Q1 2024 DigitalOcean Holdings Inc Earnings Call

Operator: Thank you for standing by, and welcome to the DigitalOcean first quarter 2024 earnings conference call. All lines have been placed on mute to prevent any background noise.

Thank you for standing by and welcome to the digital Ocean first quarter 'twenty 'twenty four earnings conference call. 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 this time simply.

Press Star followed by the number one on your telephone keypad. If you would like to withdraw your question Press Star One again, thank you all.

Operator: After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one again. Thank you. I would now like to turn the call over to Rob Bradley, Vice President of Investor Relations. Please go ahead.

I would like to turn the call over to Rob Bradley Vice President of Investor Relations. Please go ahead.

Right.

Rob Bradley: Thank you, Rochelle. Good morning. Thank you all for joining us to review DigitalOcean's first quarter 2024 financial results. Joining me today are Patti Srinivasan, our Chief Executive Officer, and Matt Steinfort, our Chief Financial Officer. After our 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 the call today may be considered forward-looking statements, which reflect management's best judgment based on currently available information.

Rob Bradley: Thank you Michelle.

Rob Bradley: Good morning. Thank you all for joining us to review digital Ocean <unk> first quarter 2024 financial results.

Rob Bradley: Joining me today.

Rob Bradley: Turning to Boston, our Chief Executive Officer and Matt.

Matt: Our Chief Financial Officer.

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

Rob Bradley: I refer specifically to the discussion of our expectations and beliefs regarding our financial outlook for the second quarter of the full year 2024. However, our actual results may differ materially from those projected in these forward-looking statements. I direct your attention to the risk factors contained in the company's 10-Q file with the Securities and Exchange Commission 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.

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

Matt: I refer specifically to the discussion of our expectations.

Matt: Regarding our financial outlook for the second quarter and full year 2002 for our actual results may differ materially from those projected in these forward looking statements I direct your attention to the risk factors contained in the company's 10-Q filed with the Securities and Exchange Commission and those referenced in todays press release is posted on our website.

Matt: <unk> expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any forward looking statements made today.

Rob Bradley: Additionally, non-GAAP financial measures will be discussed on this conference call, and reconciliations to the most directly comparable GAAP financial measures are also available in today's press release as well as in our updated investor presentation that outlines the financial discussion of today's call. A webcast of today's call is also available on our website in the IRC. With that, I'd like to turn the call over to our CEO, Paddy Srinivasan.

Matt: Additionally, non-GAAP financial measures will be discussed on this conference call and reconciliations to the most directly comparable GAAP financial measures are also available in today's press release as well as in our updated investor presentation that outlines the financial discussion today's call.

Matt: Webcast of todays call is also available on our website IR section.

Matt: With that I'd like to turn the call over to our CEO Paddy Srinivasan Patty.

Padmanabhan T. Srinivasan: Thank you, Rob. Good morning, everyone, and thank you for joining us today as we review our first quarter results. After my first three months in the role, I am pleased with both the solid execution and durable growth we delivered in Q1, and the early progress we are making to position the company to take advantage of the material growth opportunities that are in front of us. In my remarks today, I will briefly highlight our first quarter results, share some initial observations from my first 90 days, provide several examples of our increasing product velocity, and discuss our progress pursuing the tremendous AI growth opportunity.

Padmanabhan T. Srinivasan: Thank you Rob good morning, everyone and thank you for joining us today.

Padmanabhan T. Srinivasan: We review our first quarter results.

After my first three months in the role I am pleased with both the solid execution and durable growth. We delivered in Q1 and the early progress we are making to position the company to take advantage of the material growth opportunities that are in front of us.

Padmanabhan T. Srinivasan: In my remarks today I will briefly highlight our first quarter results share. Some initial observations from my first 90 days.

Padmanabhan T. Srinivasan: Provide several examples of our increasing product velocity and discuss our progress pursuing the tremendous AI growth opportunity.

Padmanabhan T. Srinivasan: Before I get too deep into my remarks, I want to highlight our Q1 performance, which was solid across the board. Revenue growth accelerated quarter over quarter, and we continue to deliver strong adjusted EBITDA and free cash flow margins while increasing investments in our higher growth businesses, demonstrating the strength of our business model. We are also encouraged by the Improving Growth Fundamentals. Net dollar retentions continue to slowly rise from our low last summer, increasing as expected to 97%.

Padmanabhan T. Srinivasan: Before I get too deep into my remarks, I want to highlight our Q1 performance, which was solid across the board.

Padmanabhan T. Srinivasan: Revenue growth accelerated quarter over quarter, and we continued to deliver strong adjusted EBITDA and free cash flow margin, while increasing investments in our higher growth businesses, demonstrating the strength of our business model.

Padmanabhan T. Srinivasan: We're also encouraged by the improving growth fundamentals net.

Padmanabhan T. Srinivasan: Net dollar retention continued to slowly rise from our low last summer increasing as expected to 97%.

Padmanabhan T. Srinivasan: Our core product usage grew faster in Q1 than it did in Q4 of 2023, and we're also seeing strong uptake of our still early stage AI and machine learning platform. While we still have a lot of work ahead, our Q1 results are very encouraging. Matt will walk you through more of the details later in this call.

Padmanabhan T. Srinivasan: Our core product usage grew faster in Q1 than it did in Q4 of 2023.

Padmanabhan T. Srinivasan: And we're also seeing strong uptake of our still early stage AI and machine learning platforms.

Padmanabhan T. Srinivasan: While we still have a lot of work ahead, our Q1 results are very encouraging.

Padmanabhan T. Srinivasan: Mark will walk you through more of the details later in this call.

Padmanabhan T. Srinivasan: I will start my deeper commentary with some initial observations after my first quarter as CEO. I spent a meaningful portion of my first 90 days with customers, partners, and employees. The feedback and insights I have received have only increased the excitement and optimism I have for DigitalOcean and our growth potential. More than anything, I've been thrilled with the positive and constructive feedback that I've gotten from our customers. We have an incredibly loyal customer base that relies on DigitalOcean to run their businesses, that want to do more with us as they grow, and they also have very clear feedback on how we can help them accelerate.

Mark: I will start my deeper commentary, but some initial observations after my first quarter as CEO.

I've spent a meaningful portion of my first 90 days with customers partners and employees.

Mark: The feedback and insights I have received.

Mark: Have only increased the excitement and optimism I have for digital ocean and our growth potential.

Mark: More than anything I've been thrilled with the positive and constructive feedback that I've gotten from our customers.

Mark: We have an incredibly loyal customer base that relies on which solution to run their businesses that want to do more with us as they grow and they also have very clear feedback on how we can help them accelerate.

Padmanabhan T. Srinivasan: Most of the builders and scalers on our platform run revenue-generating software products on DigitalOcean and have come to know and love us for our simplicity, our valuable technical content, and our compelling price to value. I've been actively engaging and listening to them, and they have helped validate some of the hypotheses that I have long held about DigitalOcean.

Mark: Most of the builders and scalar on our platform Ron revenue generating software products on digital auction.

Mark: And have come to know and love us for our simplicity, our valuable technical content and our compelling price to value.

Mark: I have been actively engaging and listening to them and they have helped validate some of the hypothesis that I've long held about good solution.

Padmanabhan T. Srinivasan: Number one, that the market opportunity for cloud platforms is large and growing and is only increasing with the advances of AI and machine learning technology. Our customers are optimistic about their own long-term growth prospects and are telling us that they see opportunities to expand their business with DigitalOcean. Our platform matches what growing technology businesses require, a scalable and performant platform, a platform that is simple to get started on and scales with them, a platform that is cost-effective and, more importantly, provides transparency of ROI with robust technical support, both directly from us and also from our passionate community of developers. My conversations with dozens of customers offered key insights into the gaps in our platform and highlighted the emerging needs of our core target customers.

Mark: Number one that the market opportunity for cloud platforms is large and growing and is only increasing with the advances of AI and machine learning technologies.

Our customers are optimistic about their own long term growth prospect and are telling us that they see opportunities to expand their business with distribution.

Mark: Our platform matters, what growing technology businesses require a scalable and performing platform a platform, which is simple to get started on and scales with them a platform that is cost effective and more importantly provide transparency of ROI with robust technical support both.

Mark: Directly from US and also from our passionate community of developers.

Mark: My conversations with dozens of customers offer key insights into the gaps in our platform and highlighted the emerging needs of our core target customer.

Padmanabhan T. Srinivasan: This reinforces our mission, and we are going to continue to focus on product innovation and ensuring we delight our customers and the developer ecosystem. Their endorsement of DigitalOcean is powerful, and we will work tirelessly to earn and retain their business while attracting net new customers. With this in mind, let me give you an update on what we've been working on recently. Over the past few weeks, we've made demonstrable progress accelerating our product innovation and the velocity of our new releases. Let me share a few highlights with you.

Mark: This reinforces our mission and we are going to continue to focus on product innovation and ensuring we delight our customers and the developer ecosystem.

Mark: Their endorsement of digital auction is powerful and we will work tirelessly to earn and retain their business, while attracting net new customers.

Padmanabhan T. Srinivasan: First, we recently introduced turnkey data protection for our customers by launching daily droplet backups. In true DigitalOcean fashion, to make it super simple for developers, this capability enables one-click droplet data protection, providing peace of mind from accidental deletion through automatic retention of the seven most recent copies. In parallel, we also improved the speed of our snapshots capability by up to 6x, enabling customers to back up even larger droplets much faster than before.

Mark: With this backdrop, let me give you an update on what we have been working on recently.

Mark: Over the past few weeks, we have made demonstrable progress accelerating our product innovation and the velocity of our new releases, let me share a few highlights with you.

Mark: First we recently introduced turnkey data protection for our customers by launching daily droplets backups.

Mark: Through this solution fashion to make it super simple for developers. This capability enables one click droplet data protection, providing peace of mind from accidental deletion.

Mark: Through automatic retention of the seven most recent copies.

Mark: In parallel we also improve the speed of our snapshots capability by up to <unk> <unk>.

Mark: Enabling customers to backup even larger droplets much faster than before.

Padmanabhan T. Srinivasan: While it is still early days, we are seeing robust adoption from both existing and new customers, enabling daily backup. We have already seen more than 1,300 new customers enabling daily backups and a 150% month-over-month increase in overall droplets being backed up daily just between March and April of this year. We also rolled out new additions to our premium droplet offering, expanding these premium options to memory and storage-optimized families, with high-performance, non-volatile memory express, and 5X increased networking throughput over regular droplets alongside our flexible egress bandwidth allowance. These new memory and storage-optimized droplets are ideal for memory, data, network, and bandwidth-intensive workloads.

Mark: While it is still early days, we're seeing robust adoption from both existing and new customers, enabling daily backups.

Mark: We have already seen more than 3500, new customers, enabling daily backups and 150% month over month increase in overall droplets being backed up daily just between March and April of this year.

Mark: Okay.

Mark: We also rolled out new editions to our premium droplet offerings expanding these premium options.

Mark: Memory and storage optimized families.

With high performance Nonvolatile memory Express Ssds.

Mark: And <unk> increased networking throughput over regular droplets alongside our flexible egress bandwidth allowance.

Mark: This new memory and storage optimized droplets are ideal for memory data network and bandwidth intensive workloads.

