today. At this time, I would like to welcome everyone to DigitalOcean's fourth quarter 2023 earnings conference. Today's conference is being recorded, and all lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during that time, simply press the star key followed by the number one on your telephone keypad. If you would like to withdraw your question, press star 1 a second time.

Ladies and gentlemen, good afternoon, my name is Abby and I'll be your conference operator today.

At this time I would like to welcome everyone to the digital Ocean fourth quarter 2023 earnings conference call.

Today's conference is being recorded in all lines have been placed on mute to prevent any background noise.

After the Speakers' remarks, there will be a question and answer session. If you would like to ask a question during that time simply press. The star key followed by the number one on your telephone keypad.

If you would like to withdraw your question Press Star one a second time.

Operator: Thank you, and I will now turn the conference over to Mr. Rob Bradley, Vice President of Investor Relations. You may begin. www.microsoft.com.ca Thank you, Abby.

Thank you and I will now turn the conference over to Mr. Rob Bradley Vice President of Investor Relations you may begin.

Thank you Abby good afternoon, and thank you for joining us today to review digital oceans fourth quarter and full year 2023 financial results.

Brad Robert Reback: Good afternoon, and thank you for joining us today to review DigitalOcean's fourth quarter and full year 2023 financial results. With me on the call today are Paddy Srinivasan, our newly joined Chief Executive Officer, and Matt Steinforth, our Chief Financial Officer. After prepared remarks, we will open the call up to a question and answer session. Before we begin, let me remind you that certain statements made on this call today may be considered forward-looking statements, which reflect management's best judgment based on currently available information. I refer specifically to the discussion of our expectations and beliefs regarding our financial outlook for the first quarter and full year 2024. However, our actual results may differ materially from those projected in these forward-looking statements.

With me on the call today are petty Srinivasan, our newly joined Chief Executive Officer, and Matt <unk>.

Our Chief Financial Officer.

After prepared remarks, we will open the call up to a question and answer session.

Before we begin let me remind you that certain statements made on this call today may be considered forward looking statements, which reflect managements best judgment based on currently available information.

I refer specifically to the discussion of our expectations and beliefs regarding our financial outlook for the first quarter and full year 2024.

Our actual results may differ materially from those projected in these forward looking statements.

Brad Robert Reback: I direct your attention to the risk factors contained in the company's annual report on Form 10-K, filed with the SEC, and those referenced in today's press release that is posted on our website. DigitalOcean expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements made today. Additionally, non-GAAP financial measures will be discussed on this conference call.

I direct your attention to the risk factors contained in the company's annual report on Form 10-K filed with the SEC and those referenced in todays press release that is posted to our website.

Digital Ocean expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any forward looking statements made today.

Additionally, non-GAAP financial measures will be discussed on this conference call.

Brad Robert Reback: Reconciliations to the most directly comparable gap financial measures are also available in today's press release, as well as in an updated investor presentation that outlines the financial discussion in today's call. A webcast of today's call is also available on our website in the Investor Relations section. With that, I'd like to turn the call over to Patty.

Reconciliations to the most directly comparable GAAP financial measures are also available in today's press release as well as an updated investor presentation.

It outlines the financial discussion on today's call.

Cost of todays call is also available on our website in the IR section.

With that I'd like to turn the call over to Patti.

Paddy Srinivasan: Thank you, Rob. Good afternoon, and thank you for joining us today. I'm very excited to be here on my first call as the CEO of DigitalOcean. As this is my first opportunity to talk to you, I would like to start by sharing a bit about my background and why I was drawn to the DigitalOcean opportunity before providing an overview of our priorities for 2024 and highlighting the focus I will bring to the company. To start, I'm thrilled to be here at DigitalOcean. Having worked my entire career in technology companies and having a professional arc that spans engineering, product management, and C-level positions, I have a deep appreciation for the opportunity that DigitalOcean has in front of us and strongly believe that I'm well-positioned, along with the DigitalOcean leadership team, to help the company reach its full potential. I started my career as a developer and spent my formative years of my career at Microsoft, where I worked on various products, including Windows Server, a variety of developer-centric distributed technologies, and finally, Microsoft Office Server.

Thank you, Rob and good afternoon, and thank you for joining us today.

I am very excited to be here with you on my first call as the CEO of this solution.

Today is my first opportunity to talk to you I would like to start by sharing a bit about my background and why I was drawn to the digital solution opportunity before providing an overview of our priorities for 2024 and highlighting the focus I will bring to the company.

To start I am.

<unk> to be here at the Solutia, having worked my entire career in technology companies and having a professional arent that spans engineering product management and C level positions.

Have a deep appreciation for the opportunity that this solution has in front of us and strongly believe that well position along with the digital Ocean leadership team to help the company reach its full potential.

I started my career as a developer and spent my formative years of my career at Microsoft where I worked on various products, including Windows server, a variety of developer centric distributor technology and finally, the Microsoft Office <unk>.

Paddy Srinivasan: As I progressed in the leadership ranks at Microsoft, I had hands-on experience building platforms aimed at developers, working with independent software vendors, and managing businesses with tens of millions of users. After Microsoft, I moved to Oracle to help launch its Asia R&D Center focused on innovating products for the unique needs of that market. As an entrepreneur at Oracle, I picked up experience identifying market opportunities and developing platforms like mobile-embedded databases with extremely small footprints and near real-time performance in a very low-bandwidth network environment to meet those unique emerging market requirements. After Oracle, I co-founded Opsterra, an application monitoring and managed cloud services platform.

I think progressing the leadership ranks at Microsoft.

It had hands on experience building platforms aimed at developers working with independent software vendors and managing businesses with tens of millions of users.

From Microsoft I moved to Oracle to help launch it's Asia R&D center focused on innovating products, but the unique needs of that market.

As in Intrapreneur at Oracle I picked up experience identifying market opportunities and developing platforms like mobile embedded databases with extremely small footprint and near real time performance and a very low bandwidth network environment to meet those unique emerging market requirements.

After Oracle I Cofounded upstairs.

And application monitoring and managed cloud services platform.

Paddy Srinivasan: This experience, again, reinforced the importance of having a deep understanding of developer needs and using that to drive innovation as we worked to keep up with the evolving needs of nearly 500 early adopter cloud companies, including most of Microsoft's top Azure customers at that. Following the successful sale of Obstera, I spent the majority of the last decade at Go2, formerly known as LogMeIn, a SaaS pioneer delivering cloud-based software applications with a global footprint, with a stint at Amazon in between. At LogMeIn, I experienced 10x growth as we took the company from a little over $100 million at the time I joined to over $1.3 billion in revenue through both organic and inorganic expansion. As part of this journey, my team built an Internet of Things platform which was later acquired by Google to form the foundation of its IoT strategy. After leaving for Amazon to be the general manager of the data and machine learning platform that powers Alexa, I returned to GOTO as its Chief Product and Technology Officer before ultimately taking over as CEO.

This experience again reinforce the importance of having a deep understanding of developer needs.

And using that to drive innovation as we work to keep up with the evolving needs of nearly 500 early adopter cloud companies, including most of Microsoft Azure customers at that time.

Following the successful sale of upstairs I spent the majority of the last decade at go to formerly known as Logmein.

SaaS pioneer <unk>.

Levering cloud based software applications with a global footprint with the standup Amazon in between.

Logmein I experienced <unk> growth as we took the company from a little over $100 million at the time I joined to over $1 $3 billion in revenue for both organic and inorganic expansion.

As part of this journey my team Bell and Internet of things platform, which was later acquired by Google to form the foundation of its Iot strategy.

After leaving for Amazon to be the general manager of the data and machine learning platform that powers Alexa.

I returned to go to as its chief product and Technology officer before ultimately taking over as CEO.

Paddy Srinivasan: At LogMeIn and GoTo, I picked up what it takes to build a product-led growth engine and augment it with a high-velocity sales and customer success machine to attract, convert, and expand hundreds of thousands of growing digital businesses at scale. All these roles and experiences have shaped my perspective and nurtured my passion for understanding customer needs, especially those of developers, innovating on their behalf by anticipating their needs, and running modern infrastructure platforms to support global-scale products. Building Efficient Customer Acquisition and Expansion Engines and delivering value for all stakeholders, customers, employees, and shareholders. I'm really looking forward to bringing these experiences, focus, and operating discipline to DigitalOcean. Switching gears now, there are a few compelling reasons that drove me to join DigitalOcean, but three stand out that I would like to share with all of you today. It's a market that DigitalOcean is focused on. The cloud computing market, and especially the one that serves developers, is one of the largest and fastest growing markets in the history of technology.

At Logmein and Goto I picked up what it takes to build a product led growth motion and augment that with a high velocity sales and customer success machine to attract convert and expand hundreds of thousands of growing digital businesses at scale.

All of this rolls and experiences have shaped my perspective and have nurtured my passion to understand.

Understand customer needs, especially those of developers and.

Innovating on their behalf by anticipating their needs.

Running modern infrastructure platforms to support global scale products.

Building efficient customer acquisition and expansion engines.

And delivering value for all stakeholders customers employees and shareholders.

I am really looking forward to bringing these experiences focus and operating discipline to digital auction.

Switching gears now there are few.

Selling reasons that drove me to join the solution, but three standout that I would like to share with all of you today.

It's a market that digital ocean is focused on the cloud computing market and especially the one that serves developers is one of the largest and fastest growing markets in the history of technology This market consisting.

Paddy Srinivasan: This market, consisting of Infrastructure-as-a-Service and Platform-as-a-Service with a $114 billion opportunity, which IDC is forecasting to grow in excess of 23% through 2027. This growth should continue well beyond the time frame as the market benefits from ongoing migrations to the cloud. Acceleration of new business formation that cloud computing enables and the still very early impact of AI and machine learning and the new generation of applications that these capabilities are already unlocking in a variety of different industries. Second, the strong position that DigitalOcean has in this market. DEO is a cloud leader focused on developers.

Consisting of infrastructure as a service and platform as a service with $114 billion opportunity, which IDC is forecasting in forecasting to grow in excess of 23% through 2027.

This growth should continue well beyond the timeframe as the market benefits from ongoing migrations to the cloud.

Acceleration of new business formation that cloud computing enabled.

But it's still very early impact of AI and machine learning and the new generation of applications that these capabilities are already unlocking and a variety of different industries.

Second reason is the strong position that digital Ocean has in this market.

So as the cloud leader focused on developers.

Paddy Srinivasan: Startups and Growing Digital Businesses. DigitalOcean has more than 640,000 customers, a global footprint with revenue in over 190 countries, and serves customers across a wide range of industries and use cases. Our brand is beloved by a large and loyal developer community that leverages our extensive library of content, including tutorials, Q&A, product how-tos, video guides, and articles. DigitalOcean has carved out a compelling segment in this market, providing a simple and easy-to-use developer cloud with transparent and cost-effective billing and a level of support that small growing businesses will not get from the larger hyperscalers. DigitalOcean has also steadily expanded its array of offerings, starting with core infrastructure as a service with its compute technology called Droplet, Object and Block Storage, and networking capacity with a global footprint to power our customers' apps and services.

<unk> and growing digital businesses.

This solution has more than 640000 customers a global footprint with revenue and over 190 countries and serves customers across a wide range of industries and use cases.

Our brand is beloved with a large.

Developer community that Leverages, our extensive library of content, including tutorials Q&A product households video guidance and articles.

This solution has carved out a compelling segment in this market, providing a simple and easy to use developer cloud with transparent and cost effective billing.

And a level of support that small growing businesses will not get from the larger hyperscale.

This solution has also steadily expanded its array of offerings, starting with core infrastructure as a service with its compute technology called droplets object and block storage.

And networking capacity with a global footprint to empower our customers apps and services.

Paddy Srinivasan: These are complemented and extended by Platform-as-a-Service products, including Managed Databases, Managed Kubernetes, app platform, and managed Kafka for those customers that need to leverage high volumes of data streaming. In addition to our core infrastructure and platform offerings, with CloudBase, we offer managed cloud hosting that is used to power digital agencies, e-commerce store fronts, and a variety of other online businesses.

These are complemented and extended by platform as a service products, including managed databases manage kubernetes.

Our platform and manage kaska for those customers that need to leverage high volumes of data streaming.

In addition to our core infrastructure and platform offerings with cloud base. We offer managed cloud hosting that is used to power digital agencies E Commerce storefront and a variety of other online businesses.

