Q3 2024 DigitalOcean Holdings Inc Earnings Call
Okay.
Speaker Change: Thank you for standing by and welcome to the digital Ocean third quarter 2024 earnings Conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you would like to ask a question. During this time simply press star followed by the number one on your telephone keypad, if you would like to win.
Draw your question again prestige star one.
Speaker Change: I'd now like to turn the call over to Melanie straight head of Investor Relations you may begin.
Melanie Straight: Thank you and good morning. Thank you all for joining us today to review digital Ocean third quarter, 'twenty 'twenty four and our financial results. Joining me on the call today are Patty Srinivasan, our Chief Executive Officer, and Matt Second part, our Chief Financial Officer.
Melanie Straight: After our prepared remarks, we will open the call up to a question and answer session. Before we begin let me remind you that certain statements made on the call today may be considered forward looking statements, which reflect managements best judgment based on currently available information I refer specifically to the discussion of our expectations and bill.
Please regarding our financial outlook for the fourth quarter and full year 2024, as well as our business goals and outlook. Our actual results may differ materially from those projected in these forward looking statements.
Melanie Straight: Direct your attention to the risk factors contained in our filings with the Securities and Exchange Commission and those referenced in todays press release that is posted on our website visualization expressly disclaims any obligation or undertaking to release publicly any updates or revisions any forward looking statements made today.
Melanie Straight: non-GAAP financial measures will be measured on the conference call and reconciliation 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 our financial discussion on today's call and webcast of today's call is also available on the IR section of our website and with that I will turn the call.
Melanie Straight: All over to Bobby.
Bobby: Thank you Melanie and good morning, everyone and thank you for joining US today as we review our third quarter 2024 results.
Bobby: Digital Ocean had a successful third quarter continuing to deliver progress on our key metrics and executing on the initiatives. We laid out earlier in the year further establishing ourselves as the simplest scalable cloud.
In my remarks today, I will briefly highlight our third quarter results share tangible examples of how our increased pace of innovation is benefiting our customers.
Bobby: The continued momentum we are seeing with our AI ml platform and give an update on our strategic partnerships and engagement with the developer ecosystem.
First I would like to briefly recap our third quarter 2024 financial results.
Bobby: Revenue growth remained steady in the third quarter at 12% year over year with solid performance in core cloud and continued growth in AI. Despite lapping difficult comps from our managed hosting price increase in April 2023, and from the paper space acquisition in July 2023.
Bobby: We continue to see momentum in demand for our AML products, where Q3, <unk> again grew close to 200% year over year.
Bobby: In addition, we saw revenue growth contributions from new customers and steady growth from our core business as we continue to enhance our customer success and go to market motions.
Bobby: Having delivered strong results through the first three quarters, we are increasing the lower end of our full year revenue guidance by $5 million and the top end by $2 million.
We continue to focus the majority of our product innovation and go to market investments on our builders since killers, who drive 88% of our total revenue and are growing 15% year over year.
Bobby: Head of our overall, 12% revenue growth.
We also delivered strong adjusted EBITDA margins at 44% and have maintained our full year free cash flow margin guidance as we continue to manage cost effectively while still investing to accelerate product innovation in cloud and AI.
Speaker Change: Matt will walk you through more details on our financial results and guidance later in this call.
Bobby: Let me start by giving you an update on our core cloud computing platform. In Q3, we continued our increased product velocity, specifically focused on the needs of our largest and fastest growing customer cohort. The 17000, plus killers that drive 58% of our total revenue and that grew.
Bobby: 19% year over year in the quarter.
Bobby: In Q3, we released 42, new product features in total which is almost double what we delivered in the previous quarter.
Bobby: We're accelerating features that will benefit our existing and potential scalar that are on other hyperscale or cloud today.
Bobby: Let me now provide a few highlights from these efforts that are specifically focused on the needs of these larger workloads.
Bobby: We announced the early availability of virtual private cloud peering or BPC peering for sure that gives customers the ability to connect to different bpc's on the digital auction platform.
Bobby: Within the data center or between different data centers.
Bobby: Through BPC peering customers can create strong data isolation and privacy, we are direct and secure networking between resources that doesn't expose traffic to the public internet.
Bobby: Our global load balancer or <unk> is now generally available for all of our customers.
Bobby: <unk> offers global traffic distribution based on geographical proximity of the end user enabling.
Bobby: Lower latency services dynamic multi regional traffic fail over enabling more service availability for our customers applications data center of prioritization.
Bobby: Caching and automatic scaling of the load balancers.