Padmanabhan T. Srinivasan: We are very excited for the potential they will offer to new and existing customers across a variety of use cases like caching, databases, and many others as they get ramped up. Also, in Q1, we introduced horizontal scaling for Managed Kafka, continuing our focus on making the complex simple for our customers. Horizontal scaling for Kafka is particularly critical for our customers who manage large volumes of streaming data and want to prioritize scaling bandwidth and highly perform an end-user experience.

Mark: We are very excited for the potential we will offer to new and existing customers across a variety of use cases like caching databases and many others as they get ramped up.

Mark: Also in Q1, we introduced horizontal scaling for managed Kafka, continuing our focus on making the complex simple for our customers.

Mark: Our resulting scaling for Kafka is particularly critical for our customers, who manage large volumes of streaming data and want to prioritize scaling bandwidth and highly performance and user experiences.

Padmanabhan T. Srinivasan: This facilitates the right provisioning of nodes in support of fluctuating workload requirements, enabling customers to handle spiky data volumes and traffic, improve the reliability of their clusters, and optimize their resources. A few other notable releases we are excited to highlight since our last call include a series of app platform improvements, such as CPU-based autoscaling and dedicated egress IP support from App Platform. Turning into our managed hosting cloud-based offering, in January, we were proud to launch CloudBase Autonomous, which has been in the market for a few months now.

This facilitates right provisioning of nodes in support of fluctuating workload requirements, enabling customers to handle despite key data volumes and traffic.

Mark: Improve the reliability of their clusters and optimize their resources.

Mark: A few other notable releases we are excited to highlight since our last call include a series of App platform improvements such as CPU based auto scaling and dedicated egress IP support from our platform.

Mark: Turning into our managed hosting cloud based offering in January we were proud to launch cloud based autonomous.

Mark: With a few months in market now.

Padmanabhan T. Srinivasan: The initial feedback from customers and the community has been very positive, with over 650 customers adopting the new capability today. Alongside Autonomous, we shipped a number of other crucial items to simplify and secure our managed hosting offering for our customers. These include DNS Made Easy to simplify DNS management for users, and integration with Padstack to provide an extra layer of vulnerability detection and alerting, and most recently, client billing. These are the first two launched for our planned agency suite that will automate and streamline various agency workflows to enable simpler, more efficient, and more agile operational support to help our agency customers grow on the DigitalOcean platform. More to come on this throughout the rest of this year.

Mark: The initial feedback from customers and community has been very positive with over 650 customers adopting the new capability to date.

Mark: Alongside autonomous we shipped a number of other crucial items to simplify and secure our managed hosting offering for our customers.

Mark: These include DNS made easy to simplify DNS management for users.

Mark: And integration with <unk> to provide an extra layer of vulnerability detection and alerting and most recently in April client billing.

Mark: The first to launch for our planned agency suite that will automate and streamline various agency workflows to enable simpler more efficient and more agile operational support to help our agency customers grow on the digital auction platform.

Mark: More to come on this throughout the rest of this year.

Padmanabhan T. Srinivasan: These examples are just a few highlights from the list of capabilities we continue adding in our mission to simplify the cloud for our customers. We will continue to listen closely to our customers and strive to accelerate our delivery velocity to ensure our customers are positioned for success as they grow on our platform. We know that when our customers win, we all win.

Mark: These examples are just a few highlights from the list of capabilities, we continue adding in our mission to simplify the cloud for our customers.

Mark: We will continue to listen closely to our customers and strive to accelerate our delivery velocity to ensure our customers are positioned for success as they grow on our platform.

So that when our customers win we all win and our focus remains squarely on delivering and rapid cadence of new releases aimed at delighting, our customers, enabling them to scale their businesses and ultimately increasing our net dollar retention.

Padmanabhan T. Srinivasan: And our focus remains squarely on delivering a rapid cadence of new releases aimed at delighting our customers, enabling them to scale their businesses, and ultimately increasing our net dollar retention. Before turning it over to Matt, I would like to share some updates on what we are seeing across the AI landscape. It is an exciting time in AI, and you can see that every day in the headlines that you read. Companies across virtually every vertical that you can imagine are eager to incorporate AI into their value proposition.

Speaker Change: Before turning it over to Matt I would like to share some updates on what we're seeing across the AI landscape. It is an exciting time in AI and you can see that every day and the headlines that you read.

Speaker Change: Companies across virtually every vertical that you can imagine are eager to incorporate AI into their value proposition.

Padmanabhan T. Srinivasan: While large language models, or LLMs, get most of the headlines, we are learning that our target customers, many of which are software vendors, are looking to consume a variety of different AI models into their offerings, like fraud detection, sentiment analysis, natural language processing, live translation, demand forecasting, and, of course, LLM-based models, like image and video generation, coding assistance, Q&A bots, and many more. We're seeing strong revenue growth for our early-stage AI solutions as we continue to ramp up our initial GPU capacity through the first part of this year. And our expectations are that demand will continue to outstrip supply for the foreseeable future.

Speaker Change: While large language models are llm's get most of the headlines we are learning that our target customers. Many of which are software vendors are looking to consume a variety of different AI models into their offerings like fraud detection sentiment analysis natural language processing life translation.

Speaker Change: Demand forecasting and of course <unk>.

Speaker Change: <unk> based models like image and video generation coating assistance Q&A box and many more.

Speaker Change: We're seeing strong revenue growth for our early stage AI solutions as we continue to ramp up our initial GPU capacity through the first part of the theory.

Speaker Change: And our expectations are that demand will continue to outstrip supply for the foreseeable future.

Padmanabhan T. Srinivasan: As of March, our ARR grew to 19 million, most of which is our platform-as-a-service offering, a 128% annualized increase from December 2023, driven by demand for both AI model training and consumption of models, also known as inference. In addition to our existing AI platform as a service that helps AI and machine learning developers consume a variety of open source models, we also launched our GPU-based infrastructure as a service offering in January of 2024 and are seeing strong traction, with GPU hours sold and consumed increasing 67% just from March to April of this year.

Speaker Change: As of March our IRR grew to $19 million, most of which is our platform as a service offering.

Speaker Change: 128% annualized increase from December 2023, driven by demand for both AI model training and consumption of models.

Speaker Change: Also known as inferencing.

Speaker Change: In addition to our existing AI platform as a service that helps AI and machine learning developers consumer variety of open source models. We also launched our GPU based infrastructure as a service offering in January of 2024 and are seeing strong traction with <unk>.

Speaker Change: Hours sold and consumed increasing 67% just from March to April of this year.

Padmanabhan T. Srinivasan: The growing customer base for our AI infrastructure as a service offering is both venture-backed startups as well as established businesses. Over the last four weeks, we have onboarded several customers that came to us for our availability, simplicity, and support. Customers are using our AI Platform-as-a-Service and Infrastructure-as-a-Service platforms for a variety of use cases, including text and video generation, AI Coding Co-Pilots, Recommendation Algorithms, Model Hosting Services, and many more. Let me give you a couple of concrete examples.

Speaker Change: The growing customer base for our AI infrastructure as a service offering are both venture backed startups as well as established businesses.

Over the last four weeks.

Speaker Change: We have onboard at several customers that came to us for our availability simplicity and support.

Speaker Change: Customers are using our AI platform as a service and infrastructure as a service platform for a variety of use cases, including text and video generation AI.

Speaker Change: AI coding co pilots recommendation algorithms model hosting services and many more.

Padmanabhan T. Srinivasan: First is a venture-backed customer that is a leading AI-driven storytelling platform that helps build marketing storyboards, visual manuals for complex products, and comics, all from textual prompts. Another customer example is an AI assistant tool that developers leverage to code with greater speed, flexibility, and accuracy. These are just two new examples of customers that we have seen this year as the AI market continues to quickly grow and evolve. I've spent a significant portion of my time and attention in my first 90 days working directly with these customers to understand their needs deeply and translate that into our longer-term AI strategy. Our customer needs, while similar, are quite distinct from the needs of large enterprise customers using hyperscalers or large language model builders who use the raw infrastructure from GPU form providers.

Speaker Change: Let me give you a couple of concrete example.

Speaker Change: First is a venture back customer that is a leading AI driven storytelling platform.

Speaker Change: That.

Speaker Change: Help build marketing storyboard visual manuals for complex products and comics all from textural prompts.

Speaker Change: Another customer example is an AI assistant tool that developers leverage to code with greater speed flexibility and accuracy.

Speaker Change: These are just two new examples of customers that we have seen this year as the AI market continues to quickly grow and evolve.

I've spent a significant portion of my time and attention in my first 90 days working directly with these customers to understand their needs deeply and translate that into a longer term AI strategy.

Speaker Change: Our customer needs, while similar are quite distinct from the needs of large enterprise customers using hyper scaler.

Speaker Change: Our large language model builders, who use the raw infrastructure from GPU from providers.

Padmanabhan T. Srinivasan: To put this in perspective, over a decade ago, DigitalOcean identified and delivered an innovative compute solution with a clear product market fit that was not being effectively addressed by the larger cloud providers, creating an easy on-ramp for developers, startups, and entrepreneurs to learn, test, and scale their businesses by simplifying cloud computing. We see a similar opportunity emerging now to democratize access to AI and machine learning capabilities, not only by providing simple access to GPU capacity via Infrastructure as a Service but also by integrating AI and machine learning into the developer experience itself to transform how developers build and run their workloads on our platform. Like many cloud platform providers, we are simultaneously turning up incremental capacity to meet near-term demand while also rapidly learning and evolving our AI strategy.

Speaker Change: To put this in perspective over a decade ago. This dilution identified and delivered an innovative compute solution with a clear product market fit that was not being effectively addressed by the larger cloud providers.

Speaker Change: Creating an easy on ramp for developers startups and entrepreneurs to learn test and scale their businesses by simplifying cloud computing.

Speaker Change: We see a similar opportunity emerging now to democratize access to AI and machine learning capabilities, not only by providing simple access to GPU capacity by our infrastructure as a service.

Speaker Change: But also by integrating AI and machine learning into the developer experience itself to transform how developers build and run their workloads on our platform.

Speaker Change: Like many cloud platform providers, we are simultaneously turning up incremental capacity to meet near term demand, while also rapidly learning and evolving our AI strategy.

Padmanabhan T. Srinivasan: While we are certainly in the very early innings of this transformative growth opportunity, we continue to believe that software, more than hardware, will be DigitalOcean's long-term differentiator and competitive advantage, especially for our target customers. We are confident in the strategic direction we are taking and believe that AI will be a meaningful growth contributor in 2024 and in the years ahead. We will make the right choices on investment this year as we continue to see positive results.

While we are certainly in the very early innings of this transformative growth opportunity. We continue to believe that software more than hardware will be digital oceans long term differentiator and competitive advantage, especially for our target customers.

Speaker Change: We are confident in the strategic direction, we are taking and believe that AI will be a meaningful growth contributor in 2024 and in the years ahead.

Speaker Change: We will make the right choices on investment this year as we continue to see positive results.