Paddy Srinivasan: Finally, to take advantage of a generational technology shift, we acquired a leading AI machine learning application development platform, PaperSpace, last year, increasing our addressable market and adding a very valuable growth level. This further extends our platform by enabling developers to test, develop, and deploy AI and machine learning-centric cloud applications that harness the power of GPUs in ways that have been predominantly available only to large enterprises. I just talked about the vast and growing market that DigitalOcean is in and the strong position we have with our platform and the customer trust that we have earned over the years. But now, let me talk about the third compelling reason that drew me to DigitalOcean, the growth and value creation opportunity that is still ahead of us. DigitalOcean has the opportunity to reach even more developers and expand the services we provide to these customers, driving higher revenue growth while maintaining our strong profitability, enabling us to generate compelling investor returns. The plan for achieving this growth centers on understanding and addressing the needs of developers as they build growing digital businesses.

Finally to take advantage of a generational technology shift.

<unk>, a leading AI and machine learning application development platform paper space last year, increasing our addressable market and adding a very valuable growth lever.

This further extends our platform by enabling developers to test develop and deploy AI and machine learning centric cloud applications that harness the power of Gpus in ways that have been predominantly available only to large enterprises.

I just talked about the vast and growing market that digital ocean SM and the strong position, we have with our platform and customers.

Customer trust that we have learned over the years, but now let me talk about the third compelling reason.

That drew me to this dilution the growth and value creation opportunity that is still ahead of us.

This solution has the opportunity to reach even more developers and expand the services. We provide to these customers driving higher revenue growth, while maintaining our strong profitability, enabling us to generate compelling investor returns.

The plan for achieving this growth centered on understanding and addressing the needs of developers as they build growing digital businesses.

Paddy Srinivasan: We will achieve our near-term growth objectives and position ourselves for higher sustainable long-term growth by focusing on these very specific growth levers. First, we are enhancing our platform with global load balancing, data resiliency, granular identity and access management, storage enhancements, and many other new features that will enable our customers to operate and scale globally. Number two, we are investing in both network and infrastructure, providing increased diversity, lower latency, and enhanced speed on our core IP backbone and edge to enhance the performance of our platform to benefit our customers and allow us to migrate more customer workloads from other providers onto our platform. On top of these product offerings and platform foundation, we will continue to expand our managed services offering to serve customers that want an assisted experience with robust scaling capabilities on our platform. As an example of this, just a few days ago, we announced Autonomous, a new cloud-based offering that enables growing businesses to scale their hosting needs dynamically without having to over-invest in infrastructure.

We will achieve our near term growth objectives and position ourselves for higher sustainable long term growth by focusing on these very specific gross levels.

First we are enhancing our platform.

Global load balancing data resiliency granular identity and access management.

Torrid enhancements and many other new features that will enable our customers to operate and scale globally.

Number two.

We are investing in both network.

In infrastructure, providing increased diversity lower latency and enhanced speed on our core IP backbone and.

H to enhance the performance of our platform to benefit our customers and allow us to migrate more customer workloads from other providers onto our platform.

On top of these product offerings and platform Foundation, we will continue to expand our managed services offering to serve customers that want an assisted experience with robust scaling capabilities on our platform. As an example of this just a few days ago, we announced autonomous a new cloud based offering that <unk>.

Enables growing businesses to scale their hosting meet dynamically without having to over invest in infrastructure.

Next building or are building on our recent papers based acquisition.

Paddy Srinivasan: Next, building on our recent paper space acquisitions, we are investing in our AI ML strategy to take advantage of this market opportunity by bringing simple, easy-to-use AI ML capabilities on both hardware and software to developers, machine learning engineers, and application builders across a broad range of business types, as we have done successfully with our core DigitalOcean cloud services. And finally, point number five, is that we will augment our durable self-service customer acquisition model with direct sales and customer success activities to acquire, retain, and expand customers and amplify our reach through our vibrant partner ecosystem. For these reasons, I'm very excited to have joined DigitalOcean at this critical time of inflection. The company begins 2024 having weathered a challenging macro demand environment where, like many large platform providers, top line growth slowed from historical highs.

Investing in our AI ml strategy to take advantage of this market opportunity by bringing simple easy to use AI ml capabilities on both hardware and software to developers machine learning engineers and application builders across a broad range of business types as we have.

Done successfully with our core digital Ocean cloud services.

And finally point number five is we will augment our durable self service customer acquisition model with direct sales and customer success motions to acquire retain and expand customers and amplify our reach through our vibrant partner ecosystem.

For these reasons I am very excited to have joined <unk> at this critical time of inflection.

The company begins 2024, having weathered a challenging macro demand environment, where like many large platform providers topline growth slowed from historical highs.

Paddy Srinivasan: Recognizing early in 2023 that near-term growth could be pressured, we successfully accelerated the attainment of long-term target margins to build a durable cost structure that will generate attractive free cash. With plans to improve net dollar retention, or NDR, through increased customer engagement and continued product innovation and driving higher growth opportunities across cloud-based services with our new AI ML platform, we are positioned to establish a foundation to deliver low double-digit growth in 2024 while setting ourselves up for the future. Let me now finish by articulating the key focus areas that I'll be driving. While I'm excited about the company's long-term growth plans, as CEO, I will leverage my product and engineering background and deep cloud experience to bring an elevated focus to two critical priorities in the short term: Product Innovation and Efficient Go-To-Market. Let me explain quickly.

Recognizing early in 2023 that near term growth could be pressure, we successfully accelerated the attainment of long term target margins.

To build a durable cost structure that will generate attractive free cash flow.

With plans to improve net dollar retention, our LDR through increased customer engagement and continued product innovation and driving higher growth opportunities across cloud base, and our new AI ml platform.

We are positioned to establish a foundation to deliver low double digit growth in 2024, while setting ourselves up for the future.

Let me now finish by articulating the key focus areas that ill be driving.

While I am excited about the company's long term growth plans as CEO I will leverage by product and engineering background and deep cloud experience to bring an elevated focus to two critical priorities in the short term.

Product innovation and efficient go to market, let me explain quickly.

Paddy Srinivasan: First and foremost, we will stress the developer experience on our platform; we will develop an intimate understanding of their needs, whether the use case is in SaaS application deployment and scaling, running the back end of web and mobile applications, game development or data streaming, e-commerce, storefronts, education technology, or any other workload, and we will be unrelenting in our quest to understand how to make their jobs easier and to be a critical part of their growth We will use this understanding to rapidly develop our product roadmap, which includes several important enhancements in security, resiliency, performance, networking, and storage, which are really critical to our customers scaling on our platform. We will also increase the pace of the identification and development of new capabilities that will drive value for our customers and fuel our growth further. Our ongoing investments in AI and machine learning capabilities are a perfect example of this.

First and foremost we will obsess over the developer experience on our platform.

We will develop an intimate understanding of their needs whether they use case is in SaaS application deployment and scaling we're running the backend of web and mobile applications game development for data streaming E Commerce storefront.

Education technology or any other workload and we will be unrelenting in our request to understand how to make their jobs easier.

And to be a critical part of their growth through our platform offerings.

We'll use this understanding to rapidly develop on our product roadmap, which includes several important enhancements in security resiliency performance networking and storage.

Really critical to our customers scaling on our platform. We will also increase the pace of identification and development of new capabilities that will drive value to our customers and fuel our growth further.

Our ongoing investments in AI machine learning capabilities is a perfect example of this.

Paddy Srinivasan: In addition to driving innovation, we will augment our best-in-class self-service, our product-led growth customer acquisition engine, with an effective high-velocity sales and customer service engine to improve NDR by establishing a trusted relationship with our top customers, drive adoption and visibility into our other offerings on our platform, and continue providing world-class support and community engagement that these customers have come to expect from DigitalOcean. By obsessing over the developer experience and Innovating on their behalf and enhancing our go-to-market, we will take advantage of the tremendous growth opportunity that is in front of us. Our aim is to cement our position in this $114 billion addressable market for infrastructure and platform as a service and be the foundation for developers at startups and growing digital businesses to rapidly build, deploy, host, and scale applications that change the world. In conclusion, over the first several weeks as CEO, I'll spend the majority of my time meeting with customers, employees, and investors to gather their feedback and sharpen our understanding of the market we serve.

In addition to driving innovation, we will augment our best in class self service or product led growth customer acquisition engine.

With an effective high velocity sales and customer service engine to.

To improve MBR by establishing a trusted relationship with our top customers drive adoption and visibility into our other offerings in our platform and continue providing world class support and community engagement that these customers have come to expect from digital Ocean.

By obsessing over the developer experience and.

And innovating on their behalf.

And enhancing our go to market, we will take advantage of the tremendous growth opportunity that is in front of us. Our aim is to cement our position in this $114 billion addressable market for infrastructure and platform as a service and be the foundation for developers that startups and growing digital businesses.

To rapidly build deploy host and scale applications that changed the world.

In conclusion over the past several weeks as CEO I'll spend the majority of my time meeting with customers employees and investors to gather their feedback and sharpen our understanding of the market we serve.

Paddy Srinivasan: While we will continue incorporating this feedback into our ongoing plans, I am very confident in the immediate priorities that I just outlined. We will continue to invest in our key revenue growth drivers to achieve our 2024 plan and position the company for further growth in 2025 and beyond. We will obsess over the developer experience and focus on innovating to meet their evolving needs with platform innovation and crisp go-to-market initiatives. We will reignite growth in our core infrastructure and platform as a service offering. We will leverage the strong margins in the core DigitalOcean business to help fund investment in our strategic long-term bets like AI and machine learning-centric cloud application development. We will maintain our long-term focus on increasing operating leverage and delivering attractive free cash flow margins, creating a compelling return for investors. As you can tell, I am very excited to be here at DigitalOcean. I've got a very busy quarter ahead, but I'm really looking forward to meeting many of you in the coming months. With that, I will now turn it over to Matt. Thanks, Patty.

While we will continue incorporating this feedback into our ongoing plans I am very confident confident and the immediate priorities that I just outlined.

We will continue to invest in our key revenue growth drivers to achieve our 2024 plan and position the company for further growth in 'twenty five and beyond.

We will obsess over the developer experience and focus on innovating to meet their evolving needs with platform innovation and Chris go to market initiatives.

We will reignite growth in our core infrastructure and platform as a service offerings, we will leverage the strong margins in the core digital Ocean business to help fund investments in our strategic long term bets like AI and machine learning centric cloud application development.

We will maintain our long term focus on increasing operating leverage and delivering attractive free cash flow margins, creating a compelling return for investors.

As you can tell I am very excited to be here at digital Ocean.

A very busy quarter ahead, but I am really looking forward to meeting many of you in the upcoming months.

With that I will now turn it over to Matt.

Thanks, Patty it's great to have you onboard I can tell you the entire digital ocean team and I are excited that you joined as CEO and we're very much looking forward to working with you to achieve <unk> enormous potential.

Matt Steinforth: It's great to have you on board. I can tell you the entire DigitalOcean team and I are excited that you've joined as CEO and we're very much looking forward to working with you to achieve DigitalOcean's enormous. In my comments, I will review our Q4 results and cover the full year 2023 financial highlights before sharing our first quarter and full year 2024 financial highlights and our GoForward Capital Allocations. Q4 2023 was a good finish to the year, with revenue, adjusted EBITDA, and net income per share all exceeding the outlook that we had provided. Revenue was $181 million, which was up 11% year-over-year, and was $3 million above the high end of our revenue outlays.

In my comments I will review, our Q4 results and cover the full year 2023 financial highlights before sharing our first quarter and full year 2024 financial outlook and our go forward capital allocation strategy.

Q4, 2023 was a good finish to the year with revenue adjusted EBITDA and net income per share all exceeding your outlook that we've provided.

Revenue was $181 million, which was up 11% year over year and was $3 million above the high end of our revenue outlook.

Matt Steinforth: This performance was driven by the stabilization of net dollar retention within our core business and strong execution on the Cloudways front. We also got some contribution from our recently acquired AI and machine learning solution. We also delivered strong profitability as we continued to appropriately manage our investment by balancing Investment for growth with Efforts to Improve Operating Efficiency in our Core Business, which resulted in adjusted EBITDA of $73 million, a 41% margin. Adjusted free cash flow was $29 million, representing 16% of revenue due to working capital timing and increased investments in our AI ML capability. For Gap, fully diluted net income per share was $0.44, which was up 57% year-over-year as we continue to successfully implement our strategy of increasing operating leverage while executing our ongoing share repurchase.