Bobby: Thrilled to be able to roll it out to all of our customers, particularly towards scalar customers with existing multinational deployments.
Bobby: Will benefit directly from this new product.
Bobby: During the third quarter, we progressed daily backups from early availability to general availability, giving our customers the additional flexibility to manage backups at a daily and weekly cadence.
Bobby: This enables increased protection for our customers workloads as with daily backups, we automatically retained the seven most recent backup copies.
Bobby: This was an explicit need.
Bobby: Given the large volume and growth of data, we're seeing on our platform with our spaces object storage footprint growing 50% year over year.
Bobby: We're also launching.
Bobby: Larger droplet configurations, including 48 V CPU memory and storage optimized droplets.
Bobby: 60, <unk> CPU GPU optimized and general purpose droplets.
Bobby: And larger seven terabytes and 10 terabytes this density variance droplets.
Bobby: This large droplet configurations are particularly relevant to our scalar customers, who can quickly scale up their workloads that require more CPU memory, our storage versus horizontal scaling out with multiple nodes.
Bobby: In September we announced Kubernetes lock forwarding, which also enables kubernetes customers centralized log management simplifying the monitoring and troubleshooting of their applications in the digital auction platform.
Bobby: This was built with simplicity in mind with just a few clicks from the kubernetes settings panel customers can easily forward cluster event logs from kubernetes directly to the digital Ocean managed open search for further analysis.
Bobby: We also enhanced application security for our cloud based managed hosting product by introducing a new malware protection solution and saw 3600 50 net activations within the first week.
Bobby: To date, we have seen near zero false positives or false negative rates from our malware detection.
Bobby: This malware protection capability is now one of the fastest growing revenue generating product modules, we have seen on our managed hosting platform.
Bobby: All of these innovations are not only helping us meet the needs of our large customers, but also helping us move customers with this larger workloads from purely usage base to committed contracts for.
Bobby: For example, an existing cyber security customer of ours, Seibel and leader in threat intelligence.
Bobby: Signed a multiyear seven figure commitment in this quarter.
Bobby: The decision to continue leveraging digital Ocean and signed a multiyear deal was driven by the release of our new large premium CPU optimized droplets that helps customers run computationally heavy workloads.
Bobby: Cyber is a petabyte scale company and after several weeks of diligence they chose digital auction for this new workload.
Bobby: Due to our scalability coverage and cost efficiency.
Bobby: Another Great example, is traject data, who signed a multiyear commitment for a broad portfolio of digital auction services, including over 500 droplets.
Bobby: Managed mongo DB spaces backups and volumes.
Bobby: Traject data requires robust scalable and reliable infrastructure to power their real time clean and bulk process data insights serving domains, including marketing retail and analytics they.
Bobby: They use the digital ocean platform to host their Apis and manage vast amounts of search engine results page and e-commerce data to deliver critical insights to their customers.
Bobby: These product innovations and enhanced customer engagement is also helping customers migrate workloads to digital ocean from the Hyperscale.
Bobby: One specific example is <unk>, a leading right sharing and logistics company based in Latin America operating in Mexico, Brazil, Peru, and Colombia, and they moved all of their workloads from various clouds to digital ocean in the third quarter.
Bobby: And migrated to deal.
Bobby: Due to the simplicity of our products transparent and simple pricing model and strong support from our customer facing teams.
Bobby: Another example is snowbird customers specializing and optimizing AD revenue for online publishers through real time bidding technology.
Bobby: Upon technical validation of the <unk> platform scale. They moved most of their large scale production applications from a hyperscale or to the <unk> platform reinforcing our opportunity to increase our.
Bobby: Our share of wallet with our scalar customers.
Bobby: Next let.
Bobby: Let me provide some updates on the AML side.
Bobby: Our AI strategy reflects our belief that the AI market will evolve in a similar fashion to other major technology transformations with initial progress in monetization at the infrastructure layer, which will eventually be eclipsed by the opportunities and value creation at the platform and application layers.
Bobby: Like others in the market today, we are actively participating in the infrastructure layer, but we're also innovating rapidly in the platform and application pillars to make it easy for our customers to use gen AI at scale without requiring deep AI ml expertise.
Bobby: This is where we see our differentiation as our customers seek to consuming through platforms and agents rather than building everything themselves using raw GPU infrastructure.
Bobby: And the infrastructure layer, we made GPU droplets accelerated buying media hedged 100 tensor core Gpus generally available to all of our customers.
Bobby: Now all digital ocean customers can leverage on demand and fractional access to Gpus, which was a critical step in achieving our overarching mission of democratizing AI for all customers.