Padmanabhan T. Srinivasan: To close my comments, I'm pleased with our performance in the early months of 2024, and I'm optimistic about our near and long-term growth potential. We have a very solid performance and growing core business. Our revenue growth accelerated quarter over quarter, NDR improved, and profitability and cash flow margins were all very healthy. We are accelerating our pace of innovation and delivering new capabilities at a rapid pace, which will help our customers grow on our platform, thereby increasing our net dollar attention.

Speaker Change: I'll share more on our plans on this front over the course of this year.

Speaker Change: To close my comments I am pleased with our performance in the early months of 2024 and I am optimistic.

Speaker Change: On our near and long term growth potential.

Speaker Change: We have a very solid performance and growing core business, our revenue growth accelerated quarter over quarter and Dr improve and profitability and cash flow margins were all very healthy.

Speaker Change: We are accelerating our pace of innovation and delivering new capabilities and rapid cadence, which will help our customers grow on our platform.

Speaker Change: Thereby increasing our net dollar retention.

Padmanabhan T. Srinivasan: Our AIML solutions are responding very strongly with our customers, and we are working to turn up incremental capacity over the balance of the year to keep up with robust demand. There's a lot of work to do to take full advantage of our opportunity. But we are moving in the right direction and continue to make steady, rapid, and respectable progress each quarter. I will now turn the call over to Matt to provide details on our financial results and on our outlook for Q2 and for the balance of the year.

Speaker Change: Our AML solutions are resonating very strongly with our customers and we are working to turn up incremental capacity over the balance of the year to keep up with robust demand.

Speaker Change: There is a lot of work to do to take full advantage of our opportunity, but we are moving in the right direction and continue to make steady.

Speaker Change: Rapid and respectable progress each quarter.

Speaker Change: I will now turn the call over to Matt to provide details on our financial results and on our outlook for Q2 and for the balance of the year.

Matt: Thanks Patty.

Matt Steinfort: Good morning, everyone, and thanks for joining us today to review our first quarter results. Revenue growth continued to improve quarter over quarter. We are seeing positive signals from our key growth drivers, and we continue to deliver attractive adjusted EBITDA and free cash flow margins while we increase investment in our AI platform to pursue this material growth opportunity. This morning, I will provide a deeper look into the first quarter results before providing our financial outlook for Q2 and the full year.

Matt: Everyone and thanks for joining us today to review our first quarter results.

Matt: Revenue growth continued to improve quarter over quarter.

Matt: We are seeing positive signals from our key growth drivers and we continue to deliver attractive adjusted EBITDA and free cash flow margins, while we increased investment in our AI platform to pursue this material growth opportunity.

Speaker Change: This morning, I will provide a deeper look into the first quarter results before providing our financial outlook for Q2 and for the full year.

Matt Steinfort: Revenue in the first quarter was $184.7 million, which was up 12% year over year and up sequentially from the fourth quarter of 2023. We added $19 million of annual recurring revenue, or ARR, in the quarter, which was the largest organic quarterly increase we generated since the second quarter of 2022 and was 82% higher than the incremental ARR we generated in Q1 of 2023. Contributing to this growth was steady incremental revenue from new customers, improving net dollar retention from our existing installed base, and healthy contributions from our managed hosting and AI.

Speaker Change: Revenue in the first quarter was $184 7 million, which was up 12% year over year and up sequentially from the fourth quarter of 2023.

Speaker Change: We added $19 million in annual recurring revenue or <unk> in the quarter, which was the largest organic quarterly increase we've generated since the second quarter of 2022 and was 82% higher than the incremental <unk>, we generated in Q1 2023.

Speaker Change: Contributing to this growth with steady incremental revenue from new customers.

Speaker Change: Improving net dollar retention from our existing installed base and healthy contributions from our managed hosting and AI platforms.

Speaker Change: Revenue from new customers in their first 12 months remains both steady and a key element of our solid growth Foundation in Q1.

Matt Steinfort: Revenue from new customers in their first 12 months remained both steady and a key element of our solid growth foundation in Q1. As we discussed in February, improving our net dollar retention, or NDR, is a major focus area and a key driver for accelerating our overall growth rate as we move through this year. As anticipated, NDR improved to 97% in Q1 and has continued to steadily increase since we reached our low point in July of 2023.

Speaker Change: As we discussed in February improving our net dollar retention or MTR is a major focus area and a key driver for accelerating our overall growth rate as we move through this year.

Speaker Change: As anticipated <unk> improved to 97% in Q1 and has continued to steadily increase since we reached a low point in July of 2023.

Matt Steinfort: We continue to see steady and historically consistent levels of churn, and we are seeing modest month-over-month improvements in our net expansion, which is expansion net of contraction, as our customers are slowly returning to growth. The work that we are doing on both accelerating our product roadmap and continuing to enhance our customer success metrics should enable us to continue to increase our net dollar retention as we seek to remove it as a headwind and eventually return it to a tailwind to our overall growth.

Speaker Change: We continue to see steady and historically consistent levels of churn and.

Speaker Change: And we are seeing modest month over month improvements in our net expansion, which is expansion net of contraction as our customers are slowly returning to growth.

The work that we're doing in both accelerating our product roadmap and continuing to enhance our customer success motions should enable us to continue to increase our net dollar retention as we seek to remove it as a headwind and eventually return it to a tailwind to our overall growth.

Matt Steinfort: Our managed hosting product, Cloudways, another key growth driver, contributed revenue of $22 million in the first quarter and grew 34% year-over-year. While we will see a slower year-over-year growth rate from Cloudways as we lap the managed hosting price increase that we made in April of last year, we do anticipate managed hosting continuing to be one of our faster-growing platforms for the foreseeable future. As Patty described, we are still in the early innings with our AI and machine learning solutions.

Speaker Change: Our managed hosting product cloud ways. Another key growth driver contributed revenue of $22 million in the first quarter and grew 34% year over year.

Speaker Change: While we will see a slower year over year growth rate from cloud ways as we lap the managed hosting price increase that we made in April of last year. We do anticipate managed hosting continuing to be one of our faster growing platforms for the foreseeable future.

Speaker Change: As Pat described we are still in the early innings with our AI and machine learning solutions, but the rate of growth of both the leading indicators and our revenue on this new platform is already meeting.

Matt Steinfort: But the rate of growth of both the leading indicators and our revenue on this new platform is already meaningful. For example, our AI and machine learning platform contributed $4 million in revenue in Q1. And we exited Q1 with AI ARR of more than $19 million, a 128% annualized increase. This strong growth came despite our being capacity constrained for the majority of the first quarter as we navigated supply chain challenges and turned up the first wave of servers that we had ordered in Q4 of 2023. We are consistently selling through our available capacity as it comes online.

Speaker Change: Our AI and machine learning platform contributed $4 million in revenue in Q1, and we exited Q1 with AI <unk> of more than $19 million, 128% annualized increase.

Speaker Change: This strong growth came despite our being capacity constrained in the majority of the first quarter as we navigated supply chain challenges and turned up the first wave of servers that we had ordered in Q4 of 2023.

Speaker Change: We are consistently selling through our available capacity as it comes online and we saw our hours sold on each one hundreds increased 67% in April just on over March than just a single month.

Matt Steinfort: And we saw our hours sold on H100s increase 67% in April, just over March in just a single month. We will continue to add the next waves of our planned incremental capacity over the balance of the year and anticipate that demand for our AI solutions will continue to be robust. Turning to the P&L, gross margin was 61%, which was an increase from 56% in the first quarter of the prior year. The largest factors in this 500-basis-point improvement were the success of our ongoing cost-optimization efforts and our having grown into infrastructure investments from prior periods. As is the nature of our business, incremental investments in equipment, space, and power, and networking cause modest step function increases in the cost of goods that are then smoothed as we fill the capacity with incremental revenue.

Speaker Change: We will continue to add the next waves of our planned incremental capacity over the balance of the year and anticipate the demand for our AI solutions will continue to be robust.

Speaker Change: Turning to the P&L gross margin was 61%, which was an increase from 56% in the first quarter of the prior year.

Speaker Change: Largest factors in this 500 basis point improvement for the success of our ongoing cost optimization efforts and are having grown into infrastructure investments from prior periods.

As is the nature of our business incremental investments in equipment space and power and networking cause modest step function increases to cost of goods that are then smoothed as we fill that capacity with incremental revenue.

Matt Steinfort: Given our planned AI investments, we anticipate that gross margin will moderate somewhat in the coming quarter. Adjusted EBITDA margin was 40% in the first quarter, in line with the prior quarter, as we continue to diligently manage expenses. Our healthy profitability in our core platform continues to provide us with the flexibility to make additional investments in R&D, accelerate our product roadmap, and invest in our higher growth opportunities, such as AI. Diluted net income per share was $0.15, and non-GET diluted net income per share was $0.43.

Speaker Change: Given our planned AI investments, we anticipate that gross margin will moderate somewhat in the coming quarters.

Speaker Change: Adjusted EBITDA margin was 40% in the first quarter in line with prior quarter as we continue to diligently manage expenses.

Speaker Change: Our healthy profitability in our core platform continues to provide us the flexibility to make additional investments in R&D to accelerate our product roadmap and to invest in our higher growth opportunities such as AI.

Speaker Change: Diluted net income per share was <unk> 15.

Speaker Change: Our non-GAAP diluted net income per share was <unk> 43.

Matt Steinfort: Gap and non-gap diluted earnings per share increased by $0.32 and $0.15, respectively, on a year-over-year basis. Meanwhile, while we have been, Cash Flow Positives Since 2021. It is notable that we are now posting positive net income quarters on a gap, which is a further indication of the profitability of our core DigitalOcean business. Adjusted free cash flow margin was $34 million, or 19% of revenue, which was an improvement from 16% of revenue in Q1 of 2023. As we have said previously, pre-cash flow margin is a more meaningful metric on an annual or trailing 12-month basis, and quarterly pre-cash flow margin will vary due to the timing of capital spend and other working capital.

Speaker Change: GAAP and non-GAAP diluted earnings per share increased by 32, and <unk> 15, respectively on a year over year basis.

Speaker Change: While we have been.

Speaker Change: Cash flow positive since 2021. It is notable that we are now posting positive net income quarters on a GAAP basis, which is a further indication of the profitability of our core digital auction business.

Speaker Change: Adjusted free cash flow margin was $34 million or 19% of revenue, which was an improvement from 16% of revenue in Q1 of 2023.

Speaker Change: As we have said previously free cash flow margin is a more meaningful metric on an annual or trailing 12 month basis and core quarterly free cash flow margin will vary given the timing of capital spend and other working capital impacts.

Matt Steinfort: Turning to our customer metrics, average revenue per customer increased 8% year-over-year to $95.13. Additionally, the number of builders and scalers on our platform, those that spend more than $50 per month, was 158,000, an increase of 8% year over year. Their revenue growth year over year was 13% ahead of our overall growth rate of 12%. The number of builders and scalers on our platform, which represents 87% of our revenue, increased by 1,300 during the quarter.

Speaker Change: Turning to our customer metrics average revenue per customer increased 8% year over year to $95 13 sets the.

Speaker Change: The number of builders and scalar is on our platform those that spend more than $50 per month was 158.

Speaker Change: An increase of 8% year over year.

Speaker Change: Their revenue growth year over year was 13% ahead of our overall growth rate of 12%.

Speaker Change: The number of builders and scalar is on our platform, which represents 87% of our revenue increased by 3500 during the quarter the.