This performance was driven by the stabilization of net dollar retention within our core business and strong execution on the <unk> front.

And we got some contribution from our recently acquired AI and machine learning solutions.

We also delivered strong profitability as we continue to appropriately manage our investments balancing investment for growth with efforts to improve operating efficiency in our core business, which resulted in adjusted EBITDA of $73 million or 41% margin.

Adjusted free cash flow was $29 million, representing 16% of revenue due to working capital timing and increased investments in our AI ml keeping us in the fourth quarter.

non-GAAP fully diluted net income per share was <unk> 44.

Which was up 57% year over year as we continued to successfully implement our strategy of increasing operating leverage while executing our ongoing share repurchase program.

Matt Steinforth: As Patty mentioned, and as it was for many players in the industry, 2023 was a challenging year with slowing revenue growth in the face of persistent macroeconomic headwinds. While top-line pressure lasted longer into 2023 than we had originally expected, we saw a bottoming of the headwinds in Q3, and with stable net dollar retention and steady growth in cloud waves in the second half, we exceeded the revised full-year revenue outlook. For 2023, total revenue increased 20% year-over-year to $693 million.

As Patti mentioned and as it was for many players in the industry 2023 was a challenging year with slowing revenue growth in the face of persistent macroeconomic headwinds.

While top line pressure lasted longer into 2023 than we had originally expected we saw a bottoming of the headwinds in Q3 and with stable net dollar retention and steady growth in cloud ways in the second half we exceeded the revised full year revenue outlook.

For 2023, total revenue increased 20% year over year to $693 million.

Matt Steinforth: This growth came from over 18,000 new customers that joined our platform through our durable self-serve funnel, and that came from increased spending from existing customers as well, as overall revenue per customer increased 6% year over year. Growth also came from the steady performance of our managed hosting platform, Cloudways, which increased revenue to $80 million, growing 43% year-over-year, and from our recently acquired paper space, AIML. On the operating leverage front, acknowledging the growth headwinds early in 2023, we proactively accelerated our long-term margin profile, positioning the business to generate attractive free cash flow regardless of the economic growth environment. We successfully achieved that objective, increasing adjusted EBITDA margins from 35% in 2022 to 40% in 2023, and pre-cash flow margins from 13% in 2022 to 22% in 2023. We accomplished this through difficult but necessary cost management of headcount as well as non-headcount related spend.

This growth came from over 18000, new customers that joined our platform through our durable self serve funnel and that came from increased spending from existing customers as well as overall revenue per customer increased 6% year over year.

Growth also came from the steady performance of our managed hosting platform cloud ways, which increased revenue to $80 million growing 43% year over year and from our recently acquired pay per space AI ml products.

On the operating leverage front acknowledging the growth headwinds early in 2023, we proactively accelerated our long term margin profile positioning the business to generate attractive free cash flow, regardless of the economic growth environment.

We successfully achieved that objective increasing adjusted EBITDA margins from 35% in 2022% to 40% in 2023 and free cash flow margins from 13% in 2022% to 22% in 2023.

We accomplished this through difficult, but necessary cost management of head count as well as non head count related spend and.

Matt Steinforth: And by expanding our global workforce, setting ourselves up structurally to improve margins in our core business as we grow. These strong margins in our core DigitalOcean platform enabled us to absorb paper space and invest in the generational growth opportunity that we see in AIML while still exceeding our full-year profitability guidance. Now I want to come back to the solid growth foundation that we have established as we launch into 2024. We have a high degree of confidence in achieving double-digit growth on the back of several growth levels.

And by expanding our global workforce setting ourselves up structurally to improve margins in our core business as we grow.

These strong margins in our core digital auction platform enabled us to absorb paper space and invest in the generational growth opportunity that we see in AI ml, while still exceeding our full year profitability guidance.

Now I want to come back to the solid growth Foundation that we've established as we launch into 2024.

We have a high degree of confidence in achieving double digit growth on the back of several growth levers.

Matt Steinforth: First, we expect new customer revenue, which includes revenue growth from any customer that's still in their first 12 months on our platform that's incremental to 2023 revenue, to contribute 8% growth in 2024. But the majority of that growth will come from self-serve, as we are still in the early innings of our direct and partnership motion. Second, we continue to invest in our managed hosting capabilities. We recently launched our Cloudways Autonomous Service, which enables customers to automatically scale their businesses on Cloudways.

First we expect new customer revenue, which includes revenue growth from any customer that still in their first 12 months on our platform that's incremental to the 2023 revenue to contribute 8% growth in 2024.

With the majority of that growth coming from self serve as we're still in the early innings of our direct and partnership motions.

Second we continue to invest in our managed hosting capabilities. Having for example, recently launched our cloud ways Autonomous service that Patty as mentioned, which enables customers to automatically scale their businesses on cloud ways, and we anticipate cowboys contributing 2% to three points of growth in 2024.

Matt Steinforth: And we anticipate Cloudways contributing two to three points of growth in 2020. Third, our AI and machine learning solutions will be another key growth driver. We see tremendous long-term growth potential in the AI market, and we are increasing our investment in both operating expenses, adding engineering resources to advance our AI software platform, and capital, adding incremental GPU capacity to take advantage of this opportunity. We recently announced the initial availability of H100s and expect additional offerings and further capacity to come online over the course of 2024.

Yes.

Third our AI and machine learning solutions will be another key growth driver.

We see tremendous long term growth potential in the AI market and we are increasing our investment in both operating expenses, adding engineering resources to advance our <unk> software platform and capital, adding incremental GPU capacity to take advantage of this opportunity.

We recently announced the initial availability of H 100, and expect additional offerings and further capacity to come online over the course of 2024.

We anticipate our AI ml solutions contributing 3% revenue growth in 2024.

Matt Steinforth: We anticipate our AI and ML solutions contributing 3% revenue growth in 2020. Our fourth and final major lever, the growth lever, is net dollar retention. As we have discussed, NDR declined over the course of 2023, with a bottoming beginning in Q3 at 96% NDR as we lapped the 2022 pricing. NDR increased several basis points in Q4, but remained at 96% due to rounding.

Our fourth and final major lever growth levers net dollar retention.

As we've discussed MTR declined over the course of 2023 with a bottoming and beginning in Q3 at 96% MBR as we lapped the 2022 price increase.

<unk> increased several basis points in Q4, but remained at 96% due to round and we anticipate NDA are continuing to improve as we move through 2024 as we were working aggressively to return MBR above 100% in the latter half of the year.

As an early indicator of our progress on this front in January we saw increasing month over month growth in customer usage on the core digital Ocean platform and we're seeing similar higher usage growth trends in February as well.

Matt Steinforth: And we anticipate NDR continuing to improve as we move through 2024, as we're working aggressively to return NDR above 100% in the latter half of the year. As an early indicator of our progress on this front, in January, we saw increasing month-over-month growth in customer usage on the core DigitalOcean platform. And we were seeing similar higher usage growth trends in February as well. With that in mind, I will now share our financial outlook for the quarter and for the year. For the first quarter of this year, we project revenue of $182 to $183 million, with adjusted EBITDA margins of 37% to 38% and Diluted Net Income Per Share of $37 to $39. As you may recall, we do not provide free cash flow guidance on a quarter-by-quarter basis, given it's heavily influenced by working capital.

With that context, I'll now share our financial outlook for the quarter and for the year.

For the first quarter of this year, we project revenue of 182 to 183 million with adjusted EBITDA margins of 37% to 38% and diluted net income per share of 37% to 39.

As you May recall, we did not provide free cash flow guidance on a quarter by quarter basis, given its heavily influenced by working capital timing.

With that said our 2024 plan is front loaded on capital as we navigate a constrained supply chain and build critical mass in our AI and milka capacity. So.

So we expect free cash flow margin to dip in Q1, and then increase over the balance of the year.

For the full year 2024, we project revenue between 755, and $775 million, which represents year over year double digit growth at the midpoint.

Matt Steinforth: With that said, our 2024 plan is front-loaded on capital as we navigate a constrained supply chain and build critical mass in our AIML capacity. So we expect free cash flow margin to dip in Q1 and then increase over the balance of the year. For the full year 2024, we project revenue between $755 million and $775 million, which represents year-over-year double-digit growth at the mid-pandemic. This range takes into account the early stage of our AIML offerings and the timing-related risks of a constrained GPU supply chain. But it doesn't require any further improvements in the broader macro demand environment.

This range takes into account the early stage of our AI ml offerings and the timing related risks of a constrained GPU supply chain, but it doesn't require any further improvements in the broader macro demand environment.

With our 2024 investments, we will see modest declines in both adjusted EBITDA and free cash flow margins as we invest to generate a higher growth trajectory as we exit 2024.

Adjusted EBITDA margin will be in the range of 37% to 38% for the year.

As improved margins from our core digital auction platform are offset somewhat by increased investment in our AI ml capabilities.

non-GAAP fully diluted net income per share for the full year will be in the range of $1 60 to $1 67.

Matt Steinforth: With our 2024 investments, we will see modest declines in both adjusted EBITDA and pre-cash flow margins as we invest to generate a higher growth trajectory as we exit 2024. Adjusted EBITDA margin will be in the range of 37% to 38% for the year, as improved margins from our core DigitalOcean platform are upset somewhat by increased investment in our AIML capabilities. Non-GAAP fully diluted net income per share for the full year will be in the range of $1.60 to $1.67.

With our increased investments, we expect to invest north of about $50 million alone.

AI and ml machine learning capabilities.

Free cash flow margin will be in the range of 19% to 21%.

We strongly believe the potential growth opportunity of this new market warrants to near term investment of one to three points and free cash flow.

Yes.

Before concluding my remarks, I'd like to reiterate our long term capital allocation strategy.

Growing levered free cash flow per share remains our ultimate goal and what we believe is a primary shareholder value creation lever.

In that pursuit, we remain committed to driving topline growth with increasing operating leverage while continuing to execute our regular stock repurchase program to return capital to our shareholders.

Matt Steinforth: With our increased investments, we expect to invest north of $50 million alone in the AI and ML machine learning capabilities. Pre-cash flow margin will be in the range of 19% to 21%. We strongly believe the potential growth opportunity of this new market warrants a near-term investment of one to three points of free cash. Before concluding my remarks, I'd like to reiterate our long-term capital allocation strategy. Growing every free cash flow per share remains our ultimate goal and what we believe is primary shareholder value creation. In that pursuit, we remain committed to driving top-line growth with increasing operating leverage while continuing to execute a regular stock repurchase program to return capital to our shareholders. Together, we believe these priorities create a compelling return profile for investors.

Together, we believe these priorities create a compelling return profile for investors.

On the buyback front the board has approved a $140 million share repurchase authorization that we will execute over the next two years utilizing the full repurchase authorization by the end of 2025.

We made strong progress on our buyback program in 2023, repurchasing $488 5 million in stock and reducing our weighted average non-GAAP fully diluted shares by 11% year over year from $118 million to 105 million shares.

Stock based compensation expense also declined materially from 18% to 13% of revenue year over year.

With respect to leverage we continue to believe that two five to three times net leverage is an appropriate long term target.

Matt Steinforth: On the buyback front, the board has approved a $140 million share repurchase authorization that we will execute over the next two years, utilizing the full repurchase authorization by the end of 2025. We made strong progress on our buyback program in 2023, repurchasing $488.5 million in stock and reducing our weighted average non-GAAP fully diluted shares by 11% year-over-year, from $118 million to $105 Stock-based compensation expense also declined materially from 18% to 13% of revenue year-over-year.

And with our strong free cash flow generation anticipate being in the low threes by the end of 2024 based on the guidance that we've provided today.

We continue to benefit from the $1 billion five zero coupon convertible debt instrument that does not mature until December of 2026.

With that said, we will manage and steadily reduce our net leverage over the remaining three years to ensure that we have an appropriate capital structure flexibility and can take advantage of the companys growth potential while increasing our levered free cash flow per share at attractive rates.

To close my remarks, the company achieved a great deal in 2023 and is well positioned for profitable growth in 2024.

