Q2 2024 DigitalOcean Holdings Inc Earnings Call

August 8, 2024

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

Operator: I direct your attention to the risk factors contained in our filings with the Securities and Exchange Commission and those referenced in today's press release that is posted on our website.

Speaker Change: I direct your attention to the risk factors contained in our filings with the Securities and Exchange Commission and those referenced in today's press release that is posted on our website.

Operator: I direct your attention to the risk factors contained in our filings with the Securities and Exchange Commission and those referenced in today's press release, but it's posted on our website.

Operator: DigitalOceanHldg expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any for looking statements made today.

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

Operator: DigitalOcean Expressly Disclans, any obligation or undertaking to release publicly any updates or revisions to any for looking statements made today. Additionally, no one got financial measures will be discussed on its conference call and reconciliation to the most directly comparable gap financial measures are also available in today's press release as well as in our investor presentation that outlines the financial discussion on today's call.

Operator: Additionally, no one got financial measures will be discussed on its conference call, and reconciliation to the most directly comparable gap financial measures are also available in today's press release, as well as in our investor presentation that outlines the financial discussion on today's call. A webcast that today's call is also available in the IR section of our website. And with that, I'll turn the call over to Patty.

Additionally, no one 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 investor presentation that outlines the financial discussion on today's call.

Speaker Change: A webcast of today's call is also available in the honors section of our website. And with that, I'll turn the call over to Patty.

Operator: A webcast such a day calls also available in the IR section of our website and with that, I'll turn the call over to Patty.

Patty: Thank you, Melanie. Good afternoon, everyone, and thank you for joining us today as we review our second quarter results. DigitalOcean delivered a strong second quarter, building on the momentum from the first quarter and continuing to execute on all key metrics.

Patty: Thank you, Melanie. Good afternoon, everyone, and thank you for joining us today as we review our second quarter results.

Patty: Thank you, Melanie.

Patty: DigitalOcean delivered a strong second quarter, building on the momentum from the first quarter and continuing to execute on all key metrics.

Patty: Good afternoon, everyone and thank you for joining us today as we review our second quarter results. DigitalOcean delivered a strong second quarter building on the momentum from the first quarter and continuing to execute on all key metrics. In my remarks today, I will briefly highlight our second quarter results, provide an update on the leadership he hired recently, share tangible examples of our increasing product velocity and discuss how we are capitalizing on our AI growth opportunity.

Patty: In my remarks today, I will briefly highlight our second quarter results, provide an update on the leadership he hired recently, share tangible examples of our increasing product velocity and discuss how we are capitalizing on our AI growth opportunity. First, I would like to briefly recap our second quarter 2024 financial results. Revenue growth has continued to re-accelerate on the second quarter to 13% year-over-year, reflecting the growing signs of success they're seeing from both a product and go-to-market standpoint and the continued acceleration of our AI and machine learning products, where ARR has grown over 200% year-over-year from the paper space ARR we acquired last year.

Patty: In my remarks today, I will briefly highlight our second quarter results, provide an update on the leadership we hired recently, share tangible examples of our increasing product velocity, and discuss how we are capitalizing on our AI growth opportunity.

Patty: First, I would like to briefly recap our second quarter 2024 financial results.

Patty: First, I would like to briefly recap our second quarter, 2024 financial results. Revenue growth has continued to re-accelerate on the second quarter to 13% Euro a year. Reflecting the growing science of success, we're seeing from both a product and go to market standpoint and the continued acceleration of our AI and machine learning products where ARR has grown over 200% Euro a year from the paper. Space ARR we acquired last year. In Q2, we also saw the largest step up an incremental total company ARR in nearly two years, excluding the quarter in which we acquired the AIML business. We also delivered strong adjusted EBITDA margins at 42% and adjusted free cash flow margins at 19% exemplifying our ability to demonstrate ongoing cost discipline and optimization while continuing to accelerate product innovation.

Patty: Revenue growth has continued to re-accelerate on the second quarter to 13% year-over-year, reflecting the growing signs of success we're seeing from both a product and go-to-market standpoint and the continued acceleration of our AI and machine learning products.

Patty: where ARR has grown over 200% year-over-year from the paper space ARR we acquired last year.

Patty: In Q2, we also saw the largest step-up in incremental total company ARR in nearly two years, excluding the quarter in which we acquired the AI ML business. We also delivered strong adjusted EBITDA margins at 42%, and adjusted free cash flow margins at 19%, exemplifying our ability to demonstrate ongoing cost discipline and optimization while continuing to accelerate product innovation. Our second quarter financial results highlight the progress we are making and our ability to execute on the plans we laid out at the beginning of the year. We're also encouraged by the signs of improvement within both our growth profile and our key fundamentals.

Patty: In Q2, we also saw the largest step-up in incremental total company ARR in nearly two years, excluding the quarter in which we acquired the AIML business.

Patty: We also delivered strong adjusted EBITDA margins at 42% and adjusted free cash flow margins at 19%, exemplifying our ability to demonstrate ongoing cost discipline and optimization, while continuing to accelerate product innovation.

Patty: Our second quarter financial results highlight the progress we are making and our ability to execute on the plans we laid out at the beginning of the year.

Patty: Our second quarter financial results highlight the progress we are making and our ability to execute on the plans we laid out at the beginning of the year. We're also encouraged by the science of improvement within both our growth profile and our key fundamentals. Next dollar retention was flat versus the previous quarter at 97% as expansion within our customer base continues to be lower than historical levels. Given we're still navigating a challenging macro environment which is muting the positive impact of our increased product velocity and the stability we have seen and churned in contraction from our solid execution on the various customer success motions. In addition to the increased momentum from our AIML products we received healthy revenue contributions from both our managed hosting products and new cups.

Patty: We're also encouraged by the signs of improvement within both our growth profile and our key fundamentals. Net dollar retention was flat.

Patty: Net dollar retention was flat versus the previous quarter at 97% as expansion within our customer base continues to be lower than historical levels, given we're still navigating a challenging macro environment, which is muting the positive impact of our increased product velocity and the stability we have seen in churn and contraction from our solid execution on the various customer success motions. In addition to the increased momentum from our AI ML products, we received healthy revenue contributions from both our managed hosting products and new cups. Schumers. Matt will walk you through more details on our financial results and guidance later in the call.

Patty: versus the previous quarter at 97% as expansion within our customer base continues to be lower than historical levels.

Patty: Given, we are still navigating a challenging macro environment, which is muting the positive impact of our increased product velocity and the stability we have seen in churn and contraction from our solid execution on the various customer success motions.

Patty: In addition to the increased momentum from our AI ML products, we received healthy revenue contributions from both our managed hosting products and new customers.

Matt: , Matt will walk you through more details on our financial results and guidance later in the call. In addition to our solid financial performance and accelerating product innovation fraction, I'm also excited about the advancements we made in building out the team. We added three critical new leaders to our executive team over the past several weeks.

Patty: Matt will walk you through more details on our financial results and guidance later in the call.

Patty: In addition to our solid financial performance and accelerating product innovation fraction, I'm also excited about the advancements we made in building out the team. We added three critical new leaders to our executive team over the past several weeks. First is Brutton Sahab, our Chief Product and Technology Officer, who will lead product strategy, product engineering, infrastructure, and security. Most recently, Brutton built AWS's multi-billion dollar AI, machine learning, and data platforms, which together represented one of its fastest growing business segments. Previously, Brutton worked at NVIDIA and Intel, running many of their software infrastructure platforms. We also announced Wade Wagner as our Chief Ecosystem and Growth Officer, which is a unique role that is highly appropriate for Digital Ocean, as we are a very unique company.

Patty: In addition to our solid financial performance and accelerating product innovation traction, I'm also excited about the advancements we made in building out the team. We added three critical new leaders to our executive team over the past several weeks.

Patty: First is Ratan Saha, our Chief Product and Technology Officer who will lead product strategy, product engineering, infrastructure, and security.

Patty: First is Brutton Sahab, our chief product and technology officer who will lead product strategy, product engineering, infrastructure and security. Most recently, Brutton built AWS's multi-billion-dollar AI, machine learning and data platforms, which together represented one of its fastest growing business segments. Previously, Brutton worked at NVIDIA and Intel running many of their software infrastructure platforms. We also announced Wade Wagner as our chief ecosystem and growth officer, which is a unique role that is highly appropriate for digital ocean as we are a very unique company.

Speaker Change: Most recently, Bratton built AWS's multibillion-dollar AI, machine learning, and data platforms, which together represented one of its fastest-growing business segments.

Ratan Saha: Previously, Bratton worked at NVIDIA and Intel, running many of their software infrastructure platforms.

Speaker Change: We also announced Wade Wegner as our Chief Ecosystem and Growth Officer, which is a unique role that is highly appropriate for DigitalOcean as we are a very unique company.

Patty: Our cost efficient self-service customer acquisition model is one of the most efficient in the industry. As I have said many times, one of Digital Ocean's strengths and a key driver of our customer acquisition model is our passionate community of developers, many of whom have grown or are growing up learning to code on our platform. Wade and his organization will be responsible for supercharging our engagement with this community and for driving our very distinct product-led growth motion. Finally, we recently announced Larry DeAngelo as our Chief Revenue Officer, who will bring us years of experience building and scaling high velocity go-to-market teams to drive direct sales and partner sales to augment our product-led growth engine and also to build scalable customer success and support functions to help our customers be successful and expand their footprint on our platform.

Speaker Change: Our cost-efficient self-service customer acquisition model is one of the most efficient in the industry. As I have said many times, one of DigitalOcean's strengths and a key driver of our customer acquisition model is our passionate community of developers.

Patty: Our cost efficient self-service customer acquisition model is one of the most efficient in the industry. As I have said many times, one of digital ocean strengths and a key driver of our customer acquisition model is our passionate community of developers. Many of whom have grown or are growing up learning to code on our platform. Wade and his organization will be responsible for supercharging our engagement with this community and for driving our very distinct product-led growth motion.

Speaker Change: Many of whom have grown or are growing up learning to code on our platform.

Speaker Change: Wade and his organization will be responsible for supercharging our engagement with this community and for driving our very distinct product-led growth motion.

Speaker Change: Finally, we recently announced Larry D'Angelo as our Chief Revenue Officer, who will bring his years of experience building and scaling high-velocity go-to-market teams to drive direct sales and partner sales to augment our product-led growth engine.

Patty: Finally, we recently announced Larry DeAngelo as our chief revenue officer who will bring us years of experience building and scaling high velocity go-to-market teams to drive direct sales and partner sales to augment our product-led growth engine and also to build scalable customer success and support functions to help our customers be successful and expand their footprint on our platform. Digital ocean's strong fundamentals and future potential grew these three world-class executives to come join us in our journey.

Speaker Change: and also to build scalable customer success and support functions to help our customers be successful and expand their footprint on our platform.

Patty: Digital Ocean's strong fundamentals and future potential grew these three world-class executives to come join us in our journey. Their arrivals have also created further hiring momentum, as having top talents such as these three new executives tends to attract additional world-class talents. We're already seeing this dynamic layout as they fill out their respective teams and are very confident that we now have the right executive team in place to fuel growth, increase product velocity, help our customers be successful, and to continue to execute on our mission of making cloud and AI simple and accessible for developers.

Speaker Change: DigitalOcean's strong fundamentals and future potential drew these three world-class executives to come join us in our journey.

Speaker Change: Their arrivals have also created further hiring momentum, as having top talents such as these three new executives tend to attract additional world-class talent.

Patty: Their arrivals have also created further hiring momentum as having top talents such as these three new executives tend to attract additional world-class talents. We are already seeing this dynamic layout as they fill out their respective teams and very confident that we now have the right executive team in place to fuel growth, increase product velocity, help our customers be successful and to continue to execute on our mission of making cloud and AI simple and accessible for developers.

Speaker Change: We're already seeing this dynamic play out as they fill out their respective teams.

Speaker Change: I'm very confident that we now have the right executive team in place to fuel growth, increase product velocity, help our customers be successful, and to continue to execute on our mission of making cloud and AI simple and accessible for developers.

Patty: Now let me give you an update on our products as we continue to listen to our customers and incorporate their feedback, enabling them to grow and scale on our platform. We released 24 new product features throughout Q2, doubling our product velocity from the prior six months. We also revived deploy our virtual developer conference which was held on July 9th and thrilled about the success of this event and look forward to continuing to engage with our developer community as we intend to increase the frequency of our deploying events and do them on regular cadence going forward.

Speaker Change: Now let me give you an update on our products.

Patty: Now, let me give you an update on our products. As we continue to listen to our customers and incorporate their feedback, enabling them to grow and scale on our platform, we released 24 new product features throughout Q2, doubling our product velocity from the prior six months. We also revived deploy our virtual developer conference which was held on July 9th and thrilled about the success of this event and look forward to continuing to engage with our developer community as we intend to increase the frequency of our deploying events and do them on our regular cadence going forward.

Speaker Change: As we continue to listen to our customers and incorporate their feedback, enabling them to grow and scale on our platform, we released 24 new product features throughout Q2, doubling our product velocity from the prior six months.

Speaker Change: We also revived Deploy, our virtual developer conference which was held on July 9th.

Speaker Change: I'm thrilled about the success of this event and look forward to continuing to engage with our developer community as we intend to increase the frequency of our deploy events and do them on a regular cadence going forward.

Patty: During our July event, we announced a number of material product announcements in response to customer feedback. First, we announced GPU droplets in early availability mode, and this launch democratizes on-demand access to NVIDIA H100 GPU instances for our customers, enabling them to leverage 1-8 or more GPUs at a time, providing flexible deployment options tailored to the various use cases and budgets. A lot more on this a little later. During deploy, we also announced our global load balance of product, which we refer to as GLB, which is currently in public beta. This is engineered to bolster application resiliency, eliminate single points of failure, and significantly minimize end user latency and secure GLB traffic from denial of service attacks.

Patty: During our July event, we announced a number of material products announcements in response to customer feedback. First, we announced GPU droplets in early availability mode and this launch democratizes on-demand access to NVIDIA H100 GPU instances for our customers, enabling them to leverage 1-8 or more GPUs at a time, providing flexible deployment options tailored to the various use cases and budgets. A lot more on this a little later. During deploy, we also announced our global load balance of product which we refer to as GLB, which is currently in public beta.

Speaker Change: During our July event, we announced a number of material product announcements in response to customer feedback.

Speaker Change: First, we announced GPU Droplets in Early Availability mode, and this launch democratizes on-demand access to NVIDIA H100 GPU instances for our customers.