Matt Steinfort: The increase in our higher spend and higher growth customers is a result of our focus and concentration of our marketing, product development, and customer success investments on these builders. Along with the increase in our higher value customers, we did see total customer count decline by 7,400 quarter over quarter.

Speaker Change: The increase in our higher spend and higher growth customers as a result of our focus and concentration of our marketing product development and customer success investments on these builders and scale.

Speaker Change: Along with the increase in our higher value customers. We did see total customer count declined by 7400 quarter over quarter.

Operator: This change was due to a reduction of 8,700 of our lowest spending customers, our learners, with that reduction collectively representing only around $100,000 a month of recurring revenue, as the average spend for those customers was less than $10. Our balance sheet remains very strong, as we ended the quarter with $419 million of cash and cash equivalents. During the first quarter, we leveraged our material cash balance and pre-cash flow to repurchase 200,000 shares of common stock for $8 million as part of our ongoing share buyback program.

Speaker Change: This change was due to a reduction of 8700 of our lowest spending customers our learners with that reduction collectively representing only around $100 a month of recurring revenue as the average spend for those customers was less than $10.

Speaker Change: Our balance sheet remains very strong as we ended the quarter with $419 million of cash and cash equivalents.

Speaker Change: During the first quarter, we leveraged our material cash balance and free cash flow to repurchase 200000 shares of common stock for $8 million as part of our ongoing share buyback.

Operator: Looking forward and building on our steady growth in Q1, we expect Q2 revenue to be in the range of $188 to $189 million, representing 11% year-over-year growth at the midpoint of our guidance. For the second quarter, we expect adjusted EBITDA margins to be in the range of 37 to 38 percent, and non-GAAP diluted earnings per share to be 38 to 40 cents, based on approximately $102 to $103 million in weighted average fully diluted shares out there.

Speaker Change: Looking forward and building on our steady growth in Q1, we expect Q2 revenue to be in the range of $188 million to $189 million representing.

Speaker Change: Representing 11% year over year growth at the midpoint of our guidance range.

Speaker Change: For the second quarter, we expect adjusted EBITDA margins to be in the range of 37% to 38% and non-GAAP diluted earnings per share to be 38 to 40.

Speaker Change: Based on approximately $100 million to $103 million and weighted average fully diluted shares outstanding.

Operator: With improving NDR and the strong demand for our AI platform that we saw in Q1, we are increasing the bottom end of our full-year revenue guide by $5 million, projecting revenue to be in the range of $760 million to $775 million for the year, a $2.5 million increase in the midpoint of our guidance range and representing year-over-year growth of 10% to 12% for the plan. On the profitability side, we continue to drive operating leverage in our core DigitalOcean platform, enabling us to increase investment in our faster-growing managed hosting and AI and machine learning platforms while maintaining attractive overall margins.

With improving and Dr and the strong demand for our AI platform that we saw in Q1, we are increasing the bottom end of our full year revenue guide by $5 million projecting revenue to be in the range of 760 $775 million for the year at $2 5 million increase in the midpoint of our guidance range and representing year over year growth.

Speaker Change: 10% to 12% for the credits.

Speaker Change: On the profitability side, we continue to drive operating leverage in our core digital ocean platform, enabling us to increase investment in our faster growing managed hosting and AI and machine learning.

Speaker Change: <unk>.

Speaker Change: While maintaining attractive overall margins.

Operator: We continue to execute the plan we articulated in February and continue to project our adjusted EBITDA margins for the full year to be in the range of 36 to 38%. We also maintain our forecast range for full-year adjusted free cash flow margins at this point. As we continue to see positive signals from our AI solutions over the balance of this year, we will continuously assess whether to deploy additional capital to further accelerate our AI growth, which may result in reductions to our free cash flow margins to support that. We are also maintaining our non-GAAP diluted earnings per share guidance, which we expect to be in the range of $1.60 to $1.60. That concludes our prepared remarks, and we'll now open the call to Q&A.

Speaker Change: We continue to execute the plan we articulated in February and continue to project, our adjusted EBITDA margins for the full year to be in the range of 36% to 38%.

Speaker Change: We also maintain our forecast range for full year adjusted free cash flow margins at this point.

Speaker Change: As we continue to see positive signals from our AI solutions over the balance of this year, we will continuously assess whether to deploy additional capital to further accelerate our AI growth, which may result in reductions to our free cash flow margins to support them.

Speaker Change: We are also maintaining our non-GAAP diluted earnings per share guidance, which we expect to be in the range of $1 60 to $1 67.

Speaker Change: That concludes our prepared remarks, and we'll now open the call for Q&A.

Operator: Thank you. We will now begin the question and answer session. If you have dialed in and would like to ask a question, please press star 1 on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, simply press star 1 again. If you are called upon to ask your question and are listening via loudspeaker on your device, please pick up your handset and ensure that your phone is not on mute when asking your question. Again, press star 1 to join the queue. Your first question comes from the line of Raimo Lenschow of Barclays. Your line is open.

Speaker Change: Thank you we will.

Speaker Change: We'll now begin the question and answer session.

Speaker Change: If you have dialed in and would like to ask a question. Please press star one on your telephone keypad to raise your hand and join the queue.

If you would like to withdraw your question simply press Star one again.

Speaker Change: Called upon to ask your question and our listening via loud speaker on your device. Please pickup your handset and ensure that your phone is not on mute when asking your question again press star one to join the queue.

Speaker Change: Your first question comes from the line of Brian Mall Lance shall of Barclays. Your line is open.

Padmanabhan T. Srinivasan: Thank you, congratulations from me for a great quarter. First question on AI: if you think about the state or the evolution of AI adoption, there's things like training, interference, and what are you seeing at the moment on the platform side, and how do you think that will kind of evolve for you? And then another question on NRR, if you think about it, it's obviously a lagging indicator, like how do you think the weaker periods coming out are impacting NRR going forward? Thank you.

Speaker Change: Thank you congrats from me for a great quarter.

Speaker Change: Question on.

Speaker Change: If you think about the.

The speed or the evolution of AI.

Speaker Change: Adoption, there's like training.

Speaker Change: <unk>.

Speaker Change: <unk> sorry.

Speaker Change: What are you seeing at the moment on the platform side and how do you think that will kind of evolve for you.

Speaker Change: And then a number of question on <unk>.

Speaker Change: If you think about it is obviously lagging indicators.

Speaker Change: How do you think the.

Speaker Change: The weaker periods coming out kind of impacting kind of going forward. Thank you.

Padmanabhan T. Srinivasan: Great. Thank you for the question, Raimo. I'll start with the AIML question, and then I'll let Matt chime in with the NRR question. So from an AIML perspective, as I said, this is very exciting traction, but I have to remind you that we are in very early innings, not just at DigitalOcean, but as a market as a whole. So, I think for us, we are super focused on the needs of our customers, and our customers are a little different, as I described in my prepared remarks.

Speaker Change: Okay, great. Thank you for the question Raimo I'll start with the AML question, and then I'll, let Matt chime in with the MLR question. So from an AI ml perspective, as I said.

Speaker Change: It is very exciting traction, but I have to remind that we are in very early innings not just at this lotion, but as a market as a whole.

Speaker Change: So I think for US we are super focused on the needs of our customers and our customers are looking at different as I described in my prepared remarks.

Padmanabhan T. Srinivasan: A lot of our customers are tech businesses that build and run software applications on the DO platform, and they need a variety of different AI models, not just LLMs. And they are mostly AI extenders, so if you take the example of LLMs that a lot of people are familiar with these days, you can inject data and fine-tune and extend current AI models. So that's a lot of what our customers are looking to do, not just in LLMs but in other models as well.

Speaker Change: A lot of our customers our tech businesses that build and run software applications on the platform.

Speaker Change: They need a variety of different AI models, not just llm's and they are mostly AI ex tenders. So if you take the example of Ela lens that lot of people are familiar with these days.

Speaker Change: You can inject data and fine tune and extend current.

Speaker Change: Current AI models. So that's a lot of what our customers are looking to do not just in LLM spud and other models as well.

Padmanabhan T. Srinivasan: Typically, our customers are AI extenders and AI consumers, and our AI value proposition is twofold, as I explained. We have recently introduced the infrastructure as a service, and the dominant use case right now is model building, model extension, and fine-tuning, and also model inference across different parts of our data center infrastructure. We also have a very robust platform-as-a-service offering with Gradient, a platform we acquired through PaperSpace, which is also undergoing considerable enhancements as we speak.

Speaker Change: Typically our customers are AI extenders, and AI consumers and our AI value proposition is twofold as I explained we have recently introduced the infrastructure as a service.

Speaker Change: And.

The dominant use case right now is model building and model extension and fine tuning and also.

Speaker Change: Model inferencing across.

Speaker Change: Different parts of our data center infrastructure.

Speaker Change: We also have a very robust platform as a service offering with <unk> and the platform. We acquired through paper space, which is also an undergoing considerable enhancements as we speak so this platform as a service.

Padmanabhan T. Srinivasan: So this platform-as-a-service has a much wider aperture in the sense that it deals with AI and machine learning throughout the lifecycle of software development. So we have that as well as the raw infrastructure as a service to fine-tune and build and train and infer these AI models. As I said, we are very happy with the progress in Q1. We will be focused on serving our customer segment primarily with our AI strategy.

Speaker Change: Has a much wider aperture in the sense that eight.

Speaker Change: Deals with AI and machine learning throughout the lifecycle of software development. So.

Speaker Change: We have both.

That as well as the raw infrastructure as a service to fine tune in.

Speaker Change: Build and train and infer.

Speaker Change: These AI models. So as I said, we are very happy.

Speaker Change: We're happy with the progress in Q1, we will be focused on serving our customer segment, primarily with with our AI strategy and we feel very confident that we are now starting to really understand the evolving needs of our customers and what they are actually looking for both end model training and inference.

Padmanabhan T. Srinivasan: And we feel very confident that we are now starting to really understand the evolving needs of our customers and what they are actually looking for both in model training and inferencing. But, as I said, these are very early innings.

Speaker Change: And as I said these are very early innings of a lot of attention is now on module building and fine tuning and training but.

Padmanabhan T. Srinivasan: A lot of attention is now on model building and fine-tuning and training, but the long-term use case is going to be super heavy on inferencing, and we have both those phases covered with our platform-as-a-service and infrastructure-as-a-service.

Speaker Change: The long term.

Speaker Change: Use case is going to be super heavy on inferencing, and we have both those faceless covered with our platform as a service and infrastructure as a service.

Matt Steinfort: And Raimo, on net dollar retention, again, we're encouraged by the steady, slow but steady increase in net dollar retention that we've seen basically on a monthly basis since July of last year. And as we've said historically, churn hasn't really been the challenge for us over that period, and even in the prior year, the issue had been net expansion, which is expansion minus contraction. And we've seen slow and steady improvement there, which is driving the improvement in NDR.

Speaker Change: And then raimo.

Speaker Change: Net dollar retention again, we're encouraged by the I'd say this the steady.

Speaker Change: Slow, but steady increase in net dollar retention that we've seen.

Speaker Change: Basically on a monthly basis from July of last year, and as we've said historically.