Matt Steinforth: With respect to leverage, we continue to believe that 2.5 to 3 times net leverage is an appropriate long-term target, and with our strong pre-cash flow generation, we anticipate being in the low threes by the end of 2024 based on the guidance that we have provided. We continue to benefit from the billion-and-a-half, zero-coupon convertible debt instrument that does not mature until December of 2026.

We have a tremendous and expanding market opportunity and an actionable strategy to capitalize on it with.

With Patty now in the seat we're eager to execute the plan and delivered strong results for our investors.

Thank you again for your time today and I'll now turn it over to the operator for your questions.

Yes.

Thank you.

At this time I would like to remind everyone in order to ask a question.

And then the number one on your telephone keypad.

To be able to take as many of your questions as possible. We ask that you. Please limit yourself to one question and one follow up.

Matt Steinforth: With that said, we will manage and steadily reduce our net leverage over the remaining three years to ensure that we have appropriate capital structure flexibility and can take advantage of the company's growth potential while increasing our leveraged free cash flow per share at attractive rates. To close, my remarks, the company achieved a great deal in 2023 and is well positioned for profitable growth in 2024. We have a tremendous and expanding market opportunity and an actionable strategy to raise capital. With Patty now in the seat, we're eager to execute the plan and deliver strong results for our investors. Thank you again for your time today, and I'll now turn it over to the operator for your question. www.digitalocean.org. Thank you for tuning in. We'll see you next time.

And we will pause for just a moment to compile the Q&A roster.

Okay.

And we will take our first question from Jason Ader with William Blair. Your line is open.

Yes. Thank you good afternoon.

Welcome aboard Patty.

Wanted to.

Ask you just as you.

I know when we've been in the seat for a few weeks, but.

From your perspective.

And observing the business so far in talking to folks.

Where do you see below the lowest hanging fruit for the company.

Yes, Hello, Jason Nice to talk to you and thank you for the welcome.

Yes. This is my day seven on the job last week I spent.

The whole week in Boulder, Colorado with my management team and just taking stock of where we are in the plan ahead for 2024.

Operator: At this time, I would like to remind everyone that in order to ask a question, press star and then the number one on your telephone keypad. To be able to take as many of your questions as possible, we ask that you please limit yourself to one question and one. And we will pause for just a moment to compile the Q&A roster, www.digitalocean.org, and we will take our first question from Jason Ader with William Blair. Your line is open. Yeah, thank you.

Yes, I don't want to comment on low hanging fruit for me everything.

Looks like.

Great.

Targets too.

To accelerate our.

Product Road map.

And as I was saying in my prepared remarks, I think it all starts with really understanding who our customers are and solving their challenges so I'm super excited.

Given the breadth of offerings, we have the.

Jason Ader: Good afternoon and welcome aboard, Patty. I wanted to ask you, just as you've, I know only been in the seat for a few weeks, but from your perspective, and from your observations of the business so far and talking to folks, where do you see the lowest, the lowest hanging fruit? Yeah, Jason.

How much our product is loved by our customers. The community engagement. All of these things are great Foundation for us to build.

<unk> and in terms of my priorities that I outlined.

It's really straightforward there are two buckets of priorities one is accelerating innovation in.

Paddy Srinivasan: Nice to talk to you, and thank you for the welcome. Yeah, this is my day seven on the job. Last week, I spent the whole week in Boulder, Colorado, with my management team and just taking stock of where we are and the plan ahead for 2024. Yeah, I don't want to comment on low-hanging fruit.

And delivering on the product roadmap and there are several aspects of that whether it is fortifying our our core network capabilities and innovating on our infrastructure and platform as a service to the exciting world of AI ml and everything in between I think we have so much.

<unk> to do it's going to be Super Super exciting. The second thing is the experience that I bring in from go to in other places, which is how can we.

Paddy Srinivasan: For me, everything looks like great targets to accelerate our product roadmap. And as I was saying in my prepared remarks, I think it all starts with really understanding who our customers are and solving their challenges. So I'm super excited.

Not only augment our product led growth.

Engine that has gotten digital ocean to wear it day.

But drive positive MBR by really establishing a.

Paddy Srinivasan: Given the breadth of offerings we have, how much our product is loved by our customers, the community engagement, all of these things are a great foundation for us to build on. And in terms of my priorities, as I outlined, it's really straightforward. There are two buckets of priorities.

A great relationship with our top thousands of customers.

Posting them to the breadth of offerings that we have in our platform already and building a great drumbeat in terms so far.

Paddy Srinivasan: One is accelerating innovation and, and delivering on the product roadmap. And there are several aspects of that, whether it is fortifying our, our core network capabilities and innovating on our infrastructure and platform as a service to the exciting world of AI ML, and everything in between, I think we have so much innovation to do, it's going to be super, super exciting. The second thing is, is the experience that I bring in from go to another places, which is how can we not only augment our product led growth engine that has gotten DigitalOcean to where it is, but drive positive NDR by really establishing a great relationship with our top 1000s of customers, exposing them to the breadth of offerings that we have in our platform already, and building a great drumbeat in terms of engaging with them and exposing them of all the great product capabilities that our teams are going to be rolling out.

Engaging with them and exporting them of all the great product capabilities that our teams are going to be rolling out. So all in all I feel very energized by all of these opportunities and of course I'm going to be building.

Series of operational mechanisms too.

To ensure that we are looking at all these saw initiatives one by one and.

Driving execution across the board so.

Super excited to be here. Thanks for the question Jason.

Yes, one quick follow up on that just how long do you think it will take to see the return on some of these initiatives do you have it.

2025, what do you think we could see some actual kind of material impact.

Later this year just to give us a sense of the timeline that you're you're thinking about right now.

Yes, I think.

Many of these initiatives are going to be long running right, we will never be done with innovation.

Fortifying and enhancing our performance tablet security kind of a bank. So I think a lot of these things are evergreen initiatives in terms of when you are going to start seeing results I hope it is sooner rather than later in terms of the outlook that Matt laid out I think it is a very appropriate outlook for the year given the year that we are coming off of.

Paddy Srinivasan: So, all in all, I feel very energized by all of these opportunities. And, of course, I'm going to be building a series of operational mechanisms to ensure that we are looking at all these initiatives one by one and driving execution across the board. So I'm super excited to be here. Thanks for the question, Jason. And one quick follow-up on just how long do you think... www. DigitalOceanHldg.com later this year.

And we will absolutely be laser focused on execution so theirs.

Great opportunity ahead of us and you can count on us to be very disciplined.

And be laser focused on execution.

Thank you and good luck.

Thank you.

And we will take our next question from Gabriela Borges with Goldman Sachs. Your line is open.

Yeah.

Gabriella, we can't hear you.

Paddy Srinivasan: Page PAGE of NUMPAGES www.verbalink.com Page PAGE of NUMPAGES Yeah, I think many of these initiatives are going to be long-term, right? We will never be done with innovation or fortifying and enhancing our performance, stability, and security, kind of a thing. So I think a lot of these things are evergreen initiatives in terms of when you're going to start seeing results. I hope it is sooner rather than later in terms of the outlook that Matt laid out. I think it is a very appropriate outlook for the year, given the year that we are coming off of. And we will absolutely be laser focused on execution. So, there's a great opportunity ahead of us, and you can count on us to be very disciplined and laser focused on execution. Thank you, and good luck.

Can you hear me now.

Yes, yes.

Okay great.

Paddy I wanted to pick up on the comments that Matt made about generating a higher growth trajectory exiting 2024. So how do you feel from that how do you think about what the sustainable growth rate is for this business and the sustainable margin profile at the plant.

Right.

Yes, Gabriel Thank you for your question and nice to meet you.

So you are absolutely right. My overall philosophy is to find the right balance between long term growth and profitability.

I am a firm believer in the concept of growth at a reasonable price with growth being the ultimate value driver for all of us.

Gabriela Borges: Thank you. And we will take our next question from Gabriela Borges with Goldman Sachs. Your line is open. Gabriela, we can't hear you. Kitty Hammond out.

And.

And you heard Matt talk about this right I don't want to put an exact exit trajectory growth rate I think it is too early for me to do that but given where our core market is and where.

Operator: Yes. Okay, great. Patti.

Our developer customers are going I think there is a tremendous opportunity in front of us.

Gabriela Borges: I want to pick up on the comment that Matt made about generating a higher growth trajectory exiting 2024. So Patty, either for you or for Matt, how do you think about what the sustainable growth rate is for this business and the sustainable margin profile that's the Yeah, Gabriela, thank you for your question. And nice to meet you.

In terms of participating in the AI ml market and make the right responsible investments to help us accelerate our growth going into next year and beyond.

I think you will find us.

<unk>.

Very active and busy in our product roadmap not just on the AML front, but also you saw just in the last few days, we announced the auto scaling capability of cloud based call autonomous.

Paddy Srinivasan: So you're absolutely right. My overall philosophy is to find the right balance between long-term growth and profitability. I'm a firm believer in the concept of growth at a reasonable price, with growth being the ultimate value driver for all of us. And, and you heard Matt talk about this, right? I don't want to put an exact exit trajectory growth rate. I think it is too early for me to do that.

You will start seeing a string of.

Announcements in spring of releases on our core infrastructure and platform as a service offerings.

I think our job is to focus on.

Delivering for our developer customers and then once we do that and we become very disciplined at doing that I think the rest is going to take care of itself.

Paddy Srinivasan: But given where our core market is and where our developer customers are going, I think there's a tremendous opportunity in front of us, in terms of participating in the AI ML market and making the right responsible investments to help us accelerate our growth going into next year and beyond. I think you will find us very active and busy on our product roadmap, not just on the AI ML front, but also, you saw just in the last few days we announced the auto-scaling capability of cloud-based call autonomous. You will start seeing a string of announcements and string of releases on our core infrastructure and platform as a service offerings. So I think our job is to focus on delivering for our developer customers. And then once we do that, and we become very disciplined at doing that, I think the rest is going to take care of itself.

No shortage of growth opportunities here right.

Just so many different problems that developers face today that I'm super excited to start solving and.

And I think it's it's really setting ourselves up for the future and I think we have the luxury of having such a strong foundational financial profile to be able to make.

Quick.

Thoughtful calibrated investments to help us lay the right Foundation for next year and beyond.

Okay that makes sense and then the follow up I have is a strategy question on how you think about AI.

If I were to oversimplify and think about.

Value proposition.

All of that is tied to the bread and butter offerings.

You see getting Smbs and developers off the ground with straightforward configurations, and usability help me understand where AI and ml fits into that how do I reconcile the classic value proposition.

Gabriela Borges: There's no shortage of growth opportunities here, right? There are just so many different problems that developers face today that I'm super excited to start solving. And I think we are really setting ourselves up for the future. And I think we have the luxury of having such a strong foundational financial profile to be able to make quick, thoughtful, calibrated investments to help us lay the right foundation for next year and beyond. Okay, that makes sense.

Simplicity with something that could arguably much more surface the much more sophisticated on target, perhaps a different customer sat from wave that's really participated.

Yes, it's a great question, Gabrielle and Thats one of the main reasons why I was so excited to come here and work at <unk>, because I feel like the rest of the market is just.

Paddy Srinivasan: And then the follow-up question I have is a strategy question on how you think about AI and ML. If I were to oversimplify and think about DigitalOcean's value proposition, so much of it is tied to the bread and butter offerings, the ease of use, and getting SMBs and developers off the ground with straightforward configurations and usability. Help me understand where AI and ML fit into that. How do I reconcile the classic value proposition?

Making it a lot more complicated than it needs to be and I'm a fundamental believer that.

The future of any kind of application development.

On the cloud is going to be AI and ml centric for the years to come but I've.

I've had a lot of background in the last few years, both at go to as well as at Amazon.

And I am a firm believer that we are in the very early innings in this space.

And to your point about Hey, this is a market for very sophisticated developers. That's because everyone is talking about large language models and the the GPU forums that you need to power that but I believe that there is a lot more to this than just <unk>.

Paddy Srinivasan: of simplicity with something that could arguably be much more sophisticated and target perhaps a different customer set from where you've just, Yeah, that's a great question, Gabriela, and that's one of the main reasons why I was so excited to come here and work at DigitalOcean, because I feel like the rest of the market is just making it a lot more complicated than it needs to be. And I'm a fundamental believer that the future of any kind of application development on the cloud is going to be AI and ML-centric for years to come. I've had a lot of background in the last few years, both at GoTo as well as at Amazon, and I'm a firm believer that we are in the very early innings in this space.