Speaker Change: enabling them to leverage one, eight, or more GPUs at a time, providing flexible deployment options tailored to the various use cases and budgets.

Speaker Change: A lot more on this a little later.

Speaker Change: During Deploy, we also announced our Global Load Balancer product, which we refer to as GLB, which is currently in public beta.

Patty: This is engineered to bolster application resiliency, eliminate single points of failure and significantly minimize end user latency and secure GLB traffic from denial of service attacks. It offers global traffic distribution based on geographical proximity of the end user, dynamic multi-regional traffic failover, data center prioritization, edge caching, and automatic scaling of the GLBs. It is intuitive, predictably priced, and tailored to the essential needs of growing technology companies for enhancing their global resiliency.

Speaker Change: This is engineered to bolster application resiliency, eliminate single points of failure, and significantly minimize end-user latency, and secure GLB traffic from denial-of-service attacks.

Patty: It offers global traffic distribution based on geographical proximity of the end user, dynamic multi-regional traffic failover, data center prioritization, edge caching, and automatic scaling of the GLBs. It is intuitive, predictably priced, and tailored to the essential needs of growing technology companies for enhancing their global resiliency. We also recently announced that select Digital Ocean products can now be used to host electronic protective health information. This allows companies such as telehealth providers, healthcare software applications, and health tech organizations to build and scale sensitive workloads regulated under HEPA on our developer cloud, leveraging select Digital Ocean covered products.

Speaker Change: It offers global traffic distribution based on geographical proximity of the end-user, dynamic multi-regional traffic failover, data center prioritization, edge caching, and automatic scaling of the GLBs.

Speaker Change: It is intuitive, predictably priced, and tailored to the essential needs of growing technology companies for enhancing their global resiliency.

Speaker Change: We also recently announced that select DigitalOcean products can now be...

Patty: We also recently announced that select digital ocean products can now be used to host electronic protective health information. This allows companies such as telehealth providers, health care software applications, and health tech organizations to build and scale sensitive workloads regulated under HEPA on our developer cloud leveraging select digital ocean covered products. During the quarter, we also launched Managed Open Search, a comprehensive solution designed for in-depth log analysis, simplifying troubleshooting, and optimizing application performance.

Speaker Change: used to host electronic protective health information.

Speaker Change: This allows companies such as telehealth providers, healthcare software applications, and health tech organizations to build and scale sensitive workloads regulated under HIPAA on our developer cloud, leveraging select DigitalOcean-covered products.

Patty: During the quarter, we also launched Manage Open Search, a comprehensive solution designed for in-depth log analysis, simplifying troubleshooting, and optimizing application performance. With Manage Open Search, customers can now pinpoint and analyze log data with a lot of these, customized log retention, enhanced security of their applications, scaled to fit capacity needs, and forward these logs from multiple sources. During Q1, we announced that we offer premium Memory Optimized Droplets and premium Storage Optimized Droplets. And in Q2, we finished rolling this out to all of our data centers, and this was a huge milestone for us. We also announced improvements to our app platform, including auto scaling, dedicated egress, and an expanded lineup with entry-level dedicated instances, higher data transfer allowances, and reduced bandwidth overage fees.

Speaker Change: During the quarter, we also launched Managed OpenSearch, a comprehensive solution designed for in-depth log analysis, simplifying troubleshooting, and optimizing application performance.

Patty: With Managed Open Search, customers can now pinpoint and analyze log data with a lot of these customized log retention and hand security of their applications, scale-to-fit capacity needs, and forward these logs from multiple sources. During Q1, we announced that we offer premium memory optimized droplets and premium storage optimized droplets. And in Q2, we finished rolling this out to all of our data centers, and this was a huge milestone for us. We also announced improvements to our app platform, including auto scaling, dedicated egress, and an expanded lineup with entry-level dedicated instances, higher data transfer allowances, and reduced bandwidth overage fees.

Speaker Change: With Managed OpenSearch, customers can now pinpoint and analyze log data with a lot of ease, customize log retention, enhance security of their applications,

Speaker Change: Scale to Fit Capacity Needs, and Forward These Logs from Multiple Sources.

Speaker Change: During Q1 we announced that we offer premium memory optimized droplets and premium storage optimized droplets and in Q2 we finished rolling this out to all of our data centers and this was a huge milestone for us.

Speaker Change: We also announced improvements to our app platform, including auto scaling, dedicated egress, and an expanded lineup with entry-level dedicated instances.

Patty: Dedicated egress provides application developers with fixed IP addresses, enabling them to meet the security needs of their customers for run applications that require white listing for authentication purposes. Additionally, with a new expanded lineup, customers can now start small and grow on the platform with auto scaling. Reduced bandwidth overage fees helps customers deploying bandwidth intensive applications. These updates allow customers more flexibility and features to deploy their production applications.

Speaker Change: Hire data transfer allowances and reduce bandwidth overage fees.

Speaker Change: Dedicated Egress provides application developers with fixed IP addresses, enabling them to meet the security needs of their customers who run applications that require whitelisting for authentication purposes.

Speaker Change: Additionally, with the new expanded lineup, customers can now start small and grow on the platform with auto-scaling.

Speaker Change: Reduce bandwidth overage fees helps customers deploying bandwidth-intensive applications.

Speaker Change: These updates allow customers more flexibility and features to deploy their production applications.

Patty: Now, turning to our managed hosting cloud-based offering, we launched Malware Protection, which detects malware and protects our customers from cyberattacks. This add-on includes critical capabilities such as phishing protection, files protection, database protection for WordPress and Joomla, automated malware cleanup, proactive defense, and CRON malware cleanup. These are just a few highlights as we continue to add new capabilities and features to achieve our objective of simplifying cloud and AI infrastructure for our customers. We will continue to listen closely to our customers and accelerate our product velocity so that customers continue to scale and grow on our platform, which is our primary focus as we work to drive up expansion and improve net dollar retention.

Speaker Change: Now, turning to our managed hosting cloud-based offering, we launched Malware Protection, which detects malware and protects our customers from cyber attacks.

Speaker Change: This add-on includes critical capabilities such as phishing protection, files protection, database protection for WordPress and Joomla!, automated malware cleanup, proactive defense, and cron malware cleanup.

Speaker Change: These are just a few highlights as we continue to add new capabilities and features to achieve our objective of simplifying cloud and AI infrastructure for our customers.

Patty: We will continue to listen closely to our customers and accelerate our product velocity so that customers continue to scale and grow on our platform, which is our primary focus as we work to drive up expansion and improve net dollar retention.

Speaker Change: We will continue to listen closely to our customers and accelerate our product velocity so that customers continue to scale and grow on our platform, which is our primary focus as we work to drive up expansion and improve net dollar retention.

Patty: And now, I'll pivot to a part of the business that is seeing a lot of momentum: our AI ML offerings. We continue to see very strong demand for our AI platform. To support that growing demand and to take the first step of our long-term data center optimization strategy, I'm very excited to announce that we will be opening a new state-of-the-art data center in Atlanta in Q1 of 2025. This not only expands our geographic footprint, providing us cost-effective additional coverage across the US for our core workloads, but also gives us near-term incremental space and power to support our AI strategy and growth.

Speaker Change: And now I pivot to a part of the business that is seeing a lot of momentum, our AIML offerings.

Patty: And now, I will pivot to a part of the business that is seeing a lot of momentum, our AI ML offerings. We continue to see very strong demand for our AI platform. To support that growing demand and to take the first step of our long-term data center optimization strategy, I'm very excited to announce that we will be opening a new state-of-the-art data center in Atlanta in Q1 of 2025. This not only expands our geographic footprint, providing us cost-effective additional coverage across the US for our core workloads, but also gives us near-term incremental space and power to support our AI strategy and growth.

Speaker Change: We continue to see very strong demand for our AI platform.

Speaker Change: To support that growing demand and to take the first step of our long-term data center optimization strategy, I'm very excited to announce that we will be opening a new state-of-the-art data center in Atlanta in Q1 of 2025.

Speaker Change: This not only expands our geographic footprint, providing us cost-effective additional coverage across the U.S. for our core workloads, but also gives us near-term incremental space and power to support our AI strategy and growth.

Patty: This new data center is also a key part of our medium-term strategy to reshape our data center footprint, including consolidating workloads from DCs that are currently in expensive locations, including New York City, San Francisco, and Toronto, enabling us to improve our growth margin profile over time. As a reminder, opening a new data center gives us ample runway to grow into the additional capacity, and we only add equipment and spend capital as needed to meet demand. As such, the financial impact of this long-term investment will appear steadily over time as we ramp capacity and leverage it for consolidation of our core workloads, and also for AI training and inferencing as that demand evolves over time.

Speaker Change: This new data center is also a key part of our medium-term strategy to reshape our data center footprint, including consolidating workloads,

Speaker Change: from DCs that are currently in excessive locations, including New York City, San Francisco, and Toronto, enabling us to improve our gross margin profile over time.

Speaker Change: As a reminder, opening a new data center gives us ample runway to grow into the additional capacity, and we only add equipment and spend capital as needed to meet demand.

Speaker Change: As such, the financial impact of this long-term investment will appear steadily over time as we ramp capacity and leverage it for consolidation of our core workloads, and also for AI training and inferencing as that demand evolves over time.

Patty: As such, the financial impact of this long-term investment will appear steadily over time as we ramp capacity and leverage it for consolidation of our core workloads, and also for AI training and inferencing as that demand evolves over time. We will share additional details over the next few calls as we start building our new data center out and make further progress on our data center optimization strategy.

Patty: We will share additional details over the next few calls as we start building our new data center out and make further progress on our data center optimization strategy. Given this DC expansion and with the modest increase in AI-related capital that maps will detail in this remarks, it is worthwhile for me to spend a little bit of time providing some context on our AI strategy and how we view this market opportunity. Today, the majority of AI action across the industry is in the foundational infrastructure layer, with a handful of companies providing GPU infrastructure to a relatively concentrated set of customers that require GPU compute for foundational model training.

Speaker Change: We will share additional details over the next few calls as we start building our new data center out and make further progress on our data center optimization strategy.

Speaker Change: Given this DC expansion and with the modest increase in AI-related capital that Matt will detail in his remarks, it is worthwhile for me to spend a little bit of time providing some context on our AI strategy and how we view this market opportunity.

Patty: Given this DC expansion, and with the modest increase in AI-related capital that maps will detail in this remark, it is worthwhile for me to spend a little bit of time providing some context on our AI strategy and how we view this market opportunity. Today, the majority of AI action across the industry is in the foundational infrastructure layer with a handful of companies providing GPU infrastructure to a relatively concentrated set of customers that require GPU compute for conditional model trains.

Speaker Change: Today,

Speaker Change: The majority of AI action across the industry is in the foundational infrastructure layer, with a handful of companies providing GPU infrastructure to a relatively concentrated set of customers that require GPU compute for foundational model training.

Patty: But over time, we expect Generative AI and AI overall to follow a similar progression that the market has seen with other technology evolution, with the action shifting upstack from infrastructure to platforms to eventually applications in the coming year to deliver actual business value to customers. The heavy users of infrastructure layer today are those building foundational Gen AI models or those extending those foundational models by injecting their own data. This requires a lot of deep expertise in machine learning data and foundational models. This restricts AI and associated innovation to well-funded startups and large enterprise companies with very skilled staff, given the limited talent pool and high cost associated with this emerging technology.

Patty: But over time, we expect Generative AI and AI overall to follow a similar progression that the market has seen with other technology evolution with the action shifting upstack from infrastructure to platforms to eventually applications in the coming year to deliver actual business value to customers. The heavy users of infrastructure layer today are those building foundational Gen AI models or those extending those foundational models by injecting their own data. This requires a lot of deep expertise in machine learning data and foundational models.

Speaker Change: But over time, we expect...

Speaker Change: Generative AI and AI overall to follow a similar progression that the market has seen with other technology evolutions.

Speaker Change: with the action Shifting UpStack from infrastructure to platforms to eventually applications in the coming years to deliver actual business value to customers.

Speaker Change: The heavy users of infrastructure layer today are those building foundational Gen-AI models or those extending those foundational models by injecting their own data.

Speaker Change: This requires a lot of deep expertise in machine learning, data, and foundational models.

Speaker Change: This restricts AI and associated innovation to well-funded startups and large enterprise companies with very skilled staff given the limited talent pool and high costs associated with this emerging technology.

Patty: This restricts AI and associated innovation to well funded startups and large enterprise companies with very skilled staff given the limited talent pool and high cost associated with this emerging technology. Leaving behind the vast majority of companies who don't have access to these capabilities.

Patty: Leaving behind the vast majority of companies who don't have access to these capabilities.

Speaker Change: leaving behind the vast majority of companies who don't have access to these capabilities.

Patty: Our mission at DigitalOcean is to change this paradigm by democratizing the access to Gen AI and AI infrastructure for all customers, just like we did with core cloud computing services using simple-to-use software platform components rather than expensive, capex-heavy hardware infrastructure. As a significant step in this direction, we announced the launch of GPU droplets, allowing customers to seamlessly leverage AI technology into their workflows and applications using as few as one or eight GPUs in an on-demand mode. GPU droplets remove the burden of managing the full-life cycle of GPUs and the orchestration associated with its usage. This type of fractional on-demand access to GPUs is not widely available in the market today.

Speaker Change: Our mission at DigitalOcean.

Patty: Our mission at DigitalOcean is to change this paradigm by democratizing the access to Gen AI and AI infrastructure for all customers, just like we did with core cloud computing services using simple to use software platform components rather than expensive, capex heavy hardware infrastructure. As a significant step in this direction, we announced the launch of GPU droplets allowing customers to seamlessly leverage AI technology into their workflows and applications using as few as one or eight GPUs in a on demand mode.

Speaker Change: is to change this paradigm by democratizing the access to Gen AI and AI infrastructure for all customers.

Speaker Change: Just like we did with core cloud computing services, using simple-to-use software platform components rather than expensive CapEx-heavy hardware infrastructure.

Speaker Change: As a significant step in this direction, we announced the launch of GPU droplets, allowing customers to seamlessly leverage AI technology into their workflows and applications using as few as one or eight GPUs in an on-demand mode.

Patty: GPU droplets remove the burden removes the burden of managing the full life cycle of GPUs and the orchestration associated with its usage with type of fractional on demand access to GPUs is not widely available in the market today. We have seen very robust demand for this capability, which is still in early availability mode. Additionally, applications that consume AI also need the usual cloud primitives like compute storage databases security and so on to be deployed in the real world and deliver real business value.