Speaker Change: Churn Hasnt really been the challenge for us over that period and even even in the prior year.

Speaker Change: The issue has been net expansion, which is <unk>.

Speaker Change: Expansion minus contraction and and we've seen slow and steady improvement there, which is driving the improvement in MBR.

Matt Steinfort: Contraction continues to kind of get better, a little bit better every month. Expansion, again, was the last of our kind of drivers of NDR to hit the bottom last year, and it's, you know, it is holding steady at the levels it's been over the last several months, and we see positive indications, but it's, I'd say, going to be slow and steady growth for us to get that NDR up, and we're encouraged by the progress that we're making.

Speaker Change: Traction continues to.

Speaker Change: Kind of get better a little bit better every month.

Speaker Change: Spansion again was the last of our kind of drivers of MBR to hit the bottom last year in it.

Speaker Change: Is holding steady at the levels.

Speaker Change: It's been over the last several months and we see positive indications, but it's I would say going to be.

Slow and steady growth for us to get that to get that NDA are up and we're encouraged by the progress that we're making in the product development work that Patti described and the heightened focus on the customer success those will all contribute to two.

Matt Steinfort: And the product development work that Patty described and the heightened focus on customer success, those will all contribute to the improvements, and we're banking on only the things that we control, so those improvements. We're not banking on any macro improvement or kind of market shift to higher growth in terms of what we're guiding.

Speaker Change: Two the improvements and we're banking on only the things that we control. So those improvements we're not banking on any.

Speaker Change: Macro improvement or kind of market shift.

Speaker Change: Higher growth in terms of what we're guiding.

Operator: Okay, perfect. That makes a lot of sense. Thank you. Well done.

Speaker Change: Okay, perfect that makes a lot of sense. Thank you.

Operator: Your next question comes from the line of Pinjalim Bora with J.P. Morgan. Your line is open.

Speaker Change: Your next question comes from the line of P. Xylene Bora with Jpmorgan. Your line is open.

Operator: Oh, great. Thanks for taking the question. And congrats on the quarter. I want to ask you, Patty, the AI strength is definitely palpable here. But I want to ask you if you are seeing a patch rate for the core DigitalOcean offering, as people create applications around the AI workloads, is that that flywheel AI driving more core deals starting to happen?

Speaker Change: Oh, great. Thanks for taking my question and congrats on the quarter.

Speaker Change: I wanted to ask you Perry.

Speaker Change: AIA strength is definitely possible here, but I wanted to ask you. If you are seeing attach rate of the core digital ocean offering.

Speaker Change: Stifel <unk> applications around around the AI.

Speaker Change: Workloads is that is that flywheel.

Speaker Change: Driving more core deals starting to happen.

Padmanabhan T. Srinivasan: Yeah, great. Good question, Pinjalim. Nice to hear from you.

Speaker Change: Great.

Good question pendulum nice nice to hear from you.

Speaker Change: No.

Speaker Change: I'm looking at it is that there are two.

Padmanabhan T. Srinivasan: So, the way I'm looking at it is that there are two ways that this cross-sell or this cross-attach happens. One, our traditional DigitalOcean core customers that are now starting to use both platform as a service as well as our infrastructure to consume some of the AI models that I was talking about. So, it is still very early, but we have a handful of examples of some of our top customers that are trying to leverage our infrastructure for things like fraud detection models and things like that.

Speaker Change: Two ways that this cross sell or this cross at that happens one.

Speaker Change: Our digital lotion traditional digital ocean core customers that.

Speaker Change: We are now starting to use our book platform as a service as well as our infrastructure.

Speaker Change: To consume some of the AI models that I was talking about so it is still very early but we have.

Speaker Change: A handful of examples of some of our top customers that are.

Speaker Change: Trying to leverage our infrastructure for things like fraud detection models and things like that so we're starting to see early signs of that happening.

Padmanabhan T. Srinivasan: So, we are starting to see early signs of that happening. The other thing which is really interesting is startups and other model-heavy companies that are coming to take advantage of our GPU as well as our platform infrastructure that we have quickly realized that for them to scale their model and deploy it as they start getting into the inferencing mode, they need a lot of the core cloud primitives that a platform like DigitalOcean offers from compute, network, storage, bandwidth, and having a global geo footprint to get inferencing with the lowest possible latency as close to their customers as possible.

Speaker Change: The other thing which is really interesting is.

I'll.

Speaker Change: Startups and other module heavy companies that are coming to take advantage of our GPU as well as our platform infrastructure that we have.

Speaker Change: Quickly realize that for them to scale their model and deploy it and assay.

Speaker Change: Getting into the inferencing mode. They need a lot of the core cloud primitive that a platform like this solution offers from compute network storage bandwidth and having a geo.

Speaker Change: Our global Geo footprint to get influencing with the lowest possible latency as close to their customers as possible. So we are starting to see very healthy early signs of this model based companies quickly realizing that for them to go live in.

Padmanabhan T. Srinivasan: So, we are starting to see very healthy early signs of these model-based companies quickly realizing that for them to go live and start getting into the inferencing mode, they need a lot more than just raw GPU horsepower. They need all of the cloud primitives. Yes, there are idiosyncrasies about how storage or networking works in the world of AI, but these cloud primitives are absolutely essential as the models get deployed and get into inferencing mode. And that's something that we are already seeing a lot of times.

Operator: Understood. Thank you. One question or two parts is for Matt.

Speaker Change: Start getting into the inferencing mode. They need a lot more than just raw GPU horsepower. They need all of the cloud perimeters, yes, there are idiosyncrasies on how storage or <unk>.

Speaker Change: Networking works in the world of.

AI, but these cloud parameters are absolutely essential as the models get deployed and get into inferencing mode, and Thats something that were already seeing a lot of things.

Matt Steinfort: The paper space, I think the assumption was that it would contribute about three points of growth this year. Seems like you're already at about three points of growth. So wondering if you're still expecting that kind of a contribution or a little bit more. And on EBIT, it seems like the beat is not flowing through the full year. I was wondering if there was something around timing of expenses or any catch up in the second half? Yeah, we're still very behind.

Speaker Change: Understood. Thank you one question or two partners for Matt <unk>.

Speaker Change: I think the.

Speaker Change: Assumption was that it will contribute about three points of growth. This year. It seems like you're already at about three points of growth. So I'm wondering if you're still expecting that kind of a contribution a little bit more and on EBIT seems like the beat is not flowing through the full year was wondering if there was something around timing of expenses or any catch up in the second half.

Matt Steinfort: Yeah, we're still very confident in our AI platform contributing 3% overall growth to the company, so that, as you said, we remain confident in, and we're encouraged by the early signs that we're seeing in that business. And I think that's what gave us the comfort to increase the bottom end of the guide and to increase the midpoint. From an expense standpoint, yeah, the investments as they come on, what drives EBITDA, some of that will happen in the latter half of the year as we increase our investment in R&D and we invest in additional space and power to accommodate the AI growth.

Speaker Change: Yes.

Speaker Change: We're still very confident in that.

Speaker Change: Our AI.

Speaker Change: AI platform contributing 3% overall growth to the company. So that as you said, we remain confident in and we're encouraged by the early signs that we're seeing.

Speaker Change: In that in that business and I think thats, what gave us the comfort to increase the bottom end of the guide.

Speaker Change: The increase at the midpoint from expense standpoint.

Speaker Change: Point, yes, the investments as they come on what drives.

Speaker Change: The EBITDA will some of that will happen in the latter half of the year as we increase our investment in the R&D and invest in additional space and power to.

Speaker Change: To accommodate the.

Speaker Change: High growth so as we said in our business looking at it on an annual basis is way better than looking at individual quarters for free cash flow and in certain extent, even gross margin and adjusted EBITDA, because our expenses, when we take down incremental space or power or.

Matt Steinfort: So, as we said, in our business, looking at it on an annual basis is way better than looking at individual quarters for free cash flow and, to a certain extent, even gross margin and adjusted EBITDA, because our expenses, when we take down incremental space or power, wouldn't hit EBITDA, but for gross margin, if we take down additional equipment, it's lumpy. It has a slight negative impact on the margins, but we grow into it in the following quarter, which is what you saw from the increase in EBITDA from the fourth quarter to the first quarter of this year.

Speaker Change: It wouldn't hit EBITDA, but for gross margin, if we take down.

Speaker Change: Additional equipment it is lumpy.

Speaker Change: Slight negative impact on the margins and then we grow into it in the following quarter, which is what you saw from the increase in the EBITDA from the fourth quarter to the first quarter of this year.

Speaker Change: Understood. Thank you.

Operator: Your next question comes from the line of Kingsley Crane with Canaccord. Your line is open.

Speaker Change: Your next question comes from the line of Kinsley Crane with Canaccord. Your line is open.

Operator: Hi, thank you. So I want to touch back on the Paperspace conversation as well. I believe you have plans to create a more native link, a shared dashboard between Paperspace and the core DigitalOcean interface sometime this year. So could you just talk more about what you can do from a product perspective to encourage those potential cross-pollination opportunities? And just what other gating factors do you think you could address to encourage this?

Unknown Attendee: Alright. Thank you so I wanted to touch back on the paper conversations where I believe you have plans to create a more need of link assured dashboard between paper space and the core digital Osha interface sometime this year. So could you just talk more about what.

You can do from a product perspective to encourage those potential cross pollination opportunities and just what are the gating factors. You think you could address to encourage those thank you.

Padmanabhan T. Srinivasan: Thank you.

Unknown Attendee: Sure.

Padmanabhan T. Srinivasan: Yeah, thank you very much for the question. That's a really good question, something that we discuss on a weekly basis in our product conversations. Our first goal is to nail the use cases that our customers are choosing us for, so we don't want to miss out on that opportunity to make sure that we have the right infrastructure, the right GPU fabrics, the right networking, different types of storage attached that model builders, trainers, and extenders need, the right infrastructure for inferencing.

Speaker Change: Yes. Thank you very much for the question that's a really good question something that.

Unknown Attendee: That we are discussing on a weekly basis and our product conversations.

Unknown Attendee: Our first goal is to nail that.

Unknown Attendee: The use cases that our customers are picking us floor. So we don't want to.

Unknown Attendee: Miss out on that opportunity to make sure that we have the right infrastructure right GPU fabrics right networking.

Unknown Attendee: Different types of storage attach that model builders and trainers and extenders need the right infrastructure for inferencing. So we are really focused on that.

Padmanabhan T. Srinivasan: So we are really focused on that. Over the next couple of quarters, you will start seeing really good progress on bringing these two environments together, both from an infrastructure point of view as well as from a user experience perspective. So we are absolutely thinking about it, but we want that cross-sell and the connection between the two worlds to happen more organically. We're certainly not going to rush into getting our customers attached before they're ready to do so.

Unknown Attendee: Over the next couple of quarters, you will start seeing.

Unknown Attendee: Really good progress on <unk>.

Unknown Attendee: Bringing these two environments together, both from an infrastructure point of view as well as from a user experience perspective. So we are absolutely thinking about it but we want that cross sell and the attach between the two was to happen more organically, we're certainly not going to rush into.

Unknown Attendee: Getting our customers.

Unknown Attendee: Attacks before they are ready to do it.