Building and training Llm's.

So there is obviously a hardware part to it but I think the power of this is again going to default back to software, that's where the magic is going to happen.

And we at this lotion firmly believe that the durable competitive differentiator for US long term is going to be in the software layer.

And you rightly mentioned that developers are finding it extraordinarily hard to say, okay, where do I believe well where do I start.

<unk> AI ml application development from should I build a model should a cleaner model while does fine tuning what is just so many buzzwords in the market today, we have a phenomenal opportunity to do what digital lotions founding principal loss, which is deliver the best cloud computing experience for developer.

Paddy Srinivasan: And to your point about, hey, this is a market for very sophisticated developers, that's because everyone is talking about large language models and the GPU forms that you need to power them. But I believe that there's a lot more to this than just building and training LLMs. So there's obviously a hardware part to it, but I think the power of this is again going to default back to software. That's where the magic is going to happen.

So that they can forget about the infrastructure and worry about the software that is going to change the vote, we have that exact opportunity to do it and AI ml and we're going to unleash the same playbook in a different domain of AML.

So having said that I feel.

Paddy Srinivasan: And we at DigitalOcean firmly believe that the durable competitive differentiator for us long term is going to be in the software layer. And you rightly mentioned that developers are finding it extraordinarily hard to say, okay, where do I believe or where do I start my AI and ML application development from? Should I build a model?

The paper space acquisition is very strategic to us the gradient experience and I personally played Ron with great and over the last few weeks. It is phenomenon. This is exactly what the market is missing today and we have a lot of work to do to to.

To integrate and we are very busy doing that integration between the gradient.

Experience and the cordis solution offerings, but as I said this is super early innings in the world of AI ml. Despite all the hype cycle. So I think this is an opportunity that we are in the very early inning soften I feel super energized that this is exactly in the wheelhouse of digital Ocean and every.

Paddy Srinivasan: Should I train a model? What is fine tuning? What is RAG?

Paddy Srinivasan: With so many buzzwords in the market today, we have a phenomenal opportunity to do what DigitalOcean's founding principle was, which is to deliver the best cloud computing experience for developers so that they can forget about the infrastructure and worry about the software that is going to change the world. We have that exact opportunity to do it in AI and ML. And we are going to unleash the same playbook in a different domain of AI, ML. So having said that, I feel the paper space acquisition is very strategic to us. The gradient experience, and I personally have played around with gradient over the last few weeks, is phenomenal.

Okay.

App developer in the world that is going to build a cloud application.

We'll have to consume.

Make sense of the complex AI machine learning landscape today, and Thats, a great opportunity for us to add value to them.

Thank you for the thoughts.

And we will take our next question from Brad Reback with Stifel. Your line is open.

Great. Thanks, very much petty given everything you just laid out there around the opportunity why not invest more and faster, especially given some of the people you're competing against or investing.

Paddy Srinivasan: This is exactly what the market is missing today, and we have a lot of work to do to integrate, and we are very busy doing that integration between the gradient experience and the core DigitalOcean offerings. But, as I said, this is the super early innings in the world of AI and ML, despite all the hype cycle. So I think this is an opportunity that we are in the very early innings of, and I feel super energized that this is exactly in the wheelhouse of DigitalOcean. And every app developer in the world that is going to build a cloud application will have to consume and make sense of the complex AI machine learning landscape today, and that's a great opportunity for us to add value to that. Thank you for listening, www.digitalocean.org. And we will take our next question from Brad Reback with Steve Hurley. Your line is open. Great. Thanks very much.

On <unk>.

Some that we've never seen before.

Yeah.

Thank you Brad for the question that is a really important question.

I'll start and then I would love for Matt too to give us a little bit of color as well.

As I said, Matt.

<unk>.

It is very early innings right. So.

And I've only been here for a week so.

I think the.

A strategy that we have is a very responsible strategy that.

Balances the right mix of investing for our future will not.

Being carried out getting carried away by the hype cycle of today.

As I said.

Our long term competitive differentiator is going to be in the software experience, we provide to the developers.

And we absolutely have to invest responsibly in the hardware that powers. This experience, but we have to be careful not to.

To try and become a hardware provider, which is not our long term strategy, but we have to find the right balance and I am a firm believer that.

Brad Robert Reback: Patty, given everything you just laid out there around the opportunity, why not invest more and faster, especially given some of the people you're competing against or investing in for, and some that we've never seen before? Yeah. Thank you, Brad, for the question. That is a really important question.

We are going to be.

Very.

We're focused on looking at our value proposition, how developers are consuming our services and we have the ability to calibrate the investment as we go along the year.

So those are my early thoughts, but Matt why don't you chime in I completely agree that it's a very similar model to the model that we have versus the Hyperscale is today I mean, we have a very small footprint of locations and a very small capital budget relative to any of the three hyperscale is just because we target a different market that doesn't require.

Paddy Srinivasan: So I'll start, and then I would love for Matt to give us a little bit of color as well. As I said, Matt, Brad, it is very early innings, right? And I've only been here for a week.

That level of sophistication of that level of scale and what youre seeing when you see a lot of these companies raising massive dollars. There. They are basically just providing bare metal solutions of renting the gpus and in some cases running them to the hyper scaler.

Paddy Srinivasan: So I think the strategy that we have is a very responsible strategy that balances the right mix of investing for our future while not getting carried away by the hype cycle of today. And as I said, our long-term competitive differentiator is going to be the software experience we provide to developers. And we absolutely have to invest responsibly in the hardware that powers this experience, but we have to be careful not to try and become a hardware provider, which is not our long-term strategy. But we have to find the right balance, and I am a firm believer that we are going to be very focused on looking at our value proposition, how developers are consuming our services, and we have the ability to calibrate the investment as we go along the year. So those are my early thoughts, but Matt, why don't you chime in? I completely agree that it's a very similar model to the model that we have versus the hyperscalers today.

That's not a model that will ever compete in at scale. It's just we don't have the cost structure for that while we do have is what Pat described as we have differentiation in the target market and we have differentiation in the software layer and that's where we're going to devote our are investments. So we're investing more in R&D and then the software layer and we clearly need GPU.

<unk> as I said, we will spend $50 million this year.

Yeah.

And GPO alone for in 2024, which is a big a third of our capital budget.

And that's an appropriate amount I think given that we think that we're taking a slightly different angle that we think is as perhaps I don't know say more durable, but its certainly got along a lot of legs from our perspective, and we see a lot of long term growth potential in that strategy.

That's great and then just one quick follow up Matt It may be sort of splitting hairs, but the cloud ways contribution I think you said, 2% to 3% for next year I believe last quarter, you put it at 3%.

Matt Steinforth: I mean, we have a very small footprint of locations and a very small capital budget relative to any of the three hyperscalers. I mean, it's because we target a different market that doesn't require that level of sophistication or that level of scale. And what you're seeing when you see a lot of these companies raising massive dollars, they're basically just providing bare metal solutions of renting the GPUs, and in some cases, renting them to hyperscalers. That's not a model that we'll ever compete in at scale. It's just we don't have the cost structure for that.

Or any specific changes there or is it just rounding.

It's Brad it's just rounding we we were as you would expect coming out of the year. We wanted to establish a baseline growth rate that we and everyone can count on and we're going to build from there.

We've tried to be real clear on on that and we're not expecting any kind of major recoveries in the market. So when you look at the exit growth rates of the various businesses.

And products, we have that's kind of what you get.

And again the MBR that's assumed in the.

Matt Steinforth: What we do have, as Patty described, is differentiation in the target market, and we have differentiation in the software layer, and that's where we're going to devote our investment. So we're investing more in R&D and in the software layer. We clearly need GPU capacity, and as I said, we'll spend 50 million this year on GPUs alone in 2024, which is a big third of our capital budget. And that's an appropriate amount, I think, given that we think that we're taking a slightly different angle that we think is perhaps, I don't want to say more durable, but it's certainly got a lot of legs from our perspective, and we see a lot That's great!

And the guide is we're not assuming any macro improvement that all the MBR improvement.

We have which is still not much we won't we won't get in the baseline plan to above 100, and we are totally in the latter part of the year, it's all tied to discrete products and initiatives that we're driving so I would just say is.

There is no known message in that number it's a little bit of rounding and it's based on the December ish exit run rates that we're seeing.

Perfect. Thank you very much.

Okay.

We will take our next question from Raimo <unk> with Barclays. Your line is open.

Hey, Thank you and all the best for me as well.

Brad Robert Reback: And then just one quick follow-up, Matt. It may be sort of splitting hairs, but the Cloudways contribution, I think you said 2 to 3% for next year. I believe last quarter you put it at 3%. So any specific changes there, or is it just rounding?

I just wanted to ask more.

<unk>.

Our expansion into new areas and how you think about that I mean, if you look at the last few quarters. It was more.

Over M&A to get you into AI with deepest space and cloud waste et cetera, like how do you think about that balance of kind of having internal product development and then you talked that you've been at AWS and Microsoft versus kind of buying expertise from the outside can you just speak to that please thank you.

Matt Steinforth: It's just rounding. We were, as you would expect, coming out of the year. We wanted to establish a baseline growth rate that we and everyone can count on, and we're going to build from there. And we've tried to be real clear on that, and we're not expecting any kind of major recoveries in the market. So when you look at the exit growth rates of the various businesses and products we have, that's kind of what you get. And, again, the NDR that's assumed in the guide is that we're not assuming any macro improvement, that all the NDR improvement that we have, which is still not much, we won't get in the baseline plan to above 100 NDR until the latter part of the year. It's all tied to discrete products and initiatives that we're driving. So I just say there's no message in that number.

Yes, Hello, Ramos nice to be here and I think my philosophy is.

We have to do both and in a market that is evolving quickly.

And I don't want to make make this sound like it is all about AML I think we have a lot of core innovation left both in our infrastructure platform as a service as well as in our cloud ways.

Hosting offering I think we have a lot of innovation left.

Within the core digital Ocean.

Matt Steinforth: It's a little bit of rounding, and it's based on the December-ish exit run rates that we're seeing. Perfect. Thank you very much, www.digitaloceanhldg.com, And we'll take our next question from Remo Lensko with Barclays. Your line is open.

And also as I mentioned.

We are still building the bridge between the creating experience at paper space in the cloud and the core.

Offering so.

We have enough to keep us very busy organically, but.

As you would expect VR.

Very diligent.

Remo Lensko: Hey, thank you, and all the best from me as well, Patty. I just wanted to ask more about expansion into new areas and how you think about that. I mean, if you look at the last few quarters, it was more about M&A to get you into AI with paper space and cloud waste, et cetera. Like, how do you think about that balance of kind of having internal product development and, you know, you talked about being at AWS and Microsoft versus kind of buying expertise from the outside. Can you speak to that? Yeah, hello Ramos.

Scanning the landscape, whether it is to buy talent.

Youre talking about or by new capabilities, which our customers will appreciate.

Expand from a geographical footprint perspective, theres. So many dimensions that we could add.

Inorganic.

Capabilities into our <unk>.

Into our offering so I'm super excited and having the financial structure that we have gives us the opportunity to make the right responsible beds to accelerate our growth.

Okay perfect. Thank you Anne and Mad one for you.

If you think about the environment out there you mentioned in your plans there's no.

Paddy Srinivasan: It's nice to be here. And my philosophy is, you know, we have to do both in a market that is evolving quickly. And I don't want to make this sound like it is all about AIML.

<unk>, if things getting better, but if you think about the linearity in the quarter and the different geographies as well what has been your observation this quarter. Thank you.

Paddy Srinivasan: I think we have a lot of core innovation left, both in our infrastructure platform as a service and in our Cloudways hosting offering. I think we have a lot of innovation left within the core DigitalOcean. And also, as I mentioned, we are still building the bridge between the gradient experience at PaperSpace and the core DO offering. So we have enough to keep us very busy organically.

Yes so.

It's again one of the things I love about this business is how.

Joe the lack of concentration we have in any vertical or in any industry or use case or country and so we're pretty diversified on that front and we havent seen.

Any kind of one sector or region performing materially different than the rest, but what I would say is while the.

Paddy Srinivasan: But as you would expect, we are very diligent in scanning the landscape, whether it is to buy talent, as you're talking about, or buy new capabilities, which our customers will appreciate, expanding from a geographical footprint perspective. There are so many dimensions in which we could add inorganic capabilities to our offering. So I'm super excited, and having the financial structure that we have gives us the opportunity to make the right responsible bets to accelerate our growth. Perfect, thank you.