Speaker Change: GPU droplets removes the burden of managing the full life cycle of GPUs and the orchestration associated with its usage.

Speaker Change: This type of fractional, on-demand access to GPUs is not widely available in the market today.

Patty: We have seen very robust demand for this capability, which is still in early availability mode. Additionally, applications that consume AI also need the usual cloud primitives like compute, storage, databases, security, and so on to be deployed in the real world and deliver real business value. Unlike applications that are built on pure GPU forms, software that consumes AI through GPU droplets can seamlessly take advantage of DigitalOcean's core computing cloud computing platform, making it easy for customers to transition from R&D mode to production very seamlessly rather than having to go through redeployment.

Speaker Change: We have seen very robust demand for this capability, which is still in early availability mode.

Speaker Change: Additionally, applications that consume AI also need the usual cloud primitives like compute, storage, databases, security, and so on to be deployed in the real world and deliver real business value.

Patty: Unlike applications that are built on pure GPU forms, software that consumes AI through GPU droplets can seamlessly take advantage of DigitalOcean's core computing cloud computing platform, making it easy for customers to transition from R&D mode to production, very seamlessly rather than having to go through redeployment.

Speaker Change: Unlike applications that are built on pure GPU forms, software that consumes AI through GPU droplets can seamlessly take advantage of DigitalOcean's core computing

Speaker Change: Core Cloud Computing Platform, making it easy for customers to transition from R&D mode to production.

Speaker Change: very seamlessly rather than having to go through redeployment.

Patty: Let me give you some specific examples of customers that are building on our AI platform. First example is an advanced state startup building a lightweight but very fast AI code completion tool for developers with a very large context window using native neural network architecture on our platform. Another example is an AI infrastructure management company that offers a middleware layer to enable rapid training and inferencing for GNI models on the DigitalOcean platform. To recap, our longer term AI vision is more software centric with the mission of making it easy for our approximately 638,000 current customers and other companies that look like them to leverage AI in their application stack without needing super deep AI and machine learning expertise.

Speaker Change: Let me give you some specific examples of customers that are building on our AI platform.

Speaker Change: First example is an advanced stage startup building a lightweight but very fast AI code completion tool for developers with a very large context window using native neural network architecture on our platform.

Speaker Change: Another example is an AI infrastructure management company that offers a middleware layer to enable rapid training and inferencing for Gen-AI models on the DigitalOcean platform.

Patty: To recap, our longer term AI vision is more software centric with the mission of making it easy for our approximately 638,000 current customers and other companies that look like them to leverage AI in their application stack without needing super deep AI and machine learning expertise. Now with Broughton Saha, one of the most accomplished AI leaders in the industry leading the charge for us, we will build on this momentum we have generated over the last couple of quarters and fulfill our mission to democratize AI and make it accessible to all companies.

Speaker Change: To recap...

Speaker Change: Our longer-term AI vision is more software-centric, with the mission of making it easy for our approximately 638,000 current customers and other companies that look like them.

Speaker Change: to leverage AI in their application stack without needing super deep AI and machine learning expertise.

Patty: Now with Broughton Saha, one of the most accomplished AI leaders in the industry leading the charge for us. We will build on this momentum we have generated over the last couple of quarters and fulfill our mission to democratize AI and make it accessible to all companies.

Bratin Saha: Now, with Bratin Saha, one of the most accomplished AI leaders in the industry leading the charge for us, we will build on this momentum we have generated over the last couple of quarters and fulfill our mission to democratize AI and make it accessible to all companies.

Patty: In conclusion, I'm very pleased with the team's performance in the first half of the year. We have seen growing science of success in our AI machine learning business, growth in our core business is reactivating and I'm excited about our near and long term growth potential across all areas of our business. We have the right leadership team in place and are focused on accelerating our product roadmap and deliver new capabilities that we announced this year at Deploy and enhancing our go-to-market motion in the second half of the year.

Bratin Saha: In conclusion, I'm very pleased with the team's performance in the first half of the year. We have seen growing signs of success in our AI machine learning business.

Patty: In conclusion, I'm very pleased with the team's performance in the first half of the year. We have seen growing science of success in our AI machine learning business, growth in our core business is reactivating and I'm excited about our nearer and long term growth potential across all areas of our business. We have the right leadership team in place and are focused on accelerating our product roadmap and deliver new capabilities that we announced this year at Deploy and enhancing our go-to-market motion in the second half of the year.

Bratin Saha: Growth in our core business is re-accelerating, and I'm excited about our near and long-term growth potential across all areas of our business.

Speaker Change: We have the right leadership team in place and are focused on accelerating our product roadmap and deliver new capabilities that we announced this year at Deploy and enhancing our go-to-market motion in the second half of the year.

Matt: I will now turn the call over to Matt to provide additional details on our financial results and for our outlook in Q3 and the reminder of the year. Over to you, Matt. Thanks, Patty. Good afternoon, everyone, and thanks for joining us today. In Q2, we continued to execute on the plans we laid out at the beginning of the year. We made progress on key metrics. We continued to see revenue growth accelerate, and we delivered favorable adjusted EBITDA and adjusted free cash flow margins. Revenue in the second quarter was 192.5 million, up 13% year over year, and up 4% quarter over quarter.

Speaker Change: I will now turn the call over to Matt to provide additional details on our financial results and for our outlook in Q3 and the remainder of the year. Over to you, Matt. Thanks, Paddy.

Matt: I will now turn the call over to Matt to provide additional details on our financial results and for our outlook in Q3 and the reminder of the year. Over to you Matt. Thanks, Patty. Good afternoon everyone and thanks for joining us today. In Q2, we continued to execute on the plans we laid out at the beginning of the year. We made progress on key metrics. We continued to see revenue growth accelerate and we delivered favorable adjusted EBITDA and adjusted free cash flow margins.

Matt: Good afternoon, everyone, and thanks for joining us today. In Q2, we continued to execute on the plans we laid out at the beginning of the year. We made progress on key metrics. We continued to see revenue growth reaccelerate. And we delivered favorable adjusted EBITDA and adjusted free cash flow margins.

Speaker Change: Revenue in the second quarter was $192.5 million, up 13% year-over-year and up 4% quarter-over-quarter.

Matt: Revenue in the second quarter was 192.5 million, up 13% year over year and up 4% quarter over quarter. We added 32 million of annual run rate revenue or ARR in the quarter, which was 158% higher than the incremental ARR we generated in Q2 of 2023 and was also the highest step up in nearly two years, excluding the quarter in which we acquired our AIML business. Contributing to this growth was healthy and incremental revenue from new customers, increased momentum from our AIML platform, which saw significant growth quarter over quarter, and contributions from our managed hosting platform, which continues to be one of our faster growing platforms.

Matt: We added 32 million of annual run rate revenue or ARR in the quarter, which was 158% higher than the incremental ARR we generated in Q2 of 2023 and was also the highest step up in nearly two years, excluding the quarter in which we acquired our AIML business. Contributing to this growth was healthy incremental revenue from new customers, increased momentum from our AIML platform, which saw significant growth quarter over quarter, and contributions from our managed hosting platform, which continues to be one of our faster growing platforms. All of these together offsetting a flat quarter over quarter net dollar retention rate from our existing installed base.

Speaker Change: We added $32 million of annual run rate revenue, or ARR, in the quarter, which was 158% higher than the incremental ARR we generated in Q2 of 2023, and was also the highest step up in nearly two years, excluding the quarter in which we acquired our AIML business.

Speaker Change: Contributing to this growth was healthy incremental revenue from new customers.

Matt: All of these together offsetting a flat quarter over quarter net dollar retention rate from our existing installed base. Our Q2 net dollar retention rate was 97%. As we saw last quarter, we continued to see stable performance in net expansion, which is defined as expansion net of contraction on our core digital ocean platform. Contributing to this stability was our increased product velocity that drove an increase in our poop, helping to offset the broader macro pressures on net expansion in our customer base.

Speaker Change: Increased momentum from our AIML platform, which saw significant growth quarter-over-quarter, and contributions from our managed hosting platform, which continues to be one of our faster-growing platforms.

Speaker Change: All of these together offsetting a flat quarter over quarter net dollar retention rate from our existing installed base.

Matt: Our Q2 net dollar retention rate was 97%. As we saw last quarter, we continued to see stable performance in net expansion, which is defined as expansion net of contraction on our core Digital Ocean platform. Contributing to this stability was our increased product velocity that drove an increase in ARPU, helping to offset the broader macro pressures on net expansion in our customer base. Our turn levels have also remained very stable for over a year across the business. We are encouraged by the stability in NDR and the modest sequential improvements we are seeing despite the challenging macro environment, which is muting the pace of improvement in NDR, and despite a positive but lower contribution to NDR from our managed hosting platform, now that we have fully lapped last April's price.

Speaker Change: Our Q2 net dollar retention rate was 97%.

Speaker Change: As we saw last quarter, we continue to see stable performance in net expansion, which is defined as expansion, net of contraction, on our core DigitalOcean platform.

Speaker Change: Contributing to this stability was our increased product velocity that drove an increase in ARPU, helping to offset the broader macro pressures on net expansion in our customer base.

Speaker Change: Our churn levels have also remained very stable for over a year across the business.

Matt: Our turn levels have also remained very stable for over a year across the business. We are encouraged by the stability in NDR and the modest sequential improvements we are seeing, despite the challenging macro environment, which is muting the pace of improvement in NDR and despite a positive but lower contribution to NDR from our managed hosting platform now that we have fully lapped last April's price. We continue to expect stable NDR and expansion levels to the end of the year, despite these ongoing headwinds.

Speaker Change: We are encouraged by the stability in NDR and the modest sequential improvements we are seeing despite the challenging macro environment, which is muting the pace of improvement in NDR and despite a positive but lower contribution to NDR from our managed hosting platform now that we have fully lapped last April's price increase.

Matt: We continue to expect stable NDR and expansion levels to the end of the year, despite these ongoing headwinds.

Speaker Change: We continue to expect stable NDR and expansion levels through the end of the year, despite these ongoing headwinds.

Matt: To further improve our net-to-dollar retention rate, we will continue our solid execution, accelerating our product roadmap, refining our pricing and packaging models, and enhancing our customer success motions. Beyond NDR, we continue to see acceleration within our AI ML platform. Q2AIRR has grown over 200% year-over-year from the ARR we acquired last year. We have also successfully navigated much of the initial supply chain and implementation risk that we had identified earlier in the year and are now working aggressively to keep up with demand. We anticipate this momentum to continue for the balance of the year, given the demand for our AI solutions.

Speaker Change: To further improve our net dollar retention rate, we will continue our solid execution, accelerating our product roadmap.

Speaker Change: refining our pricing and packaging models, and enhancing our customer success motions.

Speaker Change: Beyond NDR, we continue to see acceleration within our AI-ML platform.

Speaker Change: Q2 AI ARR has grown over 200% year-over-year from the ARR we acquired last year.

Speaker Change: We have also successfully navigated much of the initial supply chain and implementation risk that we had identified earlier in the year and are now working aggressively to keep up with demand.

Speaker Change: We anticipate this momentum to continue for the balance of the year given the demand for our AI solutions.

Matt: We anticipate this momentum to continue for the balance of the year given the demand for our AI solutions. Turning to the P&L, Gross Margin was 61%, which was consistent with the prior quarter and up 100 basis points from the prior year. The 100 basis point year-over-year improvement is primarily a result of the success of our ongoing cost optimization efforts, which to date have more than offset our continued investment in AI infrastructure.

Matt: Turning to the P&L, gross margin was 61%, which was consistent with the prior quarter and up 100 basis points from the prior year. The 100 basis point year-over-year improvement is primarily a result of the success of our ongoing cost optimization efforts, which to date have more than offset our continued investments in AI infrastructure. Adjust to the EBITDA margin was 42% in the second quarter, which was ahead of guidance and approximately 200 basis points higher than the prior quarter. This feat was primarily driven by strength in gross margin and our ongoing operating cost discipline. Deluted net income per share was 20 cents, and non-GAAP deluted net income per share was 48 cents.

Speaker Change: Turning to the P&L, gross margin was 61%, which was consistent with the prior quarter and up 100 basis points from the prior year.

Speaker Change: The 100-basis-point year-over-year improvement is primarily a result of the success of our ongoing cost optimization efforts.

Speaker Change: which to date have more than offset our continued investment in AI infrastructure.

Speaker Change: Adjusted EBITDA margin was 42% in the second quarter, which was ahead of guidance and approximately 200 basis points higher than the prior quarter.

Matt: Adjust to the EBITDA Margin was 42% in the second quarter, which was ahead of guidance and approximately 200 basis points higher than the prior quarter. This feat was primarily driven by strength in Gross Margin and our ongoing operating cost discipline. Deluded net income per share was 20 cents, and non-gap deluded net income per share was 48 cents. Gap and non-gap deluded earnings per share increased by 19 cents and 4 cents respectively on a year-over-year basis.

Speaker Change: This beat was primarily driven by strength and gross margin and our ongoing operating cost discipline.

Speaker Change: Diluted net income per share was $0.20, and non-GAAP diluted net income per share was $0.48.

Matt: GAP and non-GAP deluded earnings per share increased by 19 cents and 4 cents, respectively, on a year-over-year basis. This is a result of our ability to increase our per share profitability levels by driving both operating leverage and reducing our share count. Finally, Q2 adjusted pre-cash flow was $37 million, or 19% of revenue. Turning to our customer metrics, our total Q2 customer count was approximately 638,000, representing an increase from 637,000 customers in Q1. The number of builders and scalers on our platform, those that spend more than $50 per month, was approximately 161,000, an increase of 7% year-over-year.

Speaker Change: GAAP and non-GAAP diluted earnings per share increased by $0.19 and $0.04 respectively on a year-over-year basis.

Speaker Change: This is a result of our ability to increase our per share profitability levels by driving both operating leverage and reducing our share count.

Matt: This is a result of our ability to increase our per share profitability levels by driving both operating leverage and reducing our share count. Finally, Q2 adjusted pre-cash flow was 37 million or 19% of revenue. Turning to our customer metrics, our total Q2 customer count was approximately 638,000, representing an increase from 637,000 customers in Q1. The number of builders and scalers on our platform, those that spend more than $50 per month, was approximately 161,000, an increase of 7% year-over-year.

Speaker Change: Finally, Q2 adjusted pre-cash flow was $37 million, or 19% of revenue.

Speaker Change: Turning to our customer metrics, our total Q2 customer count was approximately 638,000, representing an increase from 637,000 customers in Q1.

Speaker Change: The number of builders and scalers on our platform, those that spend more than $50 per month, was approximately 161,000, an increase of 7% year-over-year.

Matt: The revenue growth associated with builders and scalers was 15% year-over-year, ahead of our overall revenue growth rate of 13%. The number of builders and scalers on our platform, which represent 87% of our total revenue, increased by approximately 3,000 quarter-over-quarter. The continued growth of our largest spending cohorts is a direct result of our focusing our product development and customer success investments on these builders and scalers. The increase in our higher spend and higher growth customers also resulted in our total average revenue per user, or our pool, increasing 9% year-over-year to $99.45. With our substantial free cash flow generation, our balance sheet remains very strong as we ended the quarter with 443 million of cash and cash equivalents.

Speaker Change: The revenue growth associated with builders and scalers was 15% year-over-year, ahead of our overall revenue growth rate of 13%.

Matt: The revenue growth associated with builders and scalers was 15% year-over-year ahead of our overall revenue growth rate of 13%. The number of builders and scalers on our platform, which represent 87% of our total revenue, increased by approximately 3,000 quarter-over-quarter. The continued growth of our largest spending cohorts is a direct result of our focusing our product development and customer success investments on these builders and scalers. The increase in our higher spend and higher growth customers also resulted in our total average revenue per user or our pool, increasing 9% year-over-year to $99.45.

Speaker Change: The number of builders and scalers on our platform, which represent 87% of our total revenue, increased by approximately 3,000 quarter over quarter.

Speaker Change: The continued growth of our largest spending cohorts is a direct result of our focusing our product development and customer success investments on these builders and scalers.

Speaker Change: The increase in our higher spend and higher growth customers also resulted in our total average revenue per user, or ARPU, increasing 9% year-over-year to $99.45.

Speaker Change: With our substantial free cash flow generation, our balance sheet remains very strong as we ended the quarter with $443 million of cash and cash equivalents.

Matt: With our substantial free cash flow generation, our balance sheet remains very strong as we ended the quarter with 443 million of cash and cash equivalents. We also continued to execute against our ongoing share repurchase program and completed 10 million of repurchases in the Governor. Moving on to guidance, we expect Q3 revenue to be in the range of $196 to $197 million, representing approximately 11% year-over-year growth at the midpoint of our guidance range.

Matt: We also continue to execute against our ongoing share repurchase program and completed 10 million of repurchases in the quarter.

Speaker Change: We also continued to execute against our ongoing share repurchase program and completed 10 million of repurchases in the quarter.

Matt: Director. Moving on to guidance, we expect Q3 revenue to be in the range of $196 to $197 million, representing approximately 11 percent year-over-year growth at the midpoint of our guidance range. For the third 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 39 to 41 cents, based on approximately 102 to 103 million in weighted average, fully diluted shares outstanding. As a result of the steady performance in our core platform and strong demand we are seeing for our AI platform, we are increasing the bottom end of our full-year revenue guide by 10 million, projecting revenue to be in the range of $770 to $775 million.

Speaker Change: Moving on to guidance, we expect Q3 revenue to be in the range of $196 to $197 million, representing approximately 11% year-over-year growth at the midpoint of our guidance range.

Matt: For the third quarter, we expect adjusted EBITDA margins to be in the range of 37 to 38%. And non-GAP diluted earnings per share to be 39 to 41 cents based on approximately 102 to 103 million in weighted average fully diluted shares outstanding. As a result of the steady performance in our core platform and strong demand we are seeing for our AI platform, we are increasing the bottom end of our full year revenue guide by 10 million, projecting revenue to be in the range of $770 to $775 million.

Speaker Change: For the third quarter, we expect adjusted EBITDA margins to be in the range of 37 to 38 percent.

Speaker Change: and non-GAAP diluted earnings per share to be $0.39 to $0.41 based on approximately $102 to $103 million in weighted average fully diluted shares outstanding.

Speaker Change: As a result of the steady performance in our core platform and strong demand we are seeing for our AI platform,

Speaker Change: We are increasing the bottom end of our full-year revenue guide by $10 million.

Matt: A $5 million increase in the midpoint of our guidance range and representing year-over-year growth were approximately 11 to 12 percent. As demonstrated through the first half of 2024, we remain committed to driving continued operating leverage in our core Digital Ocean platform. Given our solid performance in the first half of the year, we are raising our adjusted EBITDA margins guidance for the full year to be in the range of 37 to 39 percent. Turning to adjusted free cash flow, we anticipate making appropriate incremental investments through the second half of the year as we continue to capitalize on the AI opportunity to fuel future growth. Although we anticipate these investments having only a modest impact on our cash flow margins.

Speaker Change: Projecting revenue to be in the range of $770 to $775 million, a $5 million increase in the midpoint of our guidance range, and representing year-over-year growth of approximately 11 to 12 percent.

Matt: A $5 million increase in the midpoint of our guidance range and representing year-over-year growth were approximately 11 to 12%. As demonstrated through the first half of 2024, we remain committed to driving continued operating leverage in our core digital ocean platform. Given our solid performance in the first half of the year, we are raising our adjusted EBITDA margins guidance for the full year to be in the range of 37 to 39%. Turning to adjusted free cash flow, we anticipate making appropriate incremental investments through the second half of the year as we continue to capitalize on the AII opportunity to fuel future growth, although we anticipate these investments having only a modest impact on our cash flow margins.

Speaker Change: As demonstrated through the first half of 2024, we remain committed to driving continued operating leverage in our core DigitalOcean platform.

Speaker Change: Given our solid performance in the first half of the year, we are raising our adjusted EBITDA margins guidance for the full year to be in the range of 37 to 39 percent.

Speaker Change: Turning to adjusted free cash flow, we anticipate making appropriate incremental investments through the second half of the year as we continue to capitalize on the AI opportunity to fuel future growth, although we anticipate these investments having only a modest impact on our cash flow margins.

Matt: We expect adjusted free cash flow margins for the full-year to be in the range of 15 to 17 percent. As a reminder, adjusted free cash flow can vary quarter to quarter given the variability of our capital spend and our working capital timing. From an overall strategic capital allocation perspective, we will continue to be good stewards of our capital and will evaluate opportunities to maximize shareholder return, maintaining financial flexibility while continuing to evaluate investments across share repurchases, incremental capacity, and balance sheet management. We are also raising the top end of our prior non-GAAP diluted earnings per share guidance and now expect this to be in the range of $1.60 to $1.70.

Speaker Change: We expect adjusted free cash flow margins for the full year to be in the range of 15 to 17 percent.

Matt: We expect adjusted free cash flow margins for the full year to be in the range of 15 to 17%. As a reminder, adjusted free cash flow can vary quarter to quarter given the variability of our capital spend and our working capital timing. From an overall strategic capital allocation perspective, we will continue to be good stewards of our capital and will evaluate opportunities to maximize shareholder return, maintaining financial flexibility while continuing to evaluate investments across share repurchases, incremental capacity, and balance management. We are also raising the top end of our prior non-gap diluted earnings per share guidance and now expect this to be in the range of $1.60 to $1.70.

Speaker Change: As a reminder, adjusted pre-cash flow can vary quarter to quarter, given the variability of our capital spend and our working capital timing.

Speaker Change: From an overall strategic capital allocation perspective, we will continue to be good stewards of our capital and will evaluate opportunities to maximize shareholder return. Maintaining financial flexibility while continuing to evaluate investments across share repurchases, incremental capacity, and balance sheet management.

Speaker Change: We are also raising the top end of our prior non-GAAP diluted earnings per share guidance, and now expect this to be in the range of $1.60 to $1.70.

Operator: That concludes our prepared remarks and will now open it up for a Q&A. Thank you. We will now begin the question and answer session. If you would like to ask a question, please press start one on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, simply press start one again.

Speaker Change: That concludes our prepared remarks and we'll now open it up for a Q&A.

Operator: That concludes our prepared remarks and will now open it up for a Q&A. Thank you.

Speaker Change: Thank you. We will now begin the question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad to raise your hand and join the queue. If you'd like to withdraw your question, simply press star 1 again. Your first question comes from the line of Gabriella Borges from Goldman Sachs. Your line is open.

Operator: We will now begin the question and answer session. If you would like to ask a question, please press 1 on your telephone keypad to raise your hand and join the Q. If you would like to withdraw your question, simply press star 1 again.

Gabriella Borges: Your first question comes from the line of Gabriella Borges from Goldman Axe. Your line is open. Good afternoon. Thank you and great to see the step up in ARR. Patty, I wanted to follow up on your comments on AI strategy. Help us understand, are you saying that other GP providers don't offer the same level of fractional access that you do with droplets? And then, broadly speaking, comment on the competitive environment. There are a number of well-funded GP providers that are spending orders of magnitude more capex than you are. How do you think about the sustainability of your differentiation when you're up against competitors that have that kind of capex fund?

Gabriella Borges: Your first question comes from the line of Gabriella Borgis from Goldman X. Your line is open. Good afternoon. Thank you and great to see the step up in ARR. Patty, I wanted to follow up on your comments on AI strategy. Help us understand, are you saying that other GP providers don't offer the same level of fractional access that you do with droplets? And then broadly speaking, comment on the competitive environment. There are a number of well-funded GP providers that are spending orders of magnitude more capex than you are.

Gabriella Borges: Good afternoon. Thank you, and great to see the step up in ARR. Patty, I wanted to follow up on your comments on AI strategy. Help us understand, are you saying that other GPU providers don't offer the same level of fractional access that you do with droplets? And then, broadly speaking,

Speaker Change: Comment on the competitive environment. There are a number of well-funded GP providers that are spending orders of magnitude more CAPEX than you are. How do you think about the sustainability of your differentiation when you're up against competitors that have that kind of CAPEX spend? Thank you.

Gabriella Borges: How do you think about the sustainability of your differentiation when you're up against competitors that have that kind of capex fund? Thank you. So, as I started the prepared remarks by talking about our AI strategy and how it is differentiated, I want to remind everyone we are also a very strong player in the GPU infrastructure as a service today. So we have very competitive offerings all the way from bare metal to virtualized environments.

Patty: Thank you. Thank you, Gabriella. That's a great question.

Patty: So, as I started the prepared remarks by talking about our AI strategy and how it is differentiated, I want to remind everyone we are also a very strong player in the GPU infrastructure as a service today. So we have very competitive offerings all the way from bare metal to virtualized environments, and what we announced with the GPU droplets is a strategy which enables access to fractional GPU access and also with the ability to orchestrate the life cycle through the virtualized environment that we provide with GPU droplets. So it just takes the overhead of having to manage the whole infrastructure, makes it super super easy for those workloads which we believe are going to be more important for customers that are digital native but also the types of customers that we are trying to do.

Speaker Change: Yeah, thank you Gabriela, that's a great question.

Speaker Change: So as I started the prepared remarks by talking about our AI strategy and how it is differentiated.

Speaker Change: I want to remind everyone, we are also a very strong player in the GPU infrastructure as a service today. So we have very competitive offerings all the way from bare metal to virtualized environments.

Speaker Change: And what we announced with the GPU droplets is it's a strategy which enables...

Gabriella Borges: And what we announced with the GPU droplets is a strategy which enables access to fractional GPU access and also with the ability to orchestrate the lifecycle through the virtualized environment that we provide with GPU droplets. So it just takes the overhead of having to manage the whole infrastructure makes it super, super easy for those workloads, which we believe are going to be more important for customers that are digital native, but also the types of customers that are available.

Speaker Change: access to fractional GPU access.

Speaker Change: and also with the ability to orchestrate the life cycle through the virtualized environment that we provide with GPU droplets. So it just takes the

Speaker Change: overhead of having to manage the whole infrastructure makes it super, super easy for

Speaker Change: Those workloads, which we believe are going to be more important for customers that are digital natives, but also the types of customers that typically reside on our platform. So they are looking to build applications.

Patty: So they are typically reside on our platform so they are looking to build applications that consume AI and leverage different parts of the AI infrastructure in a way that extends existing AI models. So they are not model builders per se in the sense that they are not trying to build another foundational model. So we feel our AI strategy, which includes the GPU infrastructure, is tailor made for customers that are looking to consume AI, not necessarily build foundational models. So when I talked about the GPU droplets, that's an abstracted version of the core GPU as a service, and then we also in the Deploy conference, we also announced and showed an early preview of what we call as the next generation of our platform as a service offerings.

Gabriella Borges: So they are typically reside on our platform. So they are looking to build applications that consume AI and leverage different parts of the AI infrastructure in a way that extends existing AI models. They're not model builders per se in the sense that they're not trying to build another foundational model. So we feel our AI strategy, which includes the GPU infrastructure is tailor made for customers that are looking to consume AI, not necessarily build foundational models.

Speaker Change: that consume AI, and...

Speaker Change: leverage different parts of the AI infrastructure in a way that extends existing AI models. They're not model builders per se in the sense that they're not trying to build another foundational model.

Speaker Change: So, we feel our AI strategy, which includes the GPU infrastructure, is

Speaker Change: tailor-made for customers that are looking to consume AI, not necessarily build foundational models.

Gabriella Borges: So when I talked about the GPU droplets, that's an abstracted version of the core GPU as a service. And then we also in the deploy conference, we also announced and showed an early preview of what we call as the next generation of our platform as a service offerings. So these are endpoint APIs for well known open source models like Lama 3.1 and so forth, which we will be releasing in early Q4, which enables another layer of abstraction to build applications on top of LLM platforms.

Speaker Change: So...

Speaker Change: When I talked about the GPU droplet, that's an abstracted version of the core GPU as a service.

Speaker Change: And then...

Speaker Change: We also, in the Deploy conference, we also announced and showed an early preview of what we call

Patty: So these are endpoint APIs for well known open source models like Lama 3.1 and so forth, which we will be releasing in early Q4, which enables another layer of abstraction to build applications on top of LLM platforms. So we feel our strategy is going more up stack and enabling applications that derive business value from AI rather than focusing on model builders that are building and training foundational models. So there's going to be different needs for customers that are looking to derive business value and build applications and platforms on top of our infrastructure. So that's what we are focused on.

Speaker Change: the next generation of our platform-as-a-service offerings.

Gabriella Borges: So we feel our strategy is going more up stack and enabling applications that derive business value from AI rather than focusing on model builders that are building and training foundational models. So there's going to be different needs for customers that are looking to derive business value and build applications and platforms on top of our infrastructure. So that's what we are focused on. Certainly there is going to be room and space for core infrastructure and GPU forms.

Speaker Change: So these are endpoint APIs for well-known open source models like LLAMA 3.1 and so forth.

Speaker Change: which we will be releasing in early Q4, which enables another layer of abstraction to build applications on top of LLM platforms. So we feel our strategy is...

Speaker Change: going more upstack and enabling applications that derive business value from AI rather than focusing on model builders that are building and training foundational models.

Speaker Change: So, there's going to be different needs.

Speaker Change: for customers that are looking to derive business value and build applications and platforms on top of our infrastructure. So that's what we are focused on.

Patty: Certainly, there is going to be room and space for core infrastructure and GPU forms, and there's a very, as I mentioned, very concentrated group of model training companies that are building foundational models, whether it is for question and answer, like a large language model for question and answer bots, or for text to image generation, or text to video generation, and things like that. But our hypothesis is that that market is very concentrated and over time there will be few but very big model companies in the world and the rest of the universe is going to move towards building applications on top of this infrastructure.

Gabriella Borges: And there's a very, as I mentioned, very concentrated group of model training companies that are building foundational models, whether it is for question and answer, like a large language model for question and answer bots or for text to image generation or text to video generation and things like that. But our hypothesis is that that market is very concentrated and over time there will be few but very big model companies in the world and the rest of the universe is going to move towards building applications on top of this infrastructure.

Speaker Change: Certainly there is going to be room and space for core infrastructure and GPU farms and there is a...

Speaker Change: A very, as I mentioned, very concentrated group of model training companies that are building foundational models, whether it is for question and answer, like a large language model for question and answer bots.

Speaker Change: or for text-to-image generation or text-to-video generation and things like that.

Speaker Change: But our hypothesis is that that market is very concentrated, and over time...

Speaker Change: There will be few but very big model companies in the world.

Speaker Change: And the rest of the universe is going to move towards building applications on top of this infrastructure. And that's where our focus is. And that's historically been our strength, is to simplify...

Patty: And that's where our focus is, and that historically being our strength is to simplify the access to complex infrastructure by providing the essential building blocks of platform and application building, and that's the strategy we are following. Thank you for the detail.

Gabriella Borges: And that's where our focus is and that's historically being our strength is to simplify the access to complex infrastructure by providing the essential building blocks of platform and application building and that's the strategy we are following.

Speaker Change: The access to complex infrastructure by providing the essential building blocks of platform and application building. And that's the strategy we are following.

Matt: Matt, the follow-up is for you on the updated outlook. How did you think about the pace of net new ARR into 3Q and 4Q? Back up in with Matt, they think it applies a moderation from the result that you just put up this quarter. So, help us understand how you thought about handicapping that call it $78 million that you were able to deliver into 2Q, into 3Q and 4Q as well. Yeah, part of it, as we think about the growth, particularly around the AI side of the business, it's somewhat lumpy, and we talked about earlier in the year that we had some risk baked in. As a part of the reason why we gave a wide revenue range in our initial guidance was, we had some supply chain risk and it was a new service for us.

Matt: Thank you for the detail. Matt, the follow-up is for you on the updated outlook. How did you think about the pace of net new ARR into 3Q and 4Q? Back up in with Matt, he think implies the moderation from the result that you just put up this quarter. So, help us understand how you thought about handicapping that, call it $78 million that you were able to deliver into 2Q into 3Q and 4Q as well.

Matt: Thank you for the detail. Matt, the follow-up is for you on the updated outlook. How did you think about the pace of net new ARR into 3Q and 4Q? Back of the envelope, Matt, I think implies a moderation from the result that you just put out this quarter. So help us understand how you thought about handicapping that, call it 7, 8 million that you were able to deliver in 2Q into 3Q and 4Q as well.

Matt: Yeah, part of the, you know, as we think about the growth, particularly around the AI side of the business, it's somewhat lumpy, and we talked about earlier in the year that

Matt: Yeah, part of the, you know, as we think about the growth, particularly around the AI side of the business, it's somewhat lumpy and we talked about earlier in the year that, you know, we had some risk baked in and as a part of the reason why we gave a wide revenue range in our initial guidance was, we had some supply chain risk and it was, you know, a new service for us, so we wanted to make sure that we were comfortable with the implementation and we managed past that risk and that enabled us to bring on a fair bit of incremental capacity that we had ordered last year in the second quarter, which drove up the ARR. And so, as we look, you know, over the balance of the year and we're, you know, continuing to add capacity, we're just not, it won't be as lumpy, so it's going to be a little bit lesser than in terms of the guide than what we had in the second quarter.

Speaker Change: We had some risk baked in, and part of the reason why we gave a wide revenue range in our initial guidance was we had some supply chain risk, and it was a new service for us, so we wanted to make sure that we were comfortable with the implementation, and we managed past that risk.

Matt: So, we wanted to make sure that we were comfortable with the implementation and manage past that risk, and that enabled us to bring on a fair bit of incremental capacity that we had ordered last year in the second quarter, which drove up the ARR. And so, as we look over the balance of the year and we're continuing to add capacity, it won't be as lumpy. So, it's going to be a little bit lesser than in terms of the guide and then what we had in the second quarter. The other thing that you're getting when people look at the implied third quarter and fourth quarter growth rates is, from a year-over-year perspective, we've got two lapping things that we're doing that are making the growth look like it's decelerating, even though we're accelerating clearly in the core and we're showing growth in the other parts of the business.

Speaker Change: And that enabled us to bring on a fair bit of incremental capacity that we had ordered last year in the second quarter, which drove up the ARR. And so as we look, you know, over the balance of the year and we're, you know,

Speaker Change: continuing to add capacity. We're just not it won't be as lumpy so it's going to be a little bit

Speaker Change: The other thing that you're getting when people look at the implied third-quarter and fourth-quarter growth rates is

Matt: The other thing that you're getting when people look at the implied third quarter and fourth quarter growth rates is, from a year over year perspective, we've got two lapings that we're doing that are making the growth look like it's decelerating, even though we're accelerating clearly in the core and we're showing growth in the other parts of the business. And that's because this is the first quarter that, or third quarter will be the first quarter that, where the paper space AI revenue is in both in the prior period and so that's a 200 point basis point reduction in the growth rate.

Speaker Change: From a year-over-year perspective, we've got two lappings that we're doing that are making the growth look like it's decelerating, even though we're accelerating clearly in the core and we're showing growth in the other parts of the business.

Matt: And that's because this is the first quarter that, or third quarter will be the first quarter that, where the paper space AI revenue is in both in the prior period. And so, that's a 200 basis point reduction in the growth rate. And then we're lapping a price increase and customer growth, and the nominal customer growth in the Cloudways business that's also contributing about a hundred basis points to the year-over-year growth, a parent deceleration from second to third quarter. Got it. Thank you for the call.

Speaker Change: And that's because this is the first quarter that, or third quarter will be the first quarter that, where the paper space AI revenue is in the prior period. And so that's a 200 point basis point.

Speaker Change: reduction in the growth rate and then we're lapping a price increase and customer growth, nominal customer growth in the cloudways business that's also contributing about a hundred basis points to the year-over-year growth apparent deceleration from second to third quarter.

Matt: And then we're lapping a price increase and customer growth and the nominal customer growth in the cloud waste business that's also contributing about a hundred basis points to the year over year growth, a parent deceleration from second to third quarter. Got it.

Raimo Lenschow: Your next question comes from a line of Raymo Lanchel from Barclays. Your line is open. And thank you. Can I go back to the first question that was asked? Just, you know, given that we are kind of early on that AI journey. So, we don't really fully understand how this is going to play out. So, so it's a message from you guys that as I train a model, I need like, you know, hundreds, you know, like a hundred thousand and thousand GPUs. But as I run a model and if I have an application, I can do that with a much smaller GPU number, like the one to eight that you're kind of kind of suggesting today.

Speaker Change: Got it. Thank you for the call.

Operator: Thank you for the call.

Speaker Change: Your next question comes from a line of Raimo Lenschow from Barclays. Your line is open.

Rainbow Line Shell: Your next question comes from a line of Rainbow Line Shell from Barclays. Your line is open. Thank you.

Speaker Change: Darn!

Speaker Change: Thank you. Can I go back to the first question that was asked? Just, you know, given that we are kind of early on that AI journey, so we don't really fully understand how this is going to play out.

Patty: Can I go back to the first question that was asked? Just, you know, given that we are kind of early on that AI journey, so we don't really fully understand how this is going to play out. So it's a message from you guys that as a trainer model, I need like, you know, hundreds, you know, like at 100,000, 10,000 GPUs, but as I run and model then, if I have an application, I can do that with a much, much smaller GPU number, like the one to eight that you're kind of suggesting today.

Raimo Lancho: So is the message from you guys that, as I train a model, I need like, you know, hundreds, you know, like, hundreds, thousands, 10,000?

Speaker Change: But as I run the model, and if I have an application, I can do that with a much, much smaller GPU number, like the one to eight.

Patty: It feels a little bit like, you know, because you're only in the journey, it feels a little bit too good to be true. Can you speak to that a little bit more?

Speaker Change: that you were kind of suggesting today. Like, it just feels a little bit like a, you know, because you're already in the journey, it feels a little bit too good to be true. Can you speak to that a little bit more?

Patty: Like, it just feels a little bit like, you know, because you're early in the journey, it feels a little bit too good to be true. Can you speak to that a little bit more? Yeah, Rainbow, thank you for the question. So, see, there are three types of AI users today. One is the true foundational model builders, like an anthropic mistrol, folks that are building the foundational model. And the second one is what I call as the AI extenders.

Patty: Yeah, Raymo, thank you for the question. So there are three types of AI users today. One is the true foundational model builders, like an Anthropic Mistral folks that are building the foundational model. And the second one is what I call as the AI extenders. So they take these models, say, a Llama 3.1 and open source model, and they inject or they enhance it using their custom data. It could be a company that has, say, for example, a geospatial data, and they enhance an existing LLM with their own custom data source and create a slightly modified version of an existing foundation model.

Speaker Change: Yeah, Raimo, thank you for the question. So there are three types of AI users today.

Patty: So they take these models, say, a Lama 3.1 and open source models, and they inject or they enhance it using their custom data. It could be a company that has, say, for example, a geospatial data and they enhance an existing LLM with their own custom data source and create a slightly modified version of an existing foundation model. So for this class of customers, they definitely don't need hundreds and hundreds of thousands of GPUs.

Speaker Change: One is the true foundational model builders like an Anthropic, Mistral, folks that are building the foundation models. And the second one is what I call it the AI extenders. So they take these models, say a LLAMA 3.1, an open-source model,

Speaker Change: and they inject or they enhance it using their custom data.

Speaker Change: It could be a company that has, say, for example, a geospatial data.

Speaker Change: and they enhance an existing LLM with their own custom data source.

Speaker Change: and create a slightly modified version of an existing foundation model. So for this class of customers, they definitely don't need hundreds of thousands of GPUs. And the third type of...

Patty: So for this class of customers, they definitely don't need hundreds and hundreds of thousands of GPUs. And the third type of user is an AI consumer. So, for example, let's say you're creating a new AI native CRM application or a supply chain application. For which you are relying on a very robust foundation model, again, Lama 3E or Mistral or something, but bulk of your application is to deliver that supply chain forecasting algorithm, but you are leveraging a heavy dose of AI, but you don't need the same kind of physical raw compute power that the category one or category two company needed.

Patty: And the third type of user is an AI consumer. So for example, let's say you're creating a new AI native CRM application or a supply chain application for which you are relying on a very robust foundation model, again, Lama 3E or Mistral or something. But bulk of your application is to deliver that supply chain forecasting algorithm, but if you are leveraging a heavy dose of AI, but you don't need the same kind of physical raw compute power that the category one or category two company needed.

Speaker Change: of user is an AI consumer. So for example, let's say you're creating a new AI native CRM application or a supply chain application.

Speaker Change: for which you are relying on a very robust foundational model, again Lama 3 or Mistral or something.

Speaker Change: The bulk of your application is to deliver that

Speaker Change: supply chain forecasting algorithm, but you're leveraging a heavy dose of AI, but you don't need the same kind of physical raw compute power that the category one or category two company needed.

Patty: So these are different types of use cases. So the AI model builders, AI model extenders, and the AI model consumers all have different requirements and need GPU capacity at different scales. And what we're seeing is we are definitely addressing the needs of the second and the third category that I just talked about. And another way to think about this rainbow is, as with any technology wave, you have infrastructure providers. In this case, this is Nvidia and all the foundational model builders. They are laying the infrastructure, but the true business value is going to be when this infrastructure is leveraged to build platforms like simple example would be operating systems of based on x86 architecture.

Speaker Change: So, these are different types of use cases. So the AI model builders, AI model extenders, and the AI model consumers all have different requirements and need GPU capacity at different scales.

Patty: So these are different types of use cases. So the AI model builders, AI model extenders and the AI model consumers all have different requirements and need GPU capacity at different scales. And what we're seeing is we are definitely addressing the needs of the second and the third category that I just talked about. And another way to think about this rainbow is as with any technology wave, you have infrastructure providers. In this case, this is Nvidia and all the foundational model builders.

Speaker Change: And what we are seeing is we are definitely addressing the needs of the second and the third category that I just talked about.

Speaker Change: And another way to think about this, Raimo, is...

Raimo: As with any technology wave, you have infrastructure providers. In this case, this is NVIDIA and all the foundational model builders.

Raimo: They are laying the infrastructure, but the true business value is going to be when this infrastructure is leveraged to build platforms like simple...

Patty: They're laying the infrastructure, but the true business value is going to be when this infrastructure is leveraged to build platforms like simple example would be operating systems of based on X86 architecture. And then you have applications which are the ones that truly deliver business value for for everyone. So as this AI wave goes through a ghost upstack from one layer to the other, we feel there's a tremendous amount of need to democratize the access to these GPUs and also provide other software frameworks on the platform layer and infrastructure layer, which is where we're building now.

Raimo: Example would be operating systems based on x86 architecture, and then you have applications which are the ones that truly deliver business value for everyone.

Patty: And then you have applications, which are the ones that truly deliver business value for everyone. So, as this AI wave goes up stack from one layer to the other, we feel there is a tremendous amount of need to democratize the access to these GPUs and also provide other software frameworks on the platform layer and infrastructure layer, which is what we are building now.

Raimo: So as this AI wave goes up stack from one layer to the other, we feel there's a tremendous amount of need to democratize the access to these GPUs and also provide other

Raimo: software frameworks on the platform layer and infrastructure layer, which is what we are building now.

Matt: That makes total sense. Thanks for the clarification. And one for Matt, if I think about the improvement in growth margins you mentioned from the optimization work you do around the data centers, like what sort of magnitude are you thinking? I don't want guidance, but it's just like a few basis points; it's kind of more meaningful. How should we think about that? Thank you, and congrats to me as well. Thanks, Raymond. It's a great question, and I think I touched upon this on prior calls. When I first joined the company, one of the first things that I observed was that the data center footprint was interesting in that we were in Tier One markets and Tier One buildings.

Raimo: Okay, perfect. That makes total sense. Thanks for the clarification. And then one for Matt, if I think about the improvement in gross margins you mentioned from just the...

Matt: Okay, that makes total sense. Thanks for the clarification. And then one format, if I think about the improvement and growth margins you've mentioned from the optimization work you do around the data centers, like what sort of magnitude are you thinking? I don't want guidance, but it is like a few basis points. It's kind of more meaningful. How should we think about that? Thank you and congrats for me as well. Thanks, Reno.

Speaker Change: optimization work you do around the data centers. Like, what sort of magnitude are you thinking? You know, I don't want guidance, but is this like a, you know, like a few basis points? Is this kind of more meaningful? How should we think about that? Thank you and congrats.

Speaker Change: Thanks, Raimo. You know, it's a great question, and I think I've touched upon this on prior calls. When I first joined the company, one of the first things that I observed was that the data center footprint was...

Matt: You know, it's a great question. And I think I touched upon this on prior calls. You know, when I, when I first joined the company, one of the first things that I observed was that the data center footprint was interesting in that we were in tier one markets and tier one, you know, buildings. And that was pretty much the way the company had architected its data center network, which is a relatively expensive way of building your architecture.

Raimo: Ah...

Speaker Change: I'd say interesting in that we were in tier one markets

Matt: And that was pretty much the way the company had architected its data center network, which is a relatively expensive way of building your architecture. Over time, you'd want to move to some tier two locations, and you'd want to be more of a wholesale and retail kind of data center kind of footprint. And so the Atlanta data center that we just announced is a great example of that, where we're going to be able to take down an incremental capacity. It'll give us room for the expansion of our AI capabilities, but we'll also be able to take workloads out of our more expensive locations and kind of reduce or consolidate those footprints and shift some of the maybe the less latency-sensitive workloads into different locations.

Raimo: So that was pretty much the way the company had architected its data center network.

Raimo: which is a relatively expensive way of building your architecture. Over time you'd want to move to some tier two locations and you'd want to be more of a wholesale than retail kind of data center kind of footprint.

Matt: Over time, you'd want to move to some tier two locations and you'd want to be more of a wholesale than retail kind of data center kind of footprint. And so the Atlanta data center that we've just announced is a great example of that, where we're going to be able to take down an incremental capacity. It'll give us room for the expansion of our AI capabilities, but we'll also be able to take workloads out of our more expensive locations and kind of reduce or consolidate those footprints and shift some of the, maybe the less latency-sensitive workloads into different locations.

Raimo: And so the Atlanta Data Center that we just announced is a great example of that, where we're going to be able to take down an incremental capacity.

Raimo: room for the expansion of our AI capabilities, but we'll also be able to take workloads out of our more expensive locations.

Raimo: and kind of reduce or consolidate those footprints and shift some of the maybe the less latency sensitive workloads into different locations.

Matt: And that's going to be a multi-year effort; it's not going to be something that we can do over time. But I think there's a meaningful improvement that we can drive in Gross Margin, and the objective is to continue to drive Gross Margin's up. And that will offset the in the core business, and that will offset some of the lower gross margin mix that we'll get as our AI business continues to grow. So I'm not going to give guidance on it, but I think it's a meaningful opportunity and breath. And I are very focused on driving that on that savings.

Raimo: And that's going to be a multi-year effort. It's not going to be something that we can do over time. But I think there's a meaningful improvement that we can drive in gross margin. And the objective is to continue to drive gross margins up.

Matt: And that's going to be a multi-year effort. It's not going to be something that we can do over time, but I think there's a meaningful improvement that we can drive in gross margin. And we're, you know, the objective is to continue to drive gross margins up. And that will offset the, in the core business, and that will offset some of the lower gross margin mix that we'll get, you know, as our AI business continues to grow. So I'm not going to give guidance on it, but I think it's a meaningful opportunity. And Bruthan and I are very focused on driving that on that savings, and driving the gross margin up.

Breton: And that will offset the, in the core business, and that will offset some of the lower gross margin mix that we'll get, you know, as our AI business continues to grow. So I'm not going to give guidance on it, but I think it's a meaningful opportunity, and Breton and I are very focused on driving that, on that savings.

Matt: and driving the gross margin up.

Kingsley Crane: Your next question comes from the line of Kingsley Crane from Canacore Security. Your line is open.

Breton: and Driving the Gross Margin Up.

Breton: i

Speaker Change: Your next question comes from a line of Kingsley Crane from Kennecourt Security. Your line is open.

Kingsley Crane: Your next question comes from a line of Kingsley Crane from Cantercourt Security. Your line is open. Great, so first question would be, you said it's customer success efforts as helping to create stability and churn contraction. Especially now with Larry Bord, how much could customer success be used not to just present churn but also drive usage and the type of potential accounts?

Patty: Great, so first question would be, you said it's customer success efforts as helping to create stability and churn contraction, especially now with Larry Bord. How much could customer success be used not to just prevent churn but also drive usage and these high potential accounts? Hello Kingsley, good to hear from you. That's a great question. So we currently are customer success efforts are fairly nascent but ramping up and they already are tasked not only managing a relationship with our top customers but also drive product usage and show them the breadth of our platform which after I joined six months ago, we have put some considerable wood behind the arrow and in doing two things for our core platform one is we are rapidly closing the gap in terms of what our top end of the scalers need from a core product point of view but also adding a lot of other new capabilities on our ad platform as I mentioned in the prepared remarks.

Kingsley Crane: Great, so first question would be, you cited customer success efforts as helping to create stability in churn contraction, especially now with Larry and Bord, how much could customer success be used not to just prevent churn but also drive usage in these high potential accounts?

Speaker Change: Hello Kingsley, good to hear from you. It's a great question.

Patty: Hello Kingsley, good to hear from you. That's a great question. So we currently are customer success efforts are fairly nascent but ramping up and they already are tasked not only managing a relationship with our top customers but also drive product usage and show them the breadth of our platform which after I joined six months ago we have put some considerable wood behind the arrow and in doing two things for our core platform one is we are rapidly closing the gap in terms of what our top end of the scalars need from a core product point of view but also adding a lot of other new capabilities on our app platform as I mentioned in the prepared remarks.

Speaker Change: So we currently, our customer success efforts are fairly nascent, but ramping up, and they already

Speaker Change: Our task, not only managing a relationship with our top customers, but also...

Speaker Change: drive product usage and show them.

Speaker Change: The breadth of our platform, which after I joined six months ago, we have put some considerable wood behind the arrow in doing two things for our core platform. One is we are rapidly closing the gap in terms of what our top end of the scalers need from a core product point of view.

Speaker Change: but also adding a lot of other new capabilities on our app platform as I

Patty: So we are doing both closing the gaps that are in the product functionality that our top end scalers need but also expanding our platform footprint. So our customer success reps have they get trained in all the latest and greatest, and they take that message to our customers and help expand the footprint of these large customers and in how they are leveraging our platform.

Speaker Change: mentioned in the prepared remarks.

Speaker Change: So we are doing both, closing the gaps in the product functionality that our top-end scalers need, but also expanding our platform footprint.

Patty: So we are doing both, closing the gaps that are in the product functionality that are top end scalars need but also expanding our platform footprint. So our customer success reps, they get trained in all the latest and greatest and they take that message to our customers and help expand the footprint of these large customers and in how they are leveraging our platform. So that's already there but I think it is fair to say that it's in its nasancy and with Larry coming on board there's going to be a big push for us so the purpose of getting someone like Larry is to ensure that he can leverage all his skills in building a high velocity motion to augment our phenomenal product lead growth and make sure that these customers that are getting on board it to our platform first of all know the breadth of our platform but also start leveraging the capabilities that we have so that we can drive up expansion.

Speaker Change: So our customer success reps...

Speaker Change: They get trained in in all the latest and greatest and they take that message to our customers and help expand the footprint of these large customers and in how they are leveraging our platform.

Patty: So that's already there, but I think it is fair to say that it's in its nasancy, and with Larry coming on board, there is going to be a big push for us. So the purpose of getting someone like Larry is to ensure that he can leverage all his skills in building a high velocity motion to augment our phenomenal product lead growth and make sure that these customers that are getting on boarded to our platform, first of all, know the breadth of our platform but also start leveraging the capabilities that we have so that we can drive up expansion.

Speaker Change: So that's already there, but I think it is fair to say that it's in its nascency, and with Larry coming on board, there's going to be a big push for us.

Larry: The purpose of getting someone like Larry is to ensure that he can leverage all his skills in building a high-velocity motion to augment our phenomenal product-led growth and make sure that

Speaker Change: These customers that are getting onboarded to our platform first of all know the breadth of our platform, but also start leveraging the capabilities that we have so that we can drive up expansion.

Patty: That makes a lot of sense, and then I want to return to the GPU topic, achievements on availability. It's great to see that on the market, and the fractional and demand consumption is relatively unique. You know we've spoken in the past about software will differentiate you from the other providers, so if you want to check in on gradient specifically, how important is that to the vision and how is that acting as an on-ramp for customers? Yeah, so we are so yes, I completely agree that software as a differentiator is going to be the one that we are going to bank on. And so right now, so let me again refresh everyone's memory in terms of the offerings we currently have. So at the bottom most layer, we have a bare metal GPU platform, and we just announced the GPU droplets, which provides virtualized and fractional and on-demand access, which is also a pretty big deal. Virtualized on-demand fractional access to GPUs is what the GPU droplets provide. And then a layer up above that is our platform as a service offering, which is Gradient, and we are doing a lot of work on that platform as a service layer, and we'll be announcing a slew of enhancements over the next 90 days to add a lot of capabilities on the platform as a service layer.

Speaker Change: That makes a lot of sense. And then I want to return to the GPU topic of comments on the availability. It's great to see that on the market. And the fractional and demand consumption is relatively unique.

Patty: That makes all the sense and then I want to return to the GPU topic of achievements on availability it's great to see that on the market and the fractional and demand consumption is relatively unique. You know we've spoken in the past about software will differentiate you from the other providers so if you want to check in on gradient specifically how important is that to the vision and how is that acting as an on-ramp for customers?

Speaker Change: You know, we've spoken in the past about software will differentiate you from the other providers. So I just want to check in on gradient specifically. How important is that to the vision and how is that acting as an on-ramp for customers?

Speaker Change: Yeah, um...

Patty: Yeah so we are so yes I completely agree that software as a differentiator is going to be the one that we are going to bank on and so right now so let me again refresh everyone's memory in terms of the offerings we currently have so at the bottom most layer we have a bare metal GPU platform and we just announced the GPU droplet which provides virtualized and fractional and on-demand access which is also a pretty big deal virtualized on-demand fractional access to GPUs is what the GPU droplets provide and then a layer up above that is our platform as a service offering which is gradient and we are doing a lot of work on that platform as a service layer and we'll be announcing a slew of enhancements over the next 90 days to add a lot of capabilities on the platform as a service layer we believe it is going to be an important front door for customers to start adopting these AI capabilities and the abstractions that we are providing right now like for example when customers come into the gradient platform they're yes they know that they are leveraging GPUs but that's not why they are coming to to our platform as a service offering they're coming because it is super compelling to to organize their AIML work spaces and share it amongst their colleagues and publish it to different repos and things like that so there are many different reasons why they come there and oh by the way when they have to push something to to testing or production they leverage the GPU infrastructure we have in which we have a variety of different hardware not just H100s we also have a variety of different GPU hardware that helps customers for different use cases so I think software is extraordinarily important as we go up the stack and gradient is very differentiated offering for us and we are working working quite a bit on enhancing gradient over the next 90 days Really encouraging, thank you.

Speaker Change: So we are, so yes, I completely agree that software as a differentiator is going to be the one that we are going to bank on. And so right now, so let me again refresh everyone's memory in terms of the offerings we currently have. So at the bottom most layer, we have a bare metal GPU platform.

Speaker Change: And we just announced the GPU Droplet, which provides virtualized and fractional and on-demand access.

Speaker Change: which is also a pretty big deal, virtualized.

Speaker Change: on-demand fractional access to GPUs is what the GPU droplets provide.

Speaker Change: Above that is our platform as a service offering, which is Gradient.

Speaker Change: And we are doing a lot of work on that platform as a service layer, and we'll be announcing a slew of enhancements over the next 90 days.

Speaker Change: to add a lot of capabilities on the platform as a service layer. We believe it is going to be an important front door for customers to start adopting these.

Patty: We believe it is going to be an important front door for customers to start adopting these AI capabilities and the abstractions that we are providing right now. Like, for example, when customers come into the gradient platform, they're yes they know that they are leveraging GPUs, but that's not why they are coming to our platform as a service offering. They're coming because it is super compelling to organize their AIML work spaces and share it amongst their colleagues and publish it to different repos and things like that. So there are many different reasons why they come there and, oh by the way, when they have to push something to testing or production, they leverage the GPU infrastructure we have in which we have a variety of different hardware, not just H100s. We also have a variety of different GPU hardware that helps customers for different use cases.

Speaker Change: , and the abstractions that we are providing right now, like for example when customers come into the Gradient platform, yes they know that they are leveraging GPUs but that's not why they are coming to our platform as a service offering. They are coming because it is...

Speaker Change: It's super compelling to organize their AIML workspaces and share it amongst their colleagues and publish it to different repos and things like that. So there are many different reasons why they come there. And oh, by the way, when they have to push something to testing or production, they leverage the GPU infrastructure we have, in which we have a variety of different hardware, not just H100s. We also have a variety of different GPU hardware that helps customers for different use cases.

Patty: So I think software is extraordinarily important as we go up the stack and Gradient is a very differentiated offering for us and we are working quite a bit on enhancing Gradient over the next 90 days.

Speaker Change: So, I think software is extraordinarily important as we go up the stack, and Gradient is a very differentiated offering for us, and we are working quite a bit on enhancing Gradient over the next 90 days.

Operator: Really encouraging, thank you.

Patrick Walravens: Your next question comes from a line of Patrick Walravens from JMP Securities. Your line is open. Oh, great. Thank you. And first of all, I want to commend you on your recruiting. I mean, the background, like Brad in particular, is just fabulous.

Speaker Change: Really encouraging, thank you.

Speaker Change: Your next question comes from a line of Patrick Walravens from JMP Securities. Your line is open.

Patrick Walravens: You are next question comes from a line of Patrick Walravens from JMP Securities. Your line is open. Oh great, thank you.

Speaker Change: Oh, great. Thank you. And first of all, I want to commend you on your recruiting. I mean, the background, like Bratton in particular.

Patrick Walravens: And first of all, I want to commend you on your your recruiting. I mean, the background like Brad in particular is just fabulous. So someday I'd like to hear how you did that.

Patty: So someday I'd like to hear how you did that. But my more specific question is what, what are the bottlenecks to growing your AI footprint in terms of the data centers? So data centers that were built for CPUs don't work very well for GPUs, right? So how are you thinking through that? Yeah, Brad, thank you so much for the kind words. Yes, you're right.

Speaker Change: Fabulous.

Speaker Change: Some day I'd like to hear how you did that. But my more specific question is, what are the bottlenecks to growing your AI footprint in terms of the data centers? So data centers that were built for CPUs.

Patty: But my more specific question is what what are the bottlenecks to growing your AI footprint in terms of the data centers. So data centers that were built for CPUs don't work very well for GPUs, right? So how are you thinking through that? Yeah, Brad, thank you so much for for the kind of words. Yes, you're right.

Speaker Change: don't work very well for GPOs, right? So, how are you thinking through that?

Speaker Change: Yeah, Pat, thank you so much for the kind words.

Patty: The, there is surely some constraints, but all of, so just to be clear, the new data center that I just talked about, we are not live yet on that. So all of the AI workloads that we are seeing now, we have crammed into our existing data centers, whether it is New York or Amsterdam and other places. Is it easy? No, but we have figured out a way to do that. See, there are multiple constraints. One is the stuff that you read in the press's power and cooling. Yes, those are really important. The other one is Network stack.

Pat: Yes, you're right. There is surely some constraints, but...

Patty: There is surely some constraints, but all of so just to be clear, the new data center that I just talked about, we are not live yet on that. So all of the AI workloads that we are seeing now, we have crammed into our existing data centers, whether it is New York or Amsterdam and other places. Is it easy? No, but we have figured out a way to do that.

Speaker Change: So, just to be clear, the new data center that I just talked about, we are not live yet on that. So, all of the AI workloads that we are seeing now, we have crammed into our existing data centers, whether it is New York or Amsterdam and other places.

Speaker Change: Um...

Speaker Change: It is easy? No. But we have figured out a way to do that. There are multiple constraints. One is the stuff that you read in the press is power. And cooling, yes. Those are really important. The other one is network stack. It is very different from our CPU offerings. So we have to build parallel network stacks to put in these GPUs.

Patty: See, there are multiple constraints. One is the stuff that you read in the presses power and cooling. Yes, those are really important. The other one is network stack. It's very different from our CPU offering. So we have to build parallel network stacks to to put in these GPUs and then real estate, right? The density of our ability to rack and stack GPUs is very different from our traditional density of our racks for CPUs because of the power and the heat that these GPUs throw out.

Patty: It's very different from our CPU offering. So we have to build parallel network stacks to put in these GPUs and then real estate, right? The density of our ability to rack and stack GPUs is very different from our traditional density of our racks for CPUs because of the power and the heat that these GPUs throw out. So there are some physical constraints, networking constraints, and of course, it is just super expensive and super hard to find more data centers space in our existing facilities.

Speaker Change: And then real estate, right? The density of our ability to rack and stack GPUs is very different from our traditional density of our racks for CPUs.

Speaker Change: because of the power and the heat that these GPUs throw out.

Speaker Change: So there are some physical constraints.

Patty: So there are some physical constraints, networking constraints, and of course, it is just super expensive and super hard to find more data centers space in our existing facilities. So that's why we decided to go to Atlanta. And by the way, it also helps us consolidate and load balance some of our very expensive data center footprint in the short term.

Speaker Change: Networking constraints, and of course, it is just super expensive and super hard to find more data center space in our existing facilities. So that's why we decided to go to Atlanta, and by the way, it also helps us consolidate and load balance some of our very expensive data center footprint in the short term.

Patty: So that's why we decided to go to Atlanta. And and load balance, some of our very expensive data center footprint in the short term.

Matt: 16 data centers across the night in regions that you have your slide deck. Does that include the paper space, whatever paper space has? Yeah, it does. And paper space coincidentally happened to be in our New York City data center. So, yeah, we, it includes that. Okay, great. Thank you.

Speaker Change: 16 data centers across 19 regions that you have in your slide deck. Does that include the paper space, whatever paper space has?

Patty: 16 data centers across the night in regions that you have your slide deck. Does that include the paper space, whatever paper space has? Yeah, it does. And paper space coincidentally happened to be in our New York City data center. So yeah, we think loads that.

Operator: Okay, great. Thank you.

Speaker Change: Yeah, it does, and PaperSpace coincidentally happened to be in our New York City data center, so yeah, it includes that.

Mike Seacos: Your next question comes from a line of Mike Seacos from Needham and Company. Your line is open. Hey guys, thanks for taking the questions here. And I, I just want to continue the thought on the DC, sorry, the data center optimization strategy that you guys are working through. With the Atlanta data center that you guys are announcing here, should we think about that as, as really taking on most of the AI workloads, or is it preying up capacity for you guys to further build out those, those GPUs in the existing. Print that you have.

Speaker Change: Okay, great. Thank you.

Speaker Change: Your next question comes from the line of Mike Cikos from Needham and Company. Your line is open.

Mike Seacos: Your next question comes from a line of Mike Seacos from Needham and Company. Your line is open. Hey guys, thanks for taking the questions here. And I just want to continue the thought on the DC. Sorry, the data center optimization strategy that you guys are working through. With the Atlanta data center that you guys are announcing here, should we think about that is really taking on most of the AI workloads or is it preying up capacity for you guys to further build out those GPUs in the existing, print that you have.

Mike Cikos: Hey guys, thanks for taking the questions here, and I just wanted to continue the thought on the data center optimization strategy that you guys are working through.

Mike Cikos: Should we think about that as really taking on most of the AI workloads, or is it freeing up capacity?

Speaker Change: for you guys to...

Speaker Change: further build out those.

Patty: And the reason I'm asking is I know when you had gone through the three types of categories, the AI, foundational model builders, the extenders, the consumers, I would think that at the very least the extenders would probably be more concerned about security. You need to be in like a tier three, maybe even a tier four data center given security restrictions. And then can you, can you help us think about the ability to re-architect the capacity that you have for these GPUs? Like, I know we're announcing Atlanta today, but should we expect a more significant build-out even beyond Atlanta?

Speaker Change: those GPUs in the existing footprint that you have. And the reason I'm asking is I know when you had gone through

Mike Seacos: And the reason I'm asking is I know when you had gone through the three types of categories, the AI, foundational model builders, the extenders, the consumers, I would think that at the very least the extenders would probably be more concerned about security, you need to be in like a tier three, maybe even a tier four data center given security restrictions. And then can you, can you help us think about the ability to re-architect the capacity that you have for these GPUs? Like I know we're announcing Atlanta today, but should we expect them more significant build out even beyond Atlanta? Yeah, so let me, thanks Mike.

Speaker Change: Those three types of categories, the AI, the foundational model builders, the extenders, the consumers.

Speaker Change: I would think that, at the very least, the extenders would probably be more concerned about security, i.e. you'd need to be in, like, a Tier 3, maybe even a Tier 4 data center, given security restrictions, and then

Speaker Change: Can you help us think about the ability to re-architect the capacity that you have for these GPUs? I know we're announcing Atlanta today, but should we expect a more significant build-out even beyond Atlanta?

Patty: Yeah, so let me, thanks Mike. I'll start with the last question: should we expect a more significant build out? I don't think so. I think we have enough capacity now for the foreseeable future. But I think the way I look at it, Mike, is slightly differently, which is as we go up the stack, the workload goes from training to what we in the industry call as inferencing, and inferencing it is important to minimize the latency. So if you ask me whether all of Atlanta is going to be consumed by AI, no, because that's why Matt and I have been talking about we need to consolidate and load balance across all of our footprint, because a lot of the AI capacity will also be in the West Coast or in Canada or in Europe or Asia, because as we are inferencing, demand grows.

Speaker Change: Thanks, Mike. I'll start with the last question. Should we expect a more significant build-out? I don't think so. I think we have enough capacity now for the foreseeable future.

Patty: I'll start with the last question. Should we expect a more significant build out? I don't think so. I think we have enough capacity now for the foreseeable future. But I think the way I look at it, Mike is slightly differently, which is as we go off the stack, the workload goes from training to what wheel industry call as inferencing and inferencing, it is important to minimize the latency. So if you ask me whether all of Atlanta is going to be consumed by AI, no, because that's why Matt and I have been talking about we need to consolidate and load balance across all of our footprint, because a lot of the AI capacity will also be in the west coast or in Canada or in Europe or Asia, because as we are inferencing demand grows.

Speaker Change: But I think the way I look at it, Mike, is slightly differently, which is as we go up the stack, the workload goes from training to what we in the industry call as inferencing. And inferencing, it is important to minimize the latency.

Speaker Change: So, if you ask me whether all of Atlanta is going to be consumed by AI, no, because that's why Matt and I have been talking about we need to consolidate and load balance across all of our footprint.

Speaker Change: A lot of the AI capacity will also be in the West Coast or in Canada or in Europe or Asia because as...

Matt: Some of our customers are already asking us to put GPUs and inferencing mode closest to where their customer density is, whether it is West Coast or Asia. So luckily we have a fairly distributed data center footprint across the globe. So we are going to take this opportunity to optimize and load balance and consolidate some of these data centers so that we can do a couple of things. Once in our core business, we can continue to look at improving our growth margins, get out of these expensive locations, and leverage larger scale data centers like the one that we just talked about, but be as the AI will move from training to a more inferencing mode.

Speaker Change: Our inferencing demand grows, some of our customers are already asking us to put GPUs in inferencing mode closest to where their customer density is, whether it is West Coast or Asia.

Patty: Some of our customers are already asking us to put GPUs and inferencing mode closest to where their customer density is, whether it is west coast or Asia. So luckily we have a fairly distributed data center footprint across the globe. So we are going to take this opportunity to optimize and load balance and consolidate some of these data centers so that we can do couple of things. Once one in our core business, we can continue to look at improving our growth margins, get out of these expensive locations and leverage larger scale data centers like the one that we just talked about, but be as the AI will move from training to a more inferencing mode.

Speaker Change: Luckily, we have a fairly distributed data center footprint across the globe.

Speaker Change: So we are going to take this opportunity to optimize and load balance and consolidate some of these data centers.

Speaker Change: So that we can do a couple of things. One, in our core business...

Speaker Change: We can continue to look at improving our growth margins, get out of these expensive locations, and leverage larger-scale data centers like the one that we just talked about. But B, as the AI world moves...

Matt: We want to also have the ability to deploy the inferencing GPU capacity closest to where our customer demands are so that we can reduce latency and give them the horsepower they need for inferencing. So that's how I look at it. Matt, is there something you want to add? I think you answered it, Patty. I think the answer to the first part of your question, it's not going to be filled with the Atlanta Day Center; it's not going to be filled with GPU, but it will take a big chunk of our capacity. And part of that is just getting that GPU capacity that Patty said we put in some of our more expensive locations.

Speaker Change: from training to a more inferencing mode, we want to also have the ability to deploy the inferencing GPU capacity closest to where our customer demands are so that we can reduce latency and give them the horsepower they need for inferencing. So that's how I look at it.

Patty: We want to also have the ability to deploy the inferencing GPU capacity closest to where our customer demands are, so that we can reduce latency and give them the horsepower they need for inferencing. So that's how I look at it.

Speaker Change: Matt, is there something you want to add?

Matt: Matt, is there something you want to add? I think you answered it, Patty, I think the answer to the first part of your question, it's not going to be filled with the Atlanta Day Center is not going to be filled with GPU, but it will take a big chunk of our capacity and part of that is just getting that GPU capacity that is patty said we put in some of our more expensive locations.

Matt: I think you answered it, Patty. I think that, you know, to answer the first part of your question, Mike, that

Matt: The Atlanta Data Center is not going to be filled with TPU, but it will take a big chunk of our capacity, and part of that is just getting that TPU capacity that, as Patty said, we put in some of our more expensive locations.

Patty: There's a more cost-effective way for us to do that, and we'll migrate a lot of that. That will free up capacity in those more expensive locations for workloads that are more relevant for that where they require that latency or it's justified to have them in the more expensive locations. So this is just a great opportunity for us to combine two very important initiatives. One is extending our GPU runway and the capacity we have, and the other is to just load balance and cost optimize in our existence. and just to add one more thing to make it clear, we are not going to rush to fill out the capacity to the brim.

Matt: There's a more cost effective way for us to do that and we'll migrate a lot of that that will free up capacity in those more expensive locations for workloads that are more relevant for that where they require that latency or it's justified to have them in the more expensive locations. So this is just a great opportunity for us to combine two very important initiatives one is extending our GPU runway and the capacity we have and the other is to just load balance and cost optimize in our existence, and just to add one more thing to make it clear, we are not going to rush to fill out the capacity to the brim. So this gives us land and space and power but we are going to fill it up as part of our consolidation strategy and as our AI demand grows over the next few years.

Speaker Change: There's a more cost-effective way for us to do that, and we'll migrate a lot of that. That will free up capacity in those more expensive locations for workloads that are more relevant for that, where they require that latency, or it's justified to have them in the more expensive locations.

Speaker Change: So, this is just a great opportunity for us to combine two very important initiatives. One is extending our GPU runway and the capacity we have, and the other is to just load balance and cost optimize in our existing portfolio.

Speaker Change: And just to add one more thing to make it clear, we are not going to rush to fill out the capacity to the brim. So this gives us land and space and power, but we are going to fill it up as part of our consolidation strategy and as our AI demand grows over the next few years.

Patty: So this gives us land and space and power, but we are going to fill it up as part of our consolidation strategy and as our AI demand grows over the next few years.

Matt: God, and then just a quick follow-up for Matt, just coming back to the prepared remarks on the net dollar retention. So the takeaway here, we're stable at 97%, and based on the guide that we have, the team's assuming that that 97% remains where we are for the rest of the year. And then the second clarification here, but I know this quarter you guys have cited 19 million in AI-related AR. Can you give us an update on what that is this quarter? Well, we're not going to guide; we're not going to provide the details at the platform level at this point going forward. But I think with the 200% increase in growth rate, not just increase, but 200% growth rate on what we acquired, you should be able to figure it out.

Speaker Change: Got it, got it. And then just a quick follow-up.

Matt: God, and then just a quick follow up for Matt, just coming back to the prepared remarks on the net dollar retention. So if we take away here, we're stable at 97% and based on the guide that we have, the team's assuming that that 97% remains where we are for the rest of the year and then the second clarification here. But I know with quarter, you guys decided 19 million in AI related or can you give us an update on what that is this quarter?

Speaker Change: for Matt. Just coming back to the prepared remarks on the net dollar retention. So the takeaway here that we're stable at 97% and based on the the guide that we have

Speaker Change: The team's assuming that that 97% remains where we are for the rest of the year. And then the second clarification here, but I know last quarter you guys had cited $19 million in AI-related ARR. Can you give us an update on what that is this quarter?

Matt: Well, we're not going to guide when I provide the details at the platform level at this point going forward, but I think with the 200% increase in growth rate, not just increase, but 200% growth rate on what we acquired, you should be able to figure it out. In terms of what the AI was for the AI business. And I'm sorry, the first part of the question was around the 97% increase. Yeah, that yeah.

Speaker Change: We're not going to guide, we're not going to provide the details at the kind of platform level at this point going forward but you know I think with the 200%

Speaker Change: increase in growth, the 200% growth rate, not just increase, but 200% growth rate on what we acquired. You should be able to figure it out in terms of what the ARR was for the AI business.

Matt: In terms of what the AR was for the AI business. And I'm sorry, the first part of the question was around the 97%. Yeah, that yeah. Yeah. No, what we're trying to be is, I mean, we're doing a lot to drive NDR up. Clearly, our goal is to try to get that above 100 and have that be a tailwind. And we're making good progress on a lot of the initiatives, as Patty talked about, and the new products and the increased product velocity is contributing. But what we're seeing is just the primarily the expansion is just stubborn.

Speaker Change: Yeah, no, what we're trying to be is, I mean, we're doing a lot to drive NDR up, clearly our goal is to try to get that above 100 and have that be a tailwind.

Matt: Yeah, the, no, what we're trying to be is, I mean, we're doing a lot to drive NDR up clearly. And our goal is to try to get that above 100 and have that be a tailwind. And we're making good progress on a lot of the initiatives that Patty talked about and the new products and the increased product velocity is contributing. But what we're seeing is just the primarily the expansion is just stubborn.

Speaker Change: And, you know, we're making good progress on a lot of the initiatives, as Patty talked about, and the new products and the increased product velocity is...

Patty: is contributing but what we're seeing is just the primarily the expansion is just stubborn.

Matt: It's not increasing at the pace at which we'd like to see. And then a lot of that is just our customers aren't growing as fast as they were previously, and their recovery is not as fast as we would like. So I don't know if we think it's going to be flat. It's just, I mean, we only show it on a rounded basis. And so it looks very flat. But we are seeing kind of green shoots and steady improvement in that. So I think the plan and the guidance that we have doesn't require it to get any better than it is today.

Speaker Change: It's not increasing at the pace at which, you know, we'd like to see it, and a lot of that is just our customers aren't growing as fast as, you know, as they were previously, and their recovery is

Matt: It's not increasing at the pace at which we'd like to see it. And a lot of that is just our customers aren't growing as fast as they were previously and their recovery is not as fast as we would like. So I don't know if we think it's going to be flat, it's just, I mean, we only show it on a rounded basis. And so it looks very flat, but we are seeing kind of green shoots and steady improvement in that.

Speaker Change: is not as fast as we would like. So, I don't know if we think it's going to be flat. It's just, I mean, we only show it on a rounded basis, and so it looks very flat, but we are seeing kind of green shoots and steady improvement in that. So, I think the plan and the guidance that we have doesn't require it to get any better than it is today.

Matt: So I think the plan and the guidance that we have doesn't require it to get any better than it is today. And so that that, you know, people shouldn't worry about, but we're clearly working aggressively to try to get it up above 100 and I'm optimistic that we'll see movement in it won't stay completely flat. But, you know, it's because it's it's such minor movements. We're just we're just kind of saying it's it's it's going to be stable.

Matt: And so that that, you know, people shouldn't worry about, but we're clearly working aggressively to try to get it up above 100, and I'm optimistic that we'll see movement in it; it won't stay completely flat. But, you know, it's because it's it's it's such minor movements. We're just we're just kind of saying it's it's it's going to be stable.

Speaker Change: And so that, you know, people shouldn't worry about, but we're clearly working aggressively to try to get it up above 100. And, you know, I'm optimistic that we'll see movement and it won't stay completely flat. But, you know, it's because it's...

Operator: Terrific. Thank you.

Speaker Change: It's such minor movements, we're just kind of saying it's going to be stable.

Operator: Terrific. Thank you.

Pinjalim Bora: Your next question comes from a line of pin gel and borough from JP Morgan. Your line is open. Oh, great. Thanks for taking the questions, and congrats on the results. You have really strengthened the leadership team. Obviously, the number of cars that you highlighted. As these leaders kind of settle into their seats, how should we think about some of the changes that might be trying to drive. And are these changes more focused on the next year or the second half of this year, and any expenses related to those changes that we should be thinking. about in the monos.

Speaker Change: Your next question comes from a line of Pinjalim Bora from J.P. Morgan. Your line is open.

Pinjalim Bora: Your next question comes from a line of pin gel and borough from JP Morgan. Your line is open. Oh, great.

Pinjellambora: I agree. Thanks for taking the questions and congrats on the results. Teddy, you have really strengthened the leadership team, obviously, with the number of hires that you highlighted.

Pinjalim Bora: Thanks for taking the questions and congrats on the results. You have really strengthened the leadership team. Obviously the number of cars that you highlighted. As these leaders kind of settle into their seats, how should we think about some of the changes that might be trying to drive. And are these changes more focused on the next year or the second half of this year and any expenses related to those changes that we should be thinking, about in the monos.

Speaker Change: As these leaders kind of settle into their seats, how should we think about some of the changes that they might be trying to drive? And are these changes more focused on for the next year or the second half of this year? And any expenses related to those changes that we should be thinking about in the model?

Patty: Thanks, Pinjalim, for the question. I'll answer it in the reverse order. Should we expect to see a difference expense profile? No. I think we are going to be super-discipline, and I don't think there's anything fundamentally different that we are going to be doing that will call for a foundationally different looking PNL or expense profile.

Speaker Change: Gospels.

Speaker Change: Yeah, thanks, Pinjalim, for the question.

Pinjalim Bora: Thanks, Pinjalim, for the question. I'll answer it in the reverse order. Should we expect to see a difference expense profile? No. I think we are going to be super-disciplined, and I don't think there's anything fundamentally different that we are going to be doing that will be called for a foundationally different looking P&L or expense profile. In terms of what we should expect in terms of their impact, I would say let's take the three key functions, right?

Speaker Change: I'll answer it in the reverse order. Should we expect to see a different expense profile? No, I think we are going to be super disciplined and I don't think there's anything fundamentally different that we are going to be doing that will call for

Speaker Change: a foundationally different looking P&L or expense profile.

Patty: In terms of what we should expect in terms of their impact, I would say let's take the three key functions. On products and technology, Broughton obviously brings a belt of AIML background, so as we go through the rest of the year you should hear a lot from us in terms of both core product innovation as well as our AI strategy. So my objective is, between now and the end of the year, we have to pick up even more pace. As I said, we have doubled the product velocity, but we are looking forward to pushing that even higher, and we absolutely want to make our customers super-successful on our platform and give them no reason to think about leaving us or leveraging any other infrastructure.

Brattain: In terms of what we should expect in terms of their impact, I would say, let's take the three key functions, right? On product and technology, Brattain obviously brings a wealth of AI, ML background. So as we go through the rest of the year, you should hear a lot from us in terms of both core product innovation as well as our AI strategy.

Pinjalim Bora: On products and technology, Broughton obviously brings a belt of AIML background, so as we go through the rest of the year, you should hear a lot from us in terms of both core product innovation, as well as our AI strategy. My objective is between now and end of the year, we have to pick up even more pace. As I said, we have doubled the product velocity, but we are looking forward to pushing that even higher, and we absolutely want to make our customers super-successful on our platform and give them no reason to think about leaving us or leveraging any other infrastructure.

Speaker Change: So, my objective is between now and the end of the year, we have to pick up even more pace. As I said, we have...

Speaker Change: Double the product velocity but we are looking forward to pushing that even higher and we absolutely want to make our customers

Speaker Change: Super successful on our platform and give them no reason to think about leaving us or leveraging any other infrastructure. So we want to really ramp up the pace of innovation and you will see that this year. The second thing is AI strategy. I want to make sure that we continue to refine our AI strategy in response to our customers.

Patty: So we want to really ramp up the pace of innovation, and you will see that this year. The second thing is AI strategy. I want to make sure that we continue to refine our AI strategy in response to our customers. As I've been saying for the last couple of calls, we want the AI strategy to be our strategy to serve our customers. So you're seeing a lot of different voices in the market in terms of companies that are chasing the big foundational model builders. That's not us. We want to be very disciplined to ensure that we know exactly which customers we're going after and what they need.

Pinjalim Bora: So we want to really ramp up the pace of innovation, and you will see that this year. The second thing is AI strategy. I want to make sure that we continue to refine our AI strategy in response to our customers. As I've been saying for the last couple of calls, we want the AI strategy to be our strategy to serve our customers. So you're seeing a lot of different voices in the market in terms of companies that are chasing the big foundation model builders.

Speaker Change: As I've been saying for the last couple of calls, we want the AI strategy to be our strategy to serve our customers.

Speaker Change: So you're seeing a lot of different voices in the market in terms of companies that are chasing the big foundational model builders. That's not us.

Pinjalim Bora: That's not us. We want to be very disciplined to ensure that we know exactly which customers we're going after and what they need. I strongly believe that with Broughton here now, we will come out on the right side of this AI strategy and make sure that we are doing it in a very responsible but very expedient fashion. In terms of weight, you already saw his team put together a really remarkable deploy event in just a few days after he joined.

Speaker Change: We want to be very disciplined to ensure that we know exactly which customers we're going after and what they need.

Patty: And I strongly believe that with Broughton here now, we will come out on the right side of this AI strategy and make sure that we are doing it in a very responsible but very expedient fashion. In terms of weight, you already saw his team put together a really remarkable deploy event in just a few days after he joined. We will continue to the, continue the drum rate. We are bringing in some very strong leaders to increase our presence and our voice in the developer community to drum up interest and really show them that Digital Ocean is back to simplifying their lives and have us be the real destination choice for developers to learn new complex technologies and start their AI journey from.

Britain: And I strongly believe that with Broughton here now, we will come out on the right side of this AI strategy and make sure that we are doing it in a very responsible but very expedient fashion.

Britain: In terms of Wade, you already saw his team put together a really remarkable deploy event in just a few days after he joined.

Speaker Change: We'll continue the drumbeat, we are bringing in some very strong leaders to increase our presence and our voice in the developer community to drum up interest and really show them

Pinjalim Bora: We will continue to the, continue the drum rate. We are bringing in some very strong leaders to increase our presence and our voice in the developer community to drum up interest and really show them that digital ocean is back to simplifying their lives and have us be the real destination choice for developers to learn new complex technologies and start their AI journey from. So you will start seeing that this year. Larry, on the other hand, from a CRO point of view, as I said, his mission is to complement our incredible best best-of-class product-led growth motion.

Speaker Change: That DigitalOcean is back to simplifying their lives and have us be the real destination choice for developers to learn new complex technologies and start their AI journey from.

Patty: So you will start seeing that this year. Larry, on the other hand, from a CRO point of view, as I said, his mission is to complement our incredible best best of class product-led growth motion. So on the direct sales and indirect sales, we have a lot of work to do to figure out the best ways to compliment the product-led growth on customer success and support. We have a running start; we have a great team, and we are going to double down on the success we already have. And with the product velocity that you're already seeing from us, the Customer Success team and Support team have plenty to work with in taking that message to our customers and help us drive up the NDR over the next several quarters.

Speaker Change: So you will start seeing that this year.

Larry: Larry, on the other hand, from a CRO point of view, as I said, his mission is to complement our incredible best.

Larry: Best of Class.

Larry: Product Lead Growth Motion.

Larry: So on the sales, on the direct sales and indirect sales, we have a lot of work to do to figure out the best ways to complement the product-led growth motion.

Pinjalim Bora: So on the direct sales and indirect sales, we have a lot of work to do to figure out the best ways to complement the product-led growth motion. On customer success and support, we have a running start, we have a great team and we are going to double down on the success we already have. And with the product velocity that you're already seeing from us, the customer success team and support team have plenty to work with in taking that message to our customers and help us drive up the NDR over the next several quarters. So hopefully that gave you a lot of color, pendulum.

Speaker Change: On customer success and support, we have a running start, we have a great team, and we're going to double down on the success we already have, and with the product velocity that you're already seeing from us, the customer success team and support team have plenty to work with in taking that message to our customers and help us

Patty: So hopefully that gave you a lot of color, Pendulum.

Speaker Change: drive up the NDR over the next several quarters. So hopefully that gave you a lot of color, Pinjalim.

Operator: And that concludes our question-and-answer session.

Patty: I will now turn the call back over to CEO Patty Schrinner-Boston for closing remarks. Again, thank you everyone for spending your hour with us. As I mentioned, we are super excited with the progress. We have a lot of work to do, and we are looking forward to staying engaged, and you all have a great rest of the day.

Speaker Change: And that concludes our question and answer session. I will now turn the call back over to CEO Patty Srinivasan for closing remarks.

Patty: And that concludes our question and answer session. I will now turn the call back over to CEO Patty Schrinner-Boston for closing remarks. Again, thank you everyone for spending your hour with us. As I mentioned, we are super excited with the progress. We have a lot of work to do and we are looking forward to staying engaged and you all have a great rest of the day.

Patty Srinivasan: Again, thank you everyone for spending your hour with us. As I mentioned, we are super excited with the progress. We have a lot of work to do and we are looking forward to staying engaged and you all have a great rest of the day.

Operator: This concludes today's conference call. Thank you for your participation. You may now disconnect.

Speaker Change: This concludes today's conference call. Thank you for your participation. You may now disconnect.

Operator: This concludes today's conference call. Thank you for your participation.

Operator: You may now disconnect.

Speaker Change: www.globalonenessproject.org www.globalonenessproject.org

Q2 2024 DigitalOcean Holdings Inc Earnings Call

Request a DemoDemo

DOCN

DigitalOcean

Earnings