Padmanabhan T. Srinivasan: That is naturally happening. And I would just add that over the next couple of quarters, you will see a lot of cross-pollination between the two worlds because there's just so much natural technological convergence between what the current paper space offering is and the DigitalOcean core platform, including our platform as a service called App Platform. Some of our storage and droplet infrastructure is getting upgraded to also consume the GPU infrastructure, so you will start seeing a lot of natural convergence over the next six months.

Unknown Attendee: That is naturally happening and I would.

Unknown Attendee: Just to add that over the next couple of quarters, you will see a lot of cross pollination between the two was because there's just so much natural.

Unknown Attendee: Technology convergence between.

Unknown Attendee: What the current paper space offering is.

Unknown Attendee: And the digital lotion core platform, including our platform as a service called App platform some of our storage and droplet infra.

Unknown Attendee: Infrastructure is is getting.

Unknown Attendee: Upgraded to two also consumed the GPU infrastructure. So you really start seeing a lot of natural convergence over the next six months and we'll keep reporting the the cross sell motions, but as I said, our focus right now is to absolutely nail and address the needs of customers walking in to <unk>.

Padmanabhan T. Srinivasan: And we'll keep reporting the cross-sell motions. But, as I said, our focus right now is to absolutely nail and address the needs of customers walking in to take advantage of our platform as a service and the GPU infrastructure. So stay tuned. We have a lot of other exciting things to come over the next six months.

Unknown Attendee: Take advantage of our platform as a service in the GPU infrastructure. So.

Unknown Attendee: Stay tuned we have lot of other exciting things to come over the next six months.

Padmanabhan T. Srinivasan: Thank you, Patty, that's really helpful. And so then either for Patty or Matt, look, to take a step back. You're building an exciting technology business, but you're also highly profitable with a great financial model. That's been core to the DigitalOcean identity for a long time. I know you just had Patty's first Shark Day in the past quarter. As we approach the next chapter of your growth story, how is employee sentiment, and then, you know, how are you communicating that profitable technology mission internally?

Thank you Patty that's really helpful and so then either party or Matt look you could take a step back you're building an exciting technology business, but you are also highly profitable with great financial model, that's been core to the digitalization agenda for a long time I know you just had.

Unknown Attendee: For short dated in the past quarter as we approach. The next chapter of your growth story, how is employee sentiment and then.

Unknown Attendee: How are you communicating uncomfortable technology mission internally.

Padmanabhan T. Srinivasan: Yeah, great question. So, outside of spending time with customers... My number two, in terms of time spent over the last 90 days, has been with our employees, also known as sharks. And employee sentiment, I don't want to speak out of turn, but I think it is very robust. A lot of optimism, especially seeing the product velocity pick up over the last several weeks. And I only had time to go over the tip of the iceberg.

Speaker Change: Yeah, Great question so.

Speaker Change: Outside of spending time with customers.

Speaker Change: My my number two.

Speaker Change: A time that.

Speaker Change: In terms of time spent over the last 90 days has been with our.

Speaker Change: Employee is also known as sharp.

Speaker Change: And the employee sentiment.

I don't want to speak out of turn but I think it is very robust.

Speaker Change: Sort of optimism, especially seeing the product velocity pick up over the last several weeks and I only had time to go over the tip of the iceberg literally I have only talked about three or four of a dozen or more.

Padmanabhan T. Srinivasan: Literally, I have only talked about three or four of a dozen or more product releases just in the last four weeks. So the innovation pace has visibly picked up across the company, and that is a massive rallying cry for the company. The sharks are super excited to get back into technological innovation.

Speaker Change: Product releases just in the last four weeks so the.

Speaker Change: The innovation pace has visibly picked up across the company and that is a massive rallying cry for the company. So the sharks are super excited to get back into technology innovation and as we do it we get a tremendous amount of.

Padmanabhan T. Srinivasan: And as we do it, we get a tremendous amount of excitement from our community. And that is a major force multiplier for us internally to see the community really step up and take notice. And they are our best evangelists.

Speaker Change: Excitement from our community and that is a major.

Speaker Change: Force multiplier for us internally to see that community really step up and take notice and they're our best evangelists. So.

Padmanabhan T. Srinivasan: So you can actually see the action in various threads on X and Discord and other social media where there is a question from one of our customers. In addition to our employees jumping to answer that question, it is often the community that provides the first level of support and engages in a debate with customers and prospects. So that is a major force multiplier for us internally. And I want to say that there is a lot of excitement internally, primarily driven by the pace of innovation.

Speaker Change: You can actually see the action and various threads on X in this quarter and other social media.

Speaker Change: <unk>.

Speaker Change: There's a question from one of our customers.

Speaker Change: In addition to our employees jumping to answer that question. It is often the community that provides the first level support and and.

Speaker Change: And engage in a debate with with customers and prospects. So that is a major force multiplier for us internally so.

Speaker Change: Want to say that there is a lot of excitement internally, primarily driven by the pace of innovation and we're also.

Padmanabhan T. Srinivasan: And we are also accelerating some talent addition, especially in the AI ML space. We're getting the core DigitalOcean engineering team to also contribute a lot to our AI journey. And just the enhancements that I rattled off in my prepared remarks in terms of our core innovation have really energized us. Then on the go-to-market side, it is still very nascent for us. We have a very robust customer service and customer support operation, and we are just in the early stages of taking all of the innovation that we are pushing out and translating that into a sustainable drumbeat of content and community amplification. So overall, I would say the company is energized, and we are starting to roll in the same direction across the company.

Speaker Change: Accelerating some talent addition, especially in the AML space, we're getting the core digital Ocean engineering team to also contribute a lot on our AI journey and just the enhancements that I rattled off in my prepared remarks in terms of our core innovation has really energized and then.

Speaker Change: On the go to market side it is still.

Speaker Change: Very nascent for us we have a very robust customer service customer support motion.

Speaker Change: We are just in the early stages of taking all of the innovation that we're pushing out and translating that into a sustainable.

Speaker Change: Drumbeat of content and community amplification. So overall I would say the company is.

Speaker Change: Is energized and we are starting to roll in the same direction across the company.

Operator: Thank you. That's exciting to hear. Thanks for your time.

Speaker Change: Thank you that's exciting to hear thanks for your time.

Operator: Your next question comes from the line of Josh Baer with Morgan Stanley. Your line is open.

Speaker Change: Your next question comes from the line of Josh Baer.

Joshua Phillip Baer: With Morgan Stanley Your line is open.

Operator: Great, thanks for the question. I did want to ask about the sequential downtick in the learner-customer cohort segment, just for any context there, and then, as a follow-up, somewhat related, just wondering more broadly if sort of having any strategy shifts away from maybe going after some of those smaller customers, thinking about moving more market from a more to, you know, land more strategic customers that can expand and use more products on the platform.

Joshua Phillip Baer: Great. Thanks for the question.

Joshua Phillip Baer: I did want to ask about the sequential down tick in the learner customer cohort segment just for any context there.

And then as a follow up.

Speaker Change: What related just wondering more broadly if sort of.

Speaker Change: Having doing any strategy shifts away from maybe going after some of those smaller customers.

Speaker Change: Thinking about moving more up market from a mark to land more strategic customers that can expand and use more products on the platform.

Matt Steinfort: Thanks, Josh. No, I think the strategy remains the same, which is that we have a phenomenal platform for developers and entrepreneurs and small, growing technology companies to come and experiment and grow their business. I think the shift that you saw in the last quarter was a result of a couple things. One, we are focused very much on the builders and scalers on our platform, which is still, you know, that's not upmarket relative to the industry, it's just the larger of our customers, because we think there's a lot of expansion opportunity there.

Speaker Change: Thanks, Josh I think.

Speaker Change: The strategy remains the same which is we have a phenomenal platform for developers and entrepreneurs and small growing technical technology companies to come and experimented and grow their business I think the shift that you saw in the last quarter was a result of a couple of things. One we are focused very much on the builders and scalar on our platform, which are still not upmarket.

Speaker Change: Relative to the industry. It's just the larger of our customers because we think there's a lot of expansion opportunity there and a lot of that feedback that Patty was talking about when talking to customers is consistent with things that we've said in the past is that we think we can get a bigger share of wallet of those customers are existing customers by eliminating some product blockers.

Matt Steinfort: And a lot of that feedback that Patty was talking about when talking to customers is consistent with things that we've said in the past, that we think we can get a bigger share of the wallet of those customers, our existing customers, by eliminating some product blockers and adding capabilities that they find valuable.

Matt Steinfort: The decline in the learners, it's, again, we had 476,000 learners. The decline of 70 or 80, 700 was like a point and a half of that. It's not a material decline, and it was likely more driven by the fact that we've tightened our screening of those small customers. And if you think about the bad actors that show up on platforms, hosting platforms, you know, you're constantly fighting battles to try to keep them off your platform. They don't typically pay, or they pay, but they're doing things that aren't helpful in the internet community.

Speaker Change: Adding capabilities that they find valuable.

Speaker Change: A climb in the learners.

We had 476000 learners the decline of 70.

Speaker Change: 700 was like a point and a half of that it's not a material decline and it was it was likely more driven by the fact that we've tightened our screening of those small customers that.

Speaker Change: And if you think about the bad actors that show up on platforms hosting platforms.

Speaker Change: Youre constantly fighting battles to try to keep them off your platform. They don't they don't typically pay or they they pay but they are doing things that are helpful. In the interim.

Matt Steinfort: So we've ramped that up a bit, and that contributed to a kind of a lessening of the number that we added in the quarter. And so the net number of learners was down a bit, but I don't think that's a long-term trend. I think that's just the result of a heavy focus on builders and scalers during the quarter and some tightening around our security practice.

Speaker Change: That community, so we've ramped that up a bit and that.

Speaker Change: <unk> contributed to a.

Speaker Change: Kind of a.

Speaker Change: A lessening of the number that we added in the quarter and so the net of the learners was down a bit but I don't think thats a long term trend I think thats. Just the result of a heavy focus on builders and scalar is during the quarter and some some tightening around our security practice.

Speaker Change: Okay.

Operator: Thank you. It is much appreciated.

Speaker Change: Thank you much I appreciate it.

Operator: Your next question comes from the line of Tim Horan with Oppenheimer. Your line is open.

Speaker Change: Your next question comes from the line of Tim Horan with Oppenheimer. Your line is open.

Operator: Thanks, guys. Can we focus on the GPU CapEx spend a little bit? It sounds like you're still capacity constrained. Maybe you can go into that a little bit. And can you give us a little color on maybe the payback that you think you'll get for this? And I know you touched on quite a bit the cross selling capability. It would seem like Unknown Attendee, Raimo Lenschow, Matt Steinfort, Quinton Gabrielli, Yancey Spruill, Matthew Steinfort, Padmanabhan Srinivasan, DigitalOceanHldg

Timothy Kelly Horan: Thanks, guys, how can we focus on the GPU capex spend a little bit.

Timothy Kelly Horan: It sounds like you're still capacity constrained maybe you can go into that a little bit and can you give us a little color on maybe the payback that you think youll get for this.

Speaker Change: I know you touched the ball you touched on quite a bit the cross selling capability it would seem like.

Speaker Change: More spend on Capex here will help out the overall revenue growth with any color on what youre thinking with GPU capex spending.