The MBR was still 96% in the fourth quarter, we are seeing increased usage and on the core <unk> platform and we saw that continue into January it's continued into February.

Yes, we're seeing we are seeing signs of.

Yes.

We expect MBR to improve over the course of the year and we're seeing good leading indicators at this point as customers are starting to pick up pick up their activity on the core <unk> platform itself, which is has been kind of the real headwind of growth over the.

Several quarters.

Okay perfect. Thank you.

Matt Steinforth: And Matt, one for you, about the environment out there. You mentioned in your plans that there's no assumption of things getting better. But if you think about the linearity in the quarter and the different geographies as well, what has been your observation? Thank you.

We will take our next question from Patrick Wahl Reagan with JMP.

Your line is open.

Oh, great. Thank you and let me add my congratulations Patty.

So my question is really basic what is your.

Patrick D. Walravens: Yeah, so again, one of the things I love about this business is the lack of concentration we have in any vertical or in any industry or use case or country, and so we're pretty diversified on that front. And we haven't seen any kind of one sector or region performing materially different from the rest. But what I would say is while the NDR was still 96% in the fourth quarter, we are seeing increased usage on the Core DO platform. We saw that continue into January, and it's continued into February, and we are seeing signs of – like we said, we expect NDR to improve over the course of the year, and we're seeing good leading indicators at this point as customers are starting to pick up their activity on the Core DO platform itself, which has been Your line is open.

The philosophy of leadership.

Patrick Thank you for your question.

<unk> philosophy leadership, all starts with the customers we serve.

Our purpose of existence as a company is to serve our customers and if we do that.

Well and if we understand their needs and deliver at a brisk pace and solve their problems.

Problems I think the rest is going to take care of itself and I think as I mentioned those are the couple of things that really excite me here its a large market and we already have a very very strong foundation and it is a market in which our core customers, which are the developers have.

The emerging set of very complex problems that are worth solving for so my leadership philosophy starts with that number two is we need to have we are a tech business. So our technology has to be world class. So that's something that I'm going to be super focused on the number three years technology has to come from.

Paddy Srinivasan: Oh, great. Thank you. And let me add my congratulations. So my question is really basic. What is it?

<unk> World Class people World Class technology should come from World class people I've been very impressed with the caliber of talent, we have here at its lotion.

Paddy Srinivasan: Wall Street. Patrick, thank you for your question. So my philosophy in leadership all starts with the customers we serve. I think our purpose of existence as a company is to serve our customers, and if we do that well, and if we understand their needs, and we deliver on a risk basis and solve their problems, I think the rest is going to take care of itself. And I think, as I mentioned, those are the couple of things that really excite me here.

<unk>.

We are.

Really excited to get to work and.

And my job as the CEO is too.

Help us understand our customers very deeply and be put the right people in the right jobs two to deliver innovation to help take care of our customers. So hopefully that.

<unk> and answer which is not super flap fluffy or high level, but you will hopefully Ivan.

Backup these things over the next several quarters with us with.

With product innovation and.

In delivery that backs up my leadership principles.

Paddy Srinivasan: It's a large market, and we already have a very, very strong foundation. And it is a market in which our core customers, which are the developers, have an emerging set of very complex problems that are worth solving for. So my leadership philosophy starts with that.

Awesome. Thank you.

We'll take our next question from Josh Baer with Morgan Stanley. Your line is open.

Great. Thanks for the question and welcome Patty I was hoping you could give an update on the revenue composition between products like how much mix is droplets or infrastructure as a service versus a platform as a service what products are contributing most in and platform.

Paddy Srinivasan: Number two is we need to have, we are a tech business, so our technology has to be world class. So that's something that I'm going to be super focused on. And number three is that technology has to come from world class people; world class technology should come from world class people.

Paddy Srinivasan: I've been very impressed with the caliber of talent we have here at DigitalOcean, and we are really excited to get to work. And my job as the CEO is to, A, help us understand our customers very deeply, and B, put the right people in the right jobs to deliver innovation to help take care of our customers. So hopefully that gives you an answer, which is not super fluffy or high-level, but you will, hopefully I will back up these things over the next several quarters with product innovation and delivery that backs up my leadership principles. Thank you. www.globalonenessproject.org. We'll take our next question from Josh Baer with Morgan Stanley. Your line is open.

I guess I'm wondering if with the net retention rate below 100 like looking at the average revenue per customer.

If some of the adoption of multiple products is sort of masked by lower consumption overall, bringing that average revenue per customer.

Keeping that more modest growth.

Hey, Josh it's Matt.

Yes, we don't disclose the mix of the Ias and Paas solutions, but I would tell you is the pad solutions are growing faster than the core kind of infrastructure as a service.

Josh Baer: Great, thanks for the question and welcome. Patty was hoping you could give an update on the revenue composition between products, like how much of the mix is droplets or infrastructure as a service versus. Platform as a service, what products are contributing most to platform? And I guess I'm wondering if with the net retention rate below 100, like looking at the average revenue per customer, if some of the adoption of multiple products is sort of masked by lower consumption overall, bringing that average revenue more modest. Hey Josh, it's Matt. We don't disclose the mix of the IaaS and PaaS solutions, but what I can tell you is the PaaS solutions are growing faster than the core kind of infrastructure-as-a-service offerings, so the database and some of the other products and the Kubernetes are all growing at a more rapid clip than the core kind of droplet and compute business.

Offering so database and some of the other products and <unk> are all growing at a more rapid clip than is the core kind of droplet and compute business.

Thats.

So the take rate of those services is.

It is very healthy I think when you see the again the big driver in the MBR challenges that we've had has been as I've said multiple times over the last several calls its expansion has slowed.

Churn has not changed its right around where it was even a year ago. The contraction is a little bit elevated but it's been fairly stable over the last now seven or eight months.

Matt Steinforth: And that's so that the take rate of those services is very healthy. I think when you see the, again, the big driver in the NDR challenges that we've had has been, as I've said multiple times over the last several calls, its expansion has slowed, right? The churn has not changed. It's right around where it was even a year ago. The contraction's a little bit elevated, but it's been fairly stable over the last seven, eight months.

Where we saw the most pressure year over year last year was an expansion and that expansion was customers that own businesses, just weren't growing as fast and so they didn't need more compute and so we didn't see as much growth in the in the core kind of droplet.

Part of the business and so I think that.

I'm very excited by the product roadmap that we have and with Patty coming on the ability to even more focus on driving adoption and increased.

Matt Steinforth: Where we saw the most pressure year over year last year was in expansion, and that expansion was customers' own businesses just weren't growing as fast, and so they didn't need more compute, and so we didn't see as much growth in the core kind of droplet part of the business. And so I think that I'm very excited by the product roadmap that we have and, with Patty coming on board, the ability to even more focus on driving adoption and an increased kind of take rate of our existing products into the install base. Most of the headwind that we've seen, though, has been in kind of just the core droplet, core compute. Great, and I was just wondering, Patty, if you're thinking about all the opportunities in front of you, all the growth levers available to you.

Kind of take rate of our existing products into the <unk>.

Going to the installed base most of the headwind that we've seen though has been and kind of just the core droplet core compute.

Great and just wondering how do you if youre thinking about all the opportunity in front of you all of the growth level levers available to you. How are you thinking about potential for future price increases over the medium term.

And Matt just wondering in your breakdown of growth drivers for the year is there any contribution from pricing embedded in those different categories. Thanks.

Josh Baer: How are you thinking about the potential for future pricing increases over the medium term? And Matt, just wondering, in your breakdown of growth drivers for the year, is there any contribution from prices? Yeah. Hey Josh.

Hey, Josh.

There is no <unk>.

<unk> factored and price increase as part of our outlook.

Paddy Srinivasan: There's no factored in price increase as part of our outlook and just my philosophy is we will continue to have packaging changes and lineup changes and we will introduce new products and premium capabilities and things like that but nothing which is which is already baked into our outlook for this year and and I my philosophy is we'll continue we have to innovate and and try new packages and different thresholds and things like that so it's it's an ongoing thing and as with any other technology vendor we will pay close attention to what our customers are are asking for so that's that's my overarching philosophy, www.microsoft.com.ca, And we will take our next question from Pinjalim Bora with J.P. Morgan. Your line is open. Oh, great. Thanks for taking the questions, and welcome, Patty. Just two-part one question on Paperspace.

And just my philosophy is.

We will continue to have packaging changes in lineup changes and we will introduce new products and premium capabilities and things like that but.

But nothing which is.

Which is already baked into our outlook for this year and.

My philosophy is we'll continue we have to innovate and try new packages in different thresholds and things like that so.

<unk>.

It's an ongoing thing and as with any other technology vendor.

We win.

Close attention to what our customers are.

Asking for it so that's that's my overarching philosophy.

Perfect. Thanks.

And we will take our next question from pendulum Bora with JP Morgan Your line is open.

Oh, great. Thanks for taking the questions and welcome Betty just.

Two part one question on vapor space.

Pinjalim Bora: Any way to understand kind of the adoption of the MLOps platform versus the IaaS side of Paperspace? Is the MLOps platform landing with customers? Are they using that more versus the IaaS side of things? And, Matt, maybe help us understand. You were, I think, assuming about $6 million from Paperspace this year. Did that land at that point around $6 million, or was it more?

Any way to understand kind of the adoption of the <unk> platform versus the IAA as site of paper space is the MLR platform landing with customers that are using that more versus the <unk> side of things.

And Matt maybe help us understand your I think assuming about $6 million from paper space. This year was that.

Did that land at that point about $6 million or was it more.

Matt Steinforth: Thanks, Pinjalim. I'll start, it's Matt, with the latter question. Yeah, we came in right on time, exactly what we had expected.

I can start thanks.

Thanks, Vincent I'll start, it's Matt with the latter question.

Yes, we came in right exactly what we had expected we had signaled I think around five and we came in around six.

Matt Steinforth: We had signaled, I think, around five, and we came in around six for the year. And clearly, on an ARR basis, it's higher than that, because that was just the last six months of the year.

For the year in.

Clearly on.

NAR basis, it's higher than that that was just the last six months of the year and we think that again that that business should give us three points of growth on the entire business. So it's more than doubling on an IRR.

Matt Steinforth: And we think that, again, that that business should give us three points of growth on the entire business. So it's more than doubling on an ARR basis over the course of the year. Yeah, and to answer the first part of your question, I think it's a mix of both, right?

Basis over the course of.

Of this year.

Yes.

And to answer your first part of your question.

I think it is a it's a mix of both right. So the machine the.

Paddy Srinivasan: So the ML Ops platform needs a steady dose of infrastructure. And as we go into this year, as we start bringing the two platforms closer together, we expect a lot of our paper space or AI ML customers to start consuming more of the DigitalOcean compute capabilities as well. So it's still early days.

The MLR platform needs, a steady dose of infrastructure and as we go into this year as we start bringing the two platforms closer together, we expect a lot of our.

Paper space, our AI ml customers to start consuming more of the bids lotion compute capabilities as well so it's still early days.

A little.

Paddy Srinivasan: So there are customers that are very heavy users of the AI ML stack, and they might use a little bit of compute on an as-needed basis. But then there are other customers who are in a steady-state inferencing type of workload. So it is still a little training-heavy, as you would expect, given the nature of what customers are trying to do with AI ML. And many of our customers are in core use cases like text-to-image generation or text-to-video generation and those kinds of things. So it's a very heavy training-oriented mode, where there are a lot more AI machine learning operations, marshaling data, getting the data set organized, and just training the data set is what we are seeing a lot more of now.

So there are customers that are very heavy users of the AML stack and they might use a little bit of compute on an as needed basis.

Then there are other customers who are in a steady state influencing type.

Type of.

Workload so.

It is still a little training heavy as you would expect given the nature of what customers are.

Some are trying to do with AI ml and many of our customers are in core use cases like tax too.

<unk> generation, our techs to video generation and those kinds of things. So it is a very heavy.

Training oriented.

Mode, where it has lot more of the.

The AI machine learning ops.

Marshaling data getting their data set organized and just start training. The dataset is what we are seeing a lot more off now, but once you get to the steady state is where the spillover to the compute side is is about to happen in the infant stage. So that's why we're getting.