Bobby: In Q3, we also announced the early availability of Nvidia hedged 100 tensor core GPU worker nodes on the digital lotion Kubernetes platform, our docs for short.
Bobby: Providing customers with the managed experience with GPU notes ready with Nvidia drivers.
Bobby: And we link fabric manager and immediate container toolkit.
Bobby: Customers can take advantage of the Nvidia GPU, operator, and Nvidia Melon Archs network, operator to install a comprehensive suite of tools required for production deployment.
Bobby: Both GPU droplets.
Bobby: And the hedge 100 GPU notes on docs are examples of how we are innovating even in the infrastructure layer, making it simpler for customers.
Bobby: Let me give you an example.
Bobby: <unk> exchange is a paper company that specializes in providing enterprise blockchain based solution for bank payments and Theyre leveraging digital oceans hedge 100 infrastructure to accelerate the processing of high volume financial transactions by providing advanced computational power.
They use machine learning models to detect fraud in real time.
Bobby: Assess risk.
Bobby: And ensure that payments are processed securely and quickly.
Bobby: The GPU infrastructure.
Laos them to process more transactions, while maintaining low latency and improving the overall user experience for both banks and end customers.
Bobby: Next at the platform layer in this quarter, we relaunched the early availability of our new Gen AI platform to select customers. So that we can iterate with them and ship the product and make it easy for them to build gen AI applications that deliver real business value.
Bobby: Users of this product will be able to combine their data with the power of foundational models to create personalized AI agents to integrate with their applications in just a few minutes.
Bobby: Customers can leverage our platform to create AI applications with foundational models and agent routing.
Bobby: <unk> spaces and retrieval augmented generation our rag.
Bobby: This is a key step towards a software centric AI strategy, which is aimed at enabling customers to derive business value from AI in a friction free manner.
Bobby: An example of a customer that is already leveraging our gen. II platform is autonomous cloud.
Bobby: <unk> Digitization company that offers a platform for manufacturing plants and machine manufacturers.
Bobby: Panama cloud creates and manages large volumes of documentation and data for each of their customers plans and individual machines and we're looking to create AI agents that understood their user specific contexts, and retrieved answers and machine specific data to their queries.
Bobby: With deals new Gen AI platform. They quickly built an interactive experience with their custom data and that reduces the cognitive overhead for its users.
Bobby: It is very important to note that these companies are not just doing internal proof of concepts are R&D projects, but are now starting to leverage our AI ml products to build AI into their own products to deliver real business value to their customers without requiring deep expertise in AI.
Bobby: Machine learning data science or data engineering.
Finally, let me talk about the third pillar of our AI strategy the application of our agent declare.
Bobby: As I just talked about our customers are using our journey II platform to create their own AI driven agents.
Bobby: In addition to that we're also innovating on this front by further simplifying cloud computing using AI and automating workflows that were previously done by humans.
Bobby: One of the frequent pain points for our customers is debugging their cloud applications when something goes wrong because.
Bobby: One it is a very complex set of technical tasks and number two they typically don't have specialized site reliability engineers, our srs available and their staff to perform these complex tasks.
So we set out to mitigate this pain point for our customers using gen. AI by building a new AI agent to perform some of these tasks that are typically done by human Srs.
We are using this AI as a reagent both internally on our systems and externally by integrating it with our cloud based products, let me explain.
Bobby: Internally, we are using the AI SRA agent to help our human Srs troubleshoot ongoing technical incidents in the deal cloud platform.
Bobby: Based on our internal initial internal data the AISI reagent is reducing the time it takes to identify root causes by almost 35% by leveraging AI to quickly process and the enormous amount of log data from disparate systems to pinpoint root causes.
Bobby: And make next step decisions, including recommendations to fixes or underlying problems.
Bobby: Externally, we integrated this AI SRA agent into our cloud based product, which hosts hundreds of thousands of mission critical web sites.
Today when issues happened on customer service and applications. They have to work with support engineers to debug. The root cause and then apply effects. This is true not just for the digital ocean platform, but across all managed hosting platforms.
Bobby: This can be a time consuming job during which their business and even web sites can be effected if not offline.
Bobby: Our new AISI reagent jumps into action upon detection of any performance degradation due to common issues like aggressive bark crawlers denial of service attacks and so forth to investigate and gather insights and provide recommendations real time on how to fix these issues.
Thereby reducing the time to resolution significantly.
Bobby: Our testing results are very encouraging and we've just started working with a few customers and early availability mode.