Matt Steinfort: Yeah, so as we said, we were definitely capacity constrained in the first quarter, and we continued to deploy the capital that we had committed at the end of last year that's consistent with our plan, and we'll be turning that up over the course of this year to give us the ability to increase the revenue growth, and that's all part of the plan, and we're watching to see how that goes, and as we learn more, as Patty described, about the specific requirements of our target customers, which are different from the requirements of some of the larger customers that are buying from the hyperscalers or the large TPU farms, we'll make good decisions about whether we should be adding incremental capital beyond what we had committed. The return profile on the business, you've got to think about it in two different categories.

Speaker Change: Yes, so as we said.

Speaker Change: We were definitely capacity constrained in the first quarter and we continue to deploy the capital that we had had committed in at the end of last year, that's consistent with our plan and we will be turning that up over the course of this year too.

Speaker Change: Give us the ability to increase the.

Speaker Change: The revenue growth and that's all part of the planet, we're watching to see how that goes and as we learn more as Pat described about the specific requirements of our our target customers, which are different from the requirements of some of the larger.

Speaker Change: Customers that are buying from the hyperscale or the large GPU firms will make good decisions about whether we should be adding incremental capital beyond what we what we had committed.

Speaker Change: The return profile on the on the business you got to think about it in two different categories. The platform as a service.

Matt Steinfort: The platform as a service offering, which is what we acquired from PaperSpace and is more consistent with kind of the traditional cloud offerings we have where there's software wrappers and capabilities around the hardware, the payback on that is very similar, a little bit lower gross margin than the core business, the core DigitalOcean business, but not that dissimilar. In the GPU as a service or the hardware business, I'm sure you have the same statistics that everyone else on the call has around what an H100 costs and when you load on the networking and everything else, and then when you look at the kind of going rate for a GPU or H100 by the hour, you get maybe 50 cents of ARR for the dollar of CapEx that you put in place.

Speaker Change: <unk>, which is what we had acquired from paper space and is more consistent with kind of the traditional cloud offerings, we have where their software wrappers and capabilities around the hardware.

Speaker Change: The payback on that is very similar a little bit lower gross margins than the core business the core digital ocean business, but not that dissimilar.

Speaker Change: In the GPU as a service or the hardware business I'm sure you have the same statistics that everyone else on the call has around water.

Speaker Change: And H 100 costs, when you load on the networking and everything else.

Speaker Change: And then when you look at the kind of going rate for GPU or each 100 by the hour.

Speaker Change: Get into a you get.

Speaker Change: 50.

Speaker Change: They are for the for the dollar of Capex that you put in place you see paybacks in the less than less than three years in and I would say that thats and thats lower clearly lower margin than our core service, but you are in an interesting part of the market, where the cost curve hasnt been yet you've got one supplier.

Matt Steinfort: You see paybacks in less than three years, and I'd say that's lower, clearly, a lower margin than our core service, but you're in an interesting part of the market where the cost curve hasn't bent yet. You've got one supplier who's controlling the majority of the inventory. You've got high demand for that inventory, and the market prices are fairly, I'd say, consistent with what you hear across all the different providers that are out there.

Speaker Change: <unk>, who is controlling the majority of the inventory you've got a high demand for that that inventory and the market prices are fairly I'd say consistent and what you hear across all different.

Speaker Change: <unk> that are out there and so I think that what will happen over time, we will see what happens to pricing over time or whether people still get the dollars per hour theyre getting today for <unk> 100, but certainly the cost structure will improve dramatically over the coming years as you have other suppliers come into the market and people just get better.

Matt Steinfort: I think that what will happen over time, we'll see what happens to pricing over time, whether people still get the dollars per hour they get today for an H100, but certainly, the cost structure will improve dramatically over the coming years as you have other suppliers come into the market, and people just get better at deploying these capabilities at scale.

Speaker Change: At deploying.

Speaker Change: These capabilities at scale.

Unknown Attendee: Unknown Attendee Well, and I know your pricing can vary from $2 an hour to $6 an hour. Can you talk a little bit about how the average ARPU is looking for these products? Are people taking more of the spot market pricing as opposed to longer term contracts?

Speaker Change: Alright, and I know you price it and can vary from $2 an hour to four.

Speaker Change: $6 an hour.

Speaker Change: Can you talk a little bit.

Speaker Change: On the average of our peer was looking for these products are people, taking more of a spot market pricing.

Speaker Change: The longer term contracts.

Matt Steinfort: I'd say it breaks into the two categories that I described. You have where it's hardware as a service, it's at one end of that range, and where it's more of the platform as a service, it's at the higher end of that range. And again, it's still early. We've only had GPU-as-a-Service as an offering on the hardware side since mid-January. So we, like most of the people in the market, are figuring things out as we go.

Matt Steinfort: Well, I'd say it breaks into...

Speaker Change: I would say it breaks into two categories that I described you have words hardware as a service it's.

Speaker Change: At one end of that range and where it's.

Speaker Change: It's more of the platform as a service.

At the higher end of that range.

Speaker Change: And again, it's still early we've only had the GPU as a service as an offering is on the hardware side since mid January so we like most of the people in the market are figuring things out.

Speaker Change: As we go.

Speaker Change: Thank you.

Speaker Change: Okay.

Operator: Your next question comes from the line of Mike Cikos. With NIDA, your line is open.

Speaker Change: Your next question comes from the line of Mike Sekos.

Michael Joseph Cikos: With Needham your line is open.

Operator: Hey guys, thanks for taking the questions here. I did just want to circle back on the expansion of the overall portfolio of services that you guys have. And I think DigitalOcean, obviously, very well known historically for its product with the Droplet, but wanted to see just given how this portfolio has expanded, are you actually seeing a shift as far as where you're landing with new customers? Are they landing on products outside Droplet, or does Droplet remain that bread and butter when we think about how customers are coming to the DigitalOcean platform?

Michael Joseph Cikos: Hey, guys. Thanks for taking the questions here.

Michael Joseph Cikos: I just wanted to circle up on.

Michael Joseph Cikos: <unk>.

Michael Joseph Cikos: The expansion of the overall portfolio of services that you guys have.

Michael Joseph Cikos: <unk>, obviously very well known historically for its products with the droplet.

Michael Joseph Cikos: Wanted to see just given how this portfolio has expanded are you actually seeing a shift as far as where you are landing with new customers or new landing on products outside rockwood or these droplet remain that bread and butter. When we think about how customers are coming to the digital auction platform.

Matt Steinfort: Thanks, Mike, for the question. Well, Patty, I think, rattled off an impressive list of incremental capabilities that we've offered. We don't view it really as a portfolio expansion so much as an enhancement of the capabilities that we have. So the company was started as an infrastructure as a service provider selling droplets, which are basically just compute, bandwidth, and storage. And as the company evolved over the last 10-plus years, we got into platform as a service and offered managed database and Kubernetes and other capabilities that are really just kind of extensions and additional layers on top of that core infrastructure as a service because our customers grew from individual developers and hobbyists to small technology companies and software providers that are running businesses on our platform.

Speaker Change: Thanks, Mike for the question.

Speaker Change: While Patty.

I think rattled off an impressive list of incremental capabilities that that we've offered we don't view it really is.

Speaker Change: As our portfolio expansion so much as enhancement of the capabilities that we have so the.

Speaker Change: The company was started as an infrastructure as a service provider selling droplets, Richard basically just compute bandwidth and storage and as the company evolved over the last 10 plus years, we got into platform as a service and offered managed database and kubernetes and other capabilities that are really just.

Speaker Change: Kind of extensions and additional layers on top of the of that core infrastructure as a service because our customers grew.

Speaker Change: Individual developers and hobbyists small technology companies in software providers that are running businesses on our platform and so if you went back and listed all of the different products that patio articulated. These are just incremental capabilities that these customers need as they leverage our platform as a service in our infrastructure as a <unk>.

Matt Steinfort: And so if you went back and listed all of the different products that Patty had articulated, these are just incremental capabilities that these customers need as they leverage our platform as a service and our infrastructure as a service. They need more flexibility in how the products are configured with different ratios of compute to storage to bandwidth. They need things that make their lives easier because they don't have giant IT organizations, so auto-scaling and other capabilities that enable them to manage their infrastructure better.

Speaker Change: They need more flexibility and how the.

Speaker Change: The products are configured with different ratios of compute to storage to bandwidth.

Speaker Change: Need things that make their lives easier because they don't have giant organization, so auto scaling and other capabilities that enable them to manage their infrastructure better. So we don't view this any really any of the products or services that we've offered us as outside the bounds of the core target customer market that we're serving and it's.

Matt Steinfort: So we don't view this, really, any of the products or services that we've offered as outside the bounds of the core target customer market that we're serving. And it's just as our customers are growing and evolving; we need to grow and evolve with them to keep making it simple for them to leverage the cloud.

Speaker Change: Just as our customers are growing and evolving we need to grow and evolve with them to keep making it simple for them to leverage the cloud.

Operator: Okay. Okay. And then the other question, more of a follow-up to the 2Q guide.

Speaker Change: Okay. Okay.

Speaker Change: Then the other question more of a follow up here on the on the <unk> Guide.

Operator: We obviously have the 11% growth in hand, which is a slight deceleration sequentially. Can you just remind us what that, I guess, Cloudways price increase that we're going to be lapping? How much of a headwind does that represent when we think about the growth we're looking at in Q2? Yeah, it's interesting. This is why.

Speaker Change: We obviously have the 11% growth in hand, which is a slight deceleration sequentially.

Speaker Change: Can you just remind us what is that.

Speaker Change: I guess cloud waste price increase that we're going to be lapping how much of a headwind does that represent when we think about the growth. We're looking at Q2.

Matt Steinfort: Yeah, it's interesting. This is why, again, coming from a different market into the software space and observing the, I'd say, obsession with, but the focus on year-over-year metrics is interesting to me. Year-over-year metrics are both laggy and also, you know, what happened a year ago is as important in the change in growth quarter-over-quarter as what happened this quarter. If you look at the progression that we've guided from Q1 to Q2, we're projecting increased revenue, increased incremental revenue, which implies an increase in, you know, a higher ARR than we added. So, the current trajectory is improving. It's not decelerating.

Speaker Change: Yes. It's interesting this is why again coming from different market into the software space.

Speaker Change: Observing the let's say obsession, but the focus on year over year metrics is interesting to me.

Speaker Change: Year over year metrics are both lagging and also what happened a year ago as a function is important.

Speaker Change: The change in the growth quarter over quarter as what happened this quarter. If you look at the <unk>.

Speaker Change: Progression that we've guided from Q1 to Q2, where we're projecting increased revenue.

Speaker Change: Increased incremental revenue, which implies an increase in <unk>.

Speaker Change: Higher IRR than we added incremental IRR then we added so the current trajectory is improving it's not decelerating, but when you look at it.

Speaker Change: As you said year over year that is a slight deceleration in some of that as you pointed out is because we had a.

Matt Steinfort: But when you look at it, as you said, year-over-year, it is a slight deceleration. And some of that, as you pointed out, is because we had a big pop in the Cloudways business. It was about a 10 percent price increase a year ago. And so, the 34 percent growth that we posted in Q1 for Cloudways is, it's got about 10 points in there of a price increase. And we'll lap that in the second quarter. So that'll come out.