Paddy Srinivasan: But once you get to the steady-state, that's where the spillover to the compute side is about to happen in the inference stage. So that's why we're getting ready with our integration of the core DEO infrastructure. Thank you, www.microsoft.com.ca, and we will take our next question from Tim Horan with Oppenheimer. Your line is open.

Ready with our integration of the core infrastructure.

Thank you.

And we will take our next question from Tim Horan with Oppenheimer. Your line is open.

Tim Horan: Thanks. Just a few clarifications. Matt, I think you said 50 million on GPUs this year. It's one-third.

I think just a few clarifications, Matt I think you said $50 million on Gpus. The share. It's one third so are you guiding to capex closer to $150 million for the year.

Matt Steinforth: So are you guiding to CapEx closer to $150 million for the year? You know, if so, how does that square with 20% free cash flow margins? Or maybe I'm just missing some adjustments.

If so how does that square with 20% free cash flow margins or maybe I'm just missing some adjustments.

Matt Steinforth: And can you just give us some color on the outlaw, the demand for GPUs, you know, how confident are you that you can, you know, utilize that? Yeah, so the guide for the year for free cash flow is 19 to 21, so kind of 20 in the middle. It's consistent with – we're not guiding to CapEx. I gave you the general parameters of it so you can kind of sort it out, but we're pretty confident in our ability to hit that 19 to 21 percent free cash flow margin. As we demonstrated this year, we have the opportunity to drive material kinds of leverage in the core DO platform, and we can use that to offset the incremental investments that we're making in both OpEx and CapEx in the paper space business.

And can you just give us some color on the outlook the demand for Gpus. How confident are you that you can utilize a $50 million and gpus. Thanks.

Yes so.

The guide for the year for free cash flow was $19 to 21, so kind of 20 in the middle.

It's consistent with we're not guiding to Capex I gave you the general parameters of it. So you can kind of sorted out but.

We were pretty confident in our ability to hit that 19% to 21% free cash flow margin as we demonstrated this year, we have the opportunity to drive material kind of leverage in the core <unk> platform and we can use that to offset the incremental investments that we're making in both opex and capex.

And the paper space business from a demand standpoint, and this gets back to I think pendulums question before which is did we exceed what we thought we would do an and.

Matt Steinforth: From a demand standpoint, which gets back to, I think, Pinjalim's question before, which is, did we exceed what we thought we would do in revenue for AIML in 2023? Part of this is there's a supply shortage, so you have to order the gear six, nine months in advance to be able to get GPU capacity, and even when you do that, the vendors – and these are major tier one distributors, not small shops – even then, they can't guarantee that you get it all, and you get it all at the right time, and you get it all with all the right parts. And so there's more of a supply challenge right now, to be honest with you, than a demand challenge. It's like, can we get it? Can we get it installed?

And revenue for for AML and <unk> three part of this is it.

There is supply chain constraints. So you have to order the gear.

Six to nine months in advance to be able to get GPU capacity and even when you do that the.

The vendors and these are major tier one does.

Distributors not not going to.

Small shops, even then they can't guarantee that you get it all and you get it at the right time and you get it all with all the right parts and so there is.

There is more of us it's more of a supply challenge right now to be honest with you the demand challenges I can't get it can we get it installed can get it up and running and we're also again very focused on the software side of things, which is an integration that we're doing with between our platforms and so we're not worried at all about the demand we're worried about.

Paddy Srinivasan: Can we get it up and running? And we're also, again, very focused on the software side of things, which is an integration that we're doing between our platforms. And so we're not worried at all about the demand. We're worried about how quickly we can get it turned up and available, and when you're starting, again, a business from this small size when we acquired the paper space, if you turn something up two months later in the month than you had anticipated, that's a big hit on the in-year revenue, which we're not fussed about, but that's why we' And then, Patty, can you, and with all the due diligence you just did, talk about who you think your primary competitors are? You know, Akamai acquired Linode, and they seem to be more focused on R&D and enterprise than SMB. Do you think competitive intensity is decreasing, or do you expect it to, or do you expect it to increase? Yeah, that's a good observation.

How quickly we can get it turned up and available.

When youre, starting again, a business from the small size of that when we acquired paper space.

You turn something up two months later in the month than you had anticipated thats a big hit on the in year revenue.

Which one other fussed about but thats why we are I think being conservative in terms of the amount of revenue that we're going to drive up that capital in 2024.

And then Patrick can you.

And all the due diligence just did can you talk about who you think your primary competitors are in.

Akamai acquired Lenovo and they seem to be more focused on R&D and enterprise and SMB.

Think competitive intensity is decreasing or do you expect it to or do you expect it to increase.

Yeah.

It's a good observation so.

Yes, I think the competitors are who all of you can get right.

Paddy Srinivasan: So, yeah, I think the competitors are who all of you can guess, right? And I feel when we are looking at our competitive posture, I always have a very healthy dose of founder's paranoia. So I feel like every dollar has to be earned.

And I feel when we are looking at are.

Competitive posture.

Always I have a very healthy dose of founders paranoia.

So I feel like every dollar has to be earned every customer has to be earned so we will go with the assumption that all of our competitors are fiercely coming after our customers. So I think thats the way.

Paddy Srinivasan: Every customer has to be earned. So we will go with the assumption that all of our competitors are fiercely coming after our customers. So I think that's the way I like to operate and push our teams to make sure that our innovation outpaces our competition and also outdelivers in terms of ease of use and the ability of our platform to stand on its own and impress our customers. So, yes, Akamai, Linode, I have also heard what you just said, but that's not to say that they might not change their strategy in the next few quarters. So we like to operate, or I like to operate with that philosophy. So, same thing for AIML. It's Everyone is throwing the kitchen sink at this problem.

I would like to operate and push our teams to make sure that our innovation.

A outpaces our competition and also our delivery in terms of ease of use and.

The ability of our platform to stand on its own and impress our customers. So.

Yes, Akamai Lenovo.

I have also heard what you just said, but that's not to say that they might not change their strategy in the next few quarters. So we.

We like to operate or I like to operate with that philosophy. So.

And same thing for AML.

Everyone is throwing the kitchen sink at this problem, but as Matt and I have been repeating ourselves over the last hour. We'll focus on hardware is an essential means to an end, but our long term durable differentiator is going to be on the software stack.

Paddy Srinivasan: But, as Matt and I have been repeating ourselves over the last hour, we'll focus on, yes, hardware is an essential means to an end, but our long-term durable differentiator is going to be the software stack, www.digitalocean.org. And we will take our next question from Jim Fish with Piper Sandler. Your line is open, www.digitalocean.org Hey, this is Quinton. I'm for Jim Fish.

Thank you.

Okay.

And we will take our next question from Jim Fish with Piper Sandler Your line is open.

Hey, this is quintin on for Jim Thanks for taking our question Patti look forward to working with you.

Jim Fish: Thanks for taking our question and, Patty, I look forward to, Patty, maybe for you, you know, you talked about a focus on augmenting self-care. www.globalonenessproject.org Is that something that's going to require a further increase in the sales rep headcount as, www.digitallocean.org Yeah, so it's all factored into the outlook that Matt gave. So yes, it is So our customers are developers, and we have to—this is again going back to my core philosophy of we really need to be world-class at understanding our customers and their preferences and how they want to be reached. And so we're not going to start dialing for dollars and calling our customers day in and day out. That's not what I'm talking about at all.

Pat maybe for you you talked about a focus on augmenting this self service motion investing more in a direct customer relationship.

Is that something that's going to require a further increase in the sales rep head count as we look to 2024 or is it more of a rebalance of the existing resources within the sales team.

So it is.

It's all factored into the outlook that Matt gave so yes. It is a rebound in <unk> and we're not talking about building an army of salespeople right. So our customers are developers and we have to this is again going back to my core philosophy, if we really need to be.

World class and understanding our customers and their preferences in how they want to be reached and so we're not going to start dialing for dollars.

Call our customers day in and day out that's not what I'm talking about at all but there are customers that are reaching a certain point.

Paddy Srinivasan: But there are customers that are reaching a certain point in time of sophistication and requirements from our platform, which, A, requires the platform to be rich. And number two is tasteful customer success and ongoing relationship to make sure that they're getting the best value from our platform. And many of our customers don't even know the breadth of or how much we have evolved since they started their journey with us. So I think it's a great opportunity for us to wave the flag and make sure that we are engaging with them in a very scaled manner. And also using technology to make sure that we are establishing that relationship at the right time with the right set of tools to raise visibility and offer them help on an as-needed basis. Matt, I don't know if you wanted to add any color on the actual expense outlay itself. You nailed it, Paddy.

Point in time of sophistication and requirements from our platform which requires.

The platform to be.

To be rich and number two is.

Tasteful customer success and ongoing relationship to make sure that they're getting the best value from our platform and many of our customers don't even know the breadth of our how much we have evolved since they started their journey with us. So I think it's a great opportunity for us to wave the flag and make sure that we are engaging with them in a.

A very scaled manner. So.

And also using technology to make sure that we are.

Establishing that relationship at the right time with the right set of tools to raise the visibility and offer them help on an as needed basis Matt.

Matt I don't know if you if you wanted to add any color on the actual expense outlay.

You nailed it.

Matt Steinforth: The plan we have already factors in the refactoring and kind of investment in the sales marketing engine. Very helpful. Then maybe a quick follow up, you know, Matt, we've talked about in the past crypto being a headwind to top line. But we've seen a little bit of improvement in the underlying pricing. Has that correlated to any sort of return in usage on the platform? Or maybe not? What are you seeing?

The plan, we have already factors in the re factoring in kind of investment in the sales and marketing engine part of the guidance.

Very helpful. And then maybe a quick follow up Matt I think it's for you we've talked about in the past crypto being a headwind to top line, we've seen a little bit of improvement in the underlying pricing has that correlated to any sort of return and usage on the platform or maybe what are you seeing from that specific vertical. Thank you.

Matt Steinforth: Yeah, we've looked exactly at that for the reasons that you describe, and we haven't seen nearly the kind of surge that we have seen in the past. We are seeing, as I said, more usage on the platform, and we saw increasing usage patterns in January. We're seeing that increase in February, but it's not coming disproportionately from crypto. As we had said previously last year, crypto was down to like 2% of revenue, so it's not by itself a needle mover at this point. Appreciate it, www.digitalocean.org, And we will take our next question from Mike Sikos with Needham & Company. Your line is open, www.microsoft.com.ca Hey, thanks for getting me on and taking the questions here, guys. I wanted to start first.

Yes.

We look exactly at that for the reasons that you described and we haven't seen nearly the kind.

Kind of surge that we had seen in the past that we are seeing as I said more usage on the platform.

And we saw increasing kind of usage patterns in January we're seeing that increase in February, but it's not coming disproportionately from crypto.

As we had said previously last year crypto was down to like 2% of revenue. So it's not a it's not by itself a needle mover at this point.

I appreciate it thank you.

Yeah.

And we will take our next question from Mike <unk> with Needham <unk> Company. Your line is open.

Hey, Thanks for getting me on and taking my questions here guys.

I wanted to start first I know that you guys are talking to some of these investments in direct sales and customer success.

Mike Sikos: I know that you guys are talking about some of these investments in direct sales and customer success. Wanted to get a sense here, remind us, what is the time to maturity for these, And also, what's the profile of the customer that you're looking to invest in as far as taking them through these solutions to increase attach rates are better?

Wanted to get a sense here could you remind us what is the time to maturity for these reps and also what's the profile of the customer that youre looking to invest in sports.

Taking them through the solutions to increase attach rates or better serve those customers.

Paddy Srinivasan: So yeah, first of all, it's not that we are starting from a clean slate. We do have people in roles that are already engaging with customers, both on the customer success side and the sales side. So I'm too new to answer your question in terms of what the ramp-up time is going to be for new reps.

So yes so.

First of all it's not that we are.

Starting from a clean slate. So we do have people and roles that are already engaging with with customers. Both on the customer success side and sales perspective. So.

I'm too new to answer your question in terms of what the ramp up time is going to be for new reps, but I just wanted to make sure that.

Paddy Srinivasan: But I just want to make sure that I'm not inadvertently signaling that, oh, we have to start from scratch, and nobody has thought about this so far in the company. So in terms of just the types of customers we'll go after, it's both a look at the top consumers of our platform with an implicit nod to the fact that the more you consume, the more you would want to have a trusted relationship with your biggest platform providers. So that's one.