Rounding out our AI strategy, we opened up a new front door by launching a strategic partnership with hugging phase in Q3.
Hugging face is the leading open source and open science platform that helps users build deploy and train machine learning models.
As a result of this partnership this solution now offers model inferencing through one click deployable models on GPU droplets, allowing users to quickly and easily deploy the most popular third party models with the simplicity of GPU droplets.
Bobby: And optimal performance accelerated by Nvidia hedged 100 tensor core Gpus.
Bobby: This offering simplifies the deployment complexity of the most popular open source AI ml models as digital Ocean is natively integrated and optimize these models for GPU droplets, enabling fast deployment and superior performance.
Bobby: The hugging faced partnership will make it easier for the more than $1 2 million hugging trees users to discover and use the digital auction platform.
Bobby: In Q3, we also announced a new partnership with <unk> and leading web development platform to enable customers seamlessly connect their net net if I applications to digital oceans managed Mongo DB.
Bobby: Offering developers all the right tools to build and scale their applications without the complexities of managing infrastructure.
These announcements in addition to the various other partnerships we already have in flight.
Bobby: Highlight our efforts to augment our durable product led growth motion with additional channels, including new front doors through partnerships with leading players in our ecosystem that will also help shape and improve our product offerings.
I'm also excited to highlight the material progress, we are making with our renewed engagement with the developer community in.
Bobby: In October we hosted the 11th edition of October Fest.
Bobby: Which has now evolved.
Bobby: From being an internal hackathon event at digital Ocean to one of the largest and Premier open source community events.
This year over 65000 developers from 172 countries participated in more than 115 community run events and contributed to 15000 open source projects.
Beyond October Fest, we also hosted.
Bobby: More than 10 digital Ocean, meetups, where developers in AML community and participated in a number of industry conferences. This broad based community engagement effort reinforces digital oceans ongoing community to our developer ecosystem.
In closing.
Im encouraged by the progress on product innovation and customer engagement, particularly.
Bobby: Particularly as it is helping our builder and scalar customers continued to grow on our platform as their businesses expand.
We're also making great strides towards our software centric AI vision by rapidly shipping products in each of the three layers infrastructure platform and applications.
We're starting to see the green shoots from these investments in the form of customer Vince <unk>.
Bobby: Including cloud migrations from the Hyperscale multiyear commitment contracts and real world deployment of AI using the deal AI platform.
We will continue to focus on our largest and fastest growing customer cohorts as we seek to accelerate growth in the quarters to come.
Bobby: Before I turn the call over to Matt I am very excited to share that we will be hosting an investor day in New York City.
Bobby: And we are currently targeting late March or early calendar Q2 2025.
Bobby: In which we will share more on our long term strategy.
Bobby: Including more detail on our progress in metrics as well as a view of our long term financial outlook.
Bobby: I will now hand, the call over to Matt Stanford, Our CFO, who will now provide some additional details on our financial results and our outlook for Q4 2024. Thank you.
Matt Stanford: Thanks Patty.
Matt Stanford: Good morning, everyone and thanks for joining us today.
Matt Stanford: How do you just covered we had a very successful Q3, both executing on key initiatives and delivering solid financial performance.
In Q3, we continued to see increased momentum from our AI ml platform and steady growth across our core business, while consistently delivering attractive adjusted EBITDA and adjusted free cash flow margins.
Revenue in the third quarter was $198 5 million up 12% year over year.
Matt Stanford: The annual run rate revenue for <unk> in the third quarter was $798 3 million also up 12% year over year.
Matt Stanford: We added 17 million of IRR in the quarter.
Most notably builders and scalar which are our largest customers together grew 15% year over year.
Contributing to our overall growth was healthy incremental revenue from new customers and increased momentum from our AI ml platform, which saw significant growth again growing close to 200% year over year on an IRR basis.
Matt Stanford: Overall growth was partially muted by our managed hosting platform as we are lapping difficult comps related to the April 2023 managed hosting price increase and a temporary surge of managed hosting revenue in Asia in late 2023.
Matt Stanford: Our Q3 net dollar retention rate was steady at 97%.
Matt Stanford: As with prior quarters, we continued to see consistent but below historical net expansion levels, while our churn levels have remained low for well over a year.
Matt Stanford: We will continue efforts to improve growth and NTR, including executing on our product roadmap and working to layer on additional go to market motions to complement our durable product led growth engine.
Matt Stanford: Turning to the P&L gross margin for the quarter was 60%, which was a 100 basis points lower than the prior quarter and consistent with the prior year.