Speaker Change: A pop in the cloud ways business. It was about a 10% price increase a year ago and so the 34% growth that we posted in Q1.

Speaker Change: For cloud ways as we've got about 10 points in there.

Speaker Change: Price increase and we'll lap that in the second quarter, so that'll that'll come out.

Speaker Change: Thank you.

Operator: Your next question comes from the line of James Fish with Piper Sandler. Your line is open.

Speaker Change: Your next question comes from the line of James Fish with Piper Sandler Your line is open.

Operator: Hey guys. Patty, in your opening remarks, you guys talked about discovering gaps in the product portfolio through customer conversations. What were those gaps that DigitalOcean needs to focus on, or were the release of products like backup and caching capabilities those gaps? And really, are those gaps on the AI side too, or what's the differentiation on this infrastructure GPU as a service launch against some of the larger players out there like the hyperscalers, CoreWeave, Lambda, especially if we start to get supply more balanced in time?

James Fish: Hey, guys.

James Fish: In your opening remarks, you guys talked about discovering gaps in the product portfolio with customer conversations.

James Fish: What were those gaps that digital ocean needs to focusing on or where the release of products like backup and cash and capabilities those gaps and really are those gasoline right.

James Fish: Alright, two or what's the differentiation on the infrastructure as a service model.

James Fish: Again, some of the larger players out there like the hyperscale or core we planned.

James Fish: Especially if we start to get supply more balanced in time.

Padmanabhan T. Srinivasan: Thank you, Jim, for the questions. So let me answer the first question first, which is some of the learnings that I described in my prepared remarks from a core DigitalOcean perspective. So those are what you are already starting to see in terms of our product delivery, right? So a lot of enhancements.

Okay. Thank you Jim for the questions. So let me answer the first question first which is some of the learnings that I described in my prepared remarks from a core digital ocean perspective. So.

James Fish: So those are what you are already starting to see in terms so far.

James Fish: Product delivery right.

James Fish: A lot of enhancements.

Padmanabhan T. Srinivasan: As Matt just described, our platform as a service offering is relatively new compared to our droplets, and as we focus more and more on builders and scalers, there are some capabilities that they would love to see from us to help them scale as they grow. So you should expect us to release a lot of additional capabilities in the world of advanced reporting and management and visibility of infrastructure capability, security enhancements, advanced networking, and global load balancing.

James Fish: As Matt just described our platform as a service offering is relatively newer compared to our droplets and.

James Fish: We are as we focus more and more on.

James Fish: Builders <unk> there are some capabilities that.

They would love to see from us.

James Fish: To help them scale as they grow so you should expect us to.

James Fish: To release a lot of.

James Fish: Additional capabilities in the world of advanced reporting and management and visibility of infrastructure capability.

James Fish: Security.

James Fish: Hansman.

James Fish: Advanced networking and global load balancing those are the types of things that some of our advanced our scalar sand even builders are looking at digital ocean to provide because as their footprint increases in their business scales up. These are some of the things that.

Padmanabhan T. Srinivasan: Those are the types of things that some of our advanced scalers and even builders are looking for DigitalOcean to provide, because as their footprint increases and their business scales up, these are some of the things that they're asking from us. So in my mind, these are all great opportunities for us to keep scaling our platform as our customers grow. Coming to the second part of your question, which is more around what is the differentiation from an AI, very specifically infrastructure as a service perspective, as I said in my prepared remarks, this feels remarkably similar to the origin story of DigitalOcean in the sense that we're trying to democratize the accessibility of infrastructure for AI builders, extenders, and companies that are looking to deploy inferencing for their applications.

James Fish: They're asking from us so that's in my mind. These are all great opportunities for us too.

James Fish: Scaling our platform as our customers.

James Fish: Growth.

James Fish: Coming to the second part of your question, which is more around what is the differentiation from.

James Fish: AI very specifically infrastructure as a service perspective.

James Fish: As I said in my prepared remarks. This is this feels remarkably similar to the the origin story of digital Ocean in the sense that we're trying to democratize.

James Fish: The accessibility of infrastructure for AI builders extenders and.

James Fish: Companies that are looking to deploy inferencing for their applications.

Padmanabhan T. Srinivasan: So the ease of getting started is a very durable advantage that we are looking to bring to our infrastructure as a service, and many customers have already started giving us feedback that it's significantly easier to get started with our infrastructure as a service. We are also looking at not just providing just bare metal GPU services, but we are adding different types of orchestration layers because it's just not SSHing into raw H100 boxes.

James Fish: No.

James Fish: The the ease of getting started is.

James Fish: A very durable advantage that we are looking to bring to our infrastructure as a service and many customers have already started giving us feedback that it's significantly easier too.

James Fish: I'll get started with our infrastructure as a service.

James Fish: We're also.

James Fish: Looking at not just providing just bare metal GPU services, but we are.

James Fish: Adding different types of orchestration layers.

James Fish: Because it's just not <unk> into raw hedged 100 boxes. There is a lot of complex things that needs to be orchestrated if euro.

Padmanabhan T. Srinivasan: There are a lot of complex things that need to be orchestrated. If you are a small startup or an ISV that specializes in, say, ad tech, and you're just looking to leverage a variety of different AI models, there's a lot of technology that goes into building or even extending models and introducing, I'm sure a lot of you have heard of things like rags, which are a way to customize these models to make them work in your environment and take into account your context So there are a lot of complications that are involved, even if you're not a model builder but a model consumer.

James Fish: A small startup or an ISP that specializes in say AD Tech and you are just looking to leverage a variety of different AI models. There's a lot of technology that goes into.

James Fish: Building or even extending models.

James Fish: Introducing I'm sure a lot of you have heard of.

James Fish: Things like rags, which are.

James Fish: Obey to customize these models to make it.

James Fish: Work in your environment.

James Fish: Take into account your context, so far of the applications. So there is a lot of.

James Fish: Complications that are involved even if youre not a model builder, but the module consumer and our software as always.

Padmanabhan T. Srinivasan: And our software, as always, has been in the forefront of making it super, super simple. Our platform as a service already does that throughout the full life cycle of AI and machine learning development, and even our infrastructure as a service goes all the way from bare metal to orchestrated abstractions to make all this easier for our customers. So we feel very good that we are taking our time. Even though the momentum is building, we are still taking our time to really understand the needs of our customers at a very deep level, because what we don't want to do is just satisfy some spiky buzz in demand. We want to build a business that is sustainable, and we feel like inferencing is a very sustainable AI business model that will help us in the years to come.

James Fish: <unk> been in the forefront of making it super Super simple so our platform as a service already does that throughout the full lifecycle of AI and machine learning development and even our infrastructure as a service goes all the way from bare metal to orchestrated.

James Fish: Abstractions to make all this easier for our customers. So we feel very good that we are taking our time, even though.

James Fish: The momentum is building we are still taking our time to really understand the needs of our customers had a very deep level because what we don't want to do is just satisfy some spiky both in demand we want to build a business that is sustainable and we feel like inferencing is a very sustainable.

James Fish: AI business model, which will help us over the years to come.

Operator: Very helpful and thorough answer. And Matt, if I could sneak in one with you, you guys are reiterating your pre-cash flow margins at this point, which probably means, you know, that 15 to 17% CapEx range is still what you're thinking. But, you know, GPU purchasing seems to be relatively strong. I'm going to guess that's why CapEx was a little bit elevated versus what we were all thinking this quarter.

Very helpful thorough answer Matt if I could sneak in one with you.

Speaker Change: You guys are reiterating your free cash flow margins at this point, which probably be about 15% to 17% Capex range is still what you're thinking but.

Speaker Change: GPU purchasing seems to be relatively strong and getting Jeff Thats why capex was a little bit elevated versus what we were all thinking this quarter is it still on pace for that $50 million at this time or should we interpret your language around potential free cash flow margins coming down in the coming quarters.

Operator: Is it still on pace for that 50 million at this time, or should we interpret your language around potential pre-cash flow margins coming down in the coming quarters as this is running ahead of schedule? And really, are you thinking about using other GPU providers? So I wouldn't say we're running out.

Speaker Change: This is running ahead of plan and really are you thinking about using other GPU providers this year.

Matt Steinfort: So I wouldn't say we're running ahead of plan on what we had said is that we're still deploying the capital that we had we had committed last year so we have very good visibility into our our capital spend on our current plan. What we had said is we're very encouraged by the progress that we're seeing with the AI business and we're learning a lot you know Patty's only been here a couple of months and you know we're evaluating the requirements of our customers and we're learning about what customers were able to attract and what the requirements are and what the right configuration is from a technology standpoint and and as we see you know continued positive signs and as we see the the continued growth we'll make the right decisions on whether we want to spend any incremental capital beyond what was in the plan but we're not we're still on our plan we're not we're not behind or ahead in any way relative to the capital intensity of our business we're just signaling that we're encouraged and and as we see more signs of encouragement you know we'll come back and provide updates as to whether we're going to increase our spend any more than what we had said we were

Speaker Change: So I wouldn't say, we're running ahead of plan on.

Speaker Change: What we had said is that we're still deploying the capital that we had we had committed last year. So we have very good visibility into our our capital spend on our current plan. What we had said is we're very encouraged by the progress that we're seeing with the AI business and we're learning a lot parity has only been here a couple of months.

Speaker Change: And we are evaluating the requirements of our customers and we're learning about what customers were able to attract and what the requirements are and what the right configuration is from a technology standpoint, and as we see continued positive signs and as we see the <unk>.

Speaker Change: <unk> growth will make the right decisions on whether we want to spend any incremental capital.

Speaker Change: And what was in the plan, but we're not we're still on our plan.

Speaker Change: We're not.

Speaker Change: Behind or ahead in any way relative to the capital intensity of our business. We're just signaling that we're encouraged and as we see more signs of encouragement.

Speaker Change: We'll come back and provide updates as to whether we're going to increase our spend any more than what we had said we would.

Operator: That concludes our Q&A session. I will now turn the conference back over to Paddy Srinivasan for the closing remarks.

Speaker Change: That concludes our Q&A session I will now turn the conference back over to Patti Srinivasan for the closing remarks.

Padmanabhan T. Srinivasan: Thank you very much. As you just heard, we are accelerating our pace of innovation and delivering new capabilities at a very rapid rate, which will help our customers grow on our platform. As I alluded to, there's still a lot of work to do to take full advantage of our opportunity, but I'm very excited that we are moving in the right direction and continue to make steady, rapid, and respectable progress quarter over quarter. So with that, I would like to thank everyone for their time and talk to you all soon.

Padmanabhan T. Srinivasan: Thank you very much as you just heard we are accelerating our pace of innovation and delivering new capabilities in a very rapid cadence, which will help our customers grow on our platform.

Padmanabhan T. Srinivasan: As I alluded to there is still a lot of work to do to take full advantage of our opportunity, but I am very excited that we are moving in the right direction and continue to make steady rapid and responsible progress quarter over quarter. So with that I would like to thank everyone for their time and talk to you also.

Operator: Thank you. That concludes today's conference call. Thank you all for joining us. You may now disconnect.

Speaker Change: Thank you that concludes today's conference call. Thank you all for joining you may now disconnect.

Speaker Change: Okay.