I'm not inadvertently signaling that all we have to start from scratch I know nobody has thought about this so far in the company. So in terms of.

Yes.

The types of customers, we will go after.

It's both looking at the top.

Consumers of our platform with an implicit.

Not for the fact that the more you consume the more.

You would want to have a trusted relationship with the our biggest platform provider. So that's one number two with <unk>.

Paddy Srinivasan: Number two is, we are also investing in, and we already have technologies that we have invested in that give us great visibility into customers that are about to hit a certain threshold of usage and consumption that we can get ahead of and be proactive in building a relationship with. So that's more of a technology-enabled engagement, if you will, to augment building this relationship to drive expansion and reduce churn with some of our top consuming customers. And I would add that the third kind of leg of that is as customers; we get millions of visitors to our site every month, and tens of thousands of those sign up as customers, and three, four months later, you kind of shake out which ones are viable customers and which ones are growing, and part of that sales motion is taking those customers as they come on and trying to figure out which ones have growth potential.

We are also investing in <unk>.

Already have technologies that we have invested in.

That gives us great visibility into customers.

That are about to hit a certain threshold of usage and consumption that we can get ahead of and be proactive in building our relationship with so that's more of a technology enabled engagement if you will.

To augment.

Building this relationship to drive expansion in <unk>.

<unk>.

Reduced churn with some of our top consuming customers.

I would add that the third leg of that is as customers, we get millions of visitors to our site every every month and tens of thousands of those sign up is as customers and three three or four months later, you get kind of shake out which ones are our valuable customers and which ones are grow and part of that sales motion is is taking those customers as they come on.

Trying to figure out which ones have growth potential and is it may they may only be spending a little bit.

Paddy Srinivasan: And they may only be spending a little bit as they are dabbling with our platform, but they might be part of a bigger company, and there is a bigger workload that they could bring. And so part of that go-to-market motion is triaging those customers and figuring out which ones are the higher-value prospects and then making sure that you are disproportionately helping them through the onboarding process and trying to understand what their potential is. Thank you for that, guys. And then for the follow-up, I know last quarter, Matt, you gave us some great parameters around, I remember churn had been relatively stable at 12 percent, and contraction had improved entering the quarter. September quarter at 16%, and you exited at 50%. Based on your comments today, is it fair to assume that churn and contraction were stable, and the big overhang on that 96% we're seeing today really ties to the expansion rate? Yeah, and this is... No, no, I think you've got it.

As they're dabbling with our platform, but there might be part of a bigger company and there is a bigger workload that they could they could bring and so part of that go to market motion is triaging those customers and figuring out which ones are the higher value prospects and then making sure that you are.

Youre disproportionately helping them through the on boarding and trying to understand what their potential is.

Understood. Thank you for that guys and then for the follow up I know latest quarter, Matt you had given us some parameters around that retention I remember.

<unk> had been relatively stable at 12% contraction had improved entering the quarter.

September quarter at 16% and you exited 15% based on your comments today is it fair to assume that churn and contraction. We're stable and then the big overhang on that 96% IRR, we're seeing today really ties to the expansion rates.

Consider.

No no I think you've got it I mean this is frustrating because it's a rounding but we actually saw improvements in all three over the course of if you look at like June July to January.

Matt Steinforth: I mean, this is frustrating because it's a rounding error, but we actually saw improvements in all three over the course of, if you look at like July to January, it's actually a much better than it appears improvement. Part of the problem is the way we define NDR; it's averaged over months. So it's July; the third quarter number was the average of July, August, and September, and the fourth quarter number is the average of those three months. But if you look at the actual months, which you can't because we don't disclose that, but there's actually more kind of steady progress. It's still modest,

Actually it is.

Much better than it appears improvement part of the problem is the way we define <unk> averaged over the months. So it's July 3rd quarter number was the average of July August and September and the fourth quarter numbers. The average of the three months, but if you look at the actual months, which you can't because we don't disclose that but theres actually more kind of steady progress.

Its still modest so clearly if it's rounding is an issue it's not massive improvements, but we have modest progress on each of the three dimensions over that period and as I said January was strong.

Matt Steinforth: So it's clearly, if rounding is an issue, it's not massive improvements. But we have made modest progress on each of the three dimensions over that period. And as I said, January was a strong month in terms of usage and NDR for the month, and February is looking good as well. So I'm confident that it will continue to steadily go up, and I would expect it to go up at a faster clip than it did clearly in the third to fourth quarter. Makes sense. Thank you for the color there, Matt.

Month in terms of usage and MBR for the month of February is looking good as well so.

Im confident that it will continue to steadily go up and I would expect it to go up at a faster clip than clearly what it did in the third to fourth quarter.

Makes sense. Thank you for the color there and looking forward to working with you as well.

Thank you Mike.

And we will take our final question from <unk> Mohan with Bank of America. Your line is open.

Mike Sikos: And I'm looking forward to working with you as well, Patty. Thank you, Mike. And we will take our final question from Wamsi Mohan with Bank of America. Your line is open. Thank you so much, Patty.

Yes. Thank you so much paddy congrats on the role I look forward to working with you as well.

Patti you mentioned focus on product innovation enhancing developer experience.

As Matt mentioned Youre very diversified customer base. So how are you thinking about prioritizing across these use cases.

Wamsi Mohan: Congratulations on the role. I look forward to working with you as well. Patty, you mentioned focusing on product innovation and enhancing developer experience, but as Matt mentioned, you have a very diversified customer base. So how are you thinking about prioritizing across these use cases?

<unk>, several including SaaS or back end of that game development ecommerce a bunch of those and is there a specific.

Maybe intersection off of that with the product roadmap that you mentioned between security resiliency storage networking et cetera that really stands out or jumps out is the area that you would tackle first or how are you thinking about prioritizing. These.

Paddy Srinivasan: I know you mentioned several, including... SASS, or the back end of web game development e-commerce, and Azera. www.digitalocean.com. Hi Wamsi, very nice to meet you and look forward to working with you again. I think in terms of the workloads themselves, the workloads might be very diverse, yes, you are right, but the core capabilities that most of these workloads need are fairly finite. So you have the core network, core compute, different types of storage, and even in AI and machine learning, there are a very finite number of capabilities that they need to power, whether it is a classification type of workload or a large language model or any other type of AI machine learning workload. It is about making sure you have the data curation right and figure out the data pipeline, and you have the right training and right inference infrastructure.

Hi, mom see very nice to meet you and look forward to working with you again.

I think in terms of.

The.

The workloads themselves the.

The workloads might be very diverse yes, you are right, but the core capabilities that most of these workloads need are fairly finite. So you have the core network core compute different types of storage and even in AI and machine learning gain it's a very finite number of work.

Capabilities that they need to power whether it is a classification typo.

Workload or a large language model are.

Any any other type of AI and machine learning workloads it.

It is about making sure you have the data curation right.

Figure out the data pipeline and you have the right training and inference infrastructure, So I feel.

Paddy Srinivasan: So I feel fairly confident having dug into some of the platform capabilities that we have and also spent a bulk of my time last week going into the customer feedback and looking at what our customers have been asking us for. I think the priorities are very overlapping between these workloads and I think we have enough to keep us super busy over the next several quarters in terms of product innovation and the prioritization of the roadmap and I think most of what we are going to be doing and most of what we have actually released, like for example I mentioned the cloud-based autonomous functionality, regardless of whether you are an e-commerce store or any other kind of web hosting customer, auto-scaling and sophisticated rules-based configuration are universal more or less.

Fully confident having dug into some of the platform.

Capabilities that we have and also spend a bulk of my time last week going into the customer feedback and looking at.

What our customers have been asking us for I think the priorities are.

Very overlapping between these workloads so.

I think if and I think we have enough to keep us super busy over the next several quarters in terms of product innovation and the prioritization of the roadmap and I think most of what we are going to be doing and most of what we have actually released like for example, I mentioned the cloud based autonomous functionality, regardless of whether you are an e-commerce store.

R R.

Any other kind of web hosting customer.

Auto scaling and sophisticated rule spaced configuration are universal more or less so I feel fairly confident that our innovation is going to impact multiple customers across different workloads. So.

Paddy Srinivasan: So I feel fairly confident that our innovation is going to impact multiple customers across different workloads. So, as we go along, I'm pretty sure that we will find ways by which we can accelerate specific workloads as we get into the latter part of this year, but I feel fairly confident that we have a robust roadmap that addresses a broad set of functionality. Okay, thanks, Patty. That's helpful.

As we go along.

Im pretty sure that we will find ways by which we can accelerate.

Specific workloads as we get into the later part of this year, but I.

I feel fairly confident that we have a robust roadmap that addresses.

<unk> set of functionality.

Okay. Thanks, that's helpful.

Wamsi Mohan: As a follow-up, Matt, the incremental quarterly-on-quarter growth of learners and builders seems to have decelerated a bit in Q4. How are you thinking about the trajectory of growth in customers over the next few quarters? Yeah, that's a good question, Wamsi.

Follow up Matt the incremental quarter on quarter growth of learners and builders seems to have decelerated a bit in Q4, how are you thinking about the trajectory of growth in customers over the next few quarters just directionally.

And over the course of the year maybe.

Yes.

Matt Steinforth: I tell you, one of the things that I've been paying attention to is the incremental ARR. Clearly, I'm looking at the customer count. I'm less worried about the customer count because it's such a broad set of customers that we have. And again, churn is not a factor.

Good question.

I'd say one of the things that I have been paying attention to is the incremental IRR clearly I'm looking at the customer count I'm less worried about the customer count because it's such a broad set of customers that we have and again churn is not a factor. So I feel like theres a lot of opportunity for us to accelerate the growth of the customer base.

Matt Steinforth: So I feel like there's a lot of opportunity for us to accelerate the growth of the customer base. And as we drive these new capabilities into the market or into our platform, that's where we're assuming the growth comes from, not that we suddenly get tons and tons of new customers on the platform. It's more growing existing customers. But when you look at the ARR growth and you take out paper space from the third quarter, clearly, the first and second quarter were really light in terms of incremental ARR growth. But then in the third and fourth quarters, we got back to closer to historical levels at around 18 million in incremental ARR, excluding what we picked up from paper space. In the third quarter, 17 million in the fourth quarter.

As we drive these new capabilities into the market.

Turning to our platform, that's where we're assuming the growth comes from not that we suddenly.

Drive tons and tons of new customers on the platform, it's more growing the existing customers, but when you look at the IRR growth and you take out paper space from the third quarter clearly the.

So first in the second quarter were really light in terms of incremental IRR growth, but then in third and fourth quarter, we got back to closer to kind of historical levels.

At around $18 million in incremental air are excluding what we picked up from paper space in the third quarter $17 million in the fourth quarter and with the increase in usage that we're seeing it's not again, it's not being driven by.

Matt Steinforth: And with the increase in usage that we're seeing, it's not because we have tons of more new customers. It's because the customers we have are starting to spend more. That's what is giving us optimism as we go into the beginning of this year. www.microsoft.com.au. There are no further questions at this time. I will now turn the call back to Mr. Patti Srinivasan for closing remarks.

We have tons of more new customers because the customers. We have are starting to spend more.

What is giving us optimism as we go into the beginning of this year.

Great. Thank you so much.

And there are no further questions at this time I will now turn the call back to Mr. Patty Srinivasan for closing remarks.

Paddy Srinivasan: Thank you all for your time and really excellent questions and great engagement. As you can tell, I'm super excited to roll up my sleeves and get to work. There are a lot of great opportunities to innovate, enhance our product offerings, and really augment our great product-led growth. I'm looking forward to working with all of you and meeting many of you over the next few months.

Thank you all for your time and really excellent questions and great engagement as you can tell I'm Super excited to roll up my sleeves and get to work a lot of great opportunities to enhance our product offerings and really augment our great product led growth motion.

I am looking forward to working with all of you and meeting many of you over the next few months, thanks and have a good rest of the day.

And ladies and gentlemen, this concludes today's call and we thank you for your participation you may now disconnect.

Operator: Thanks and have a good rest of the day, www.microsoft.com.ca. And, ladies and gentlemen, this concludes today's call, and we thank you for your participation. You may now disconnect, DigitalOceanHldg.com www. DigitalOceanHldg.com www. DigitalOceanHldg.com www. DigitalOceanHldg.com www. DigitalOceanHldg.com

Okay.

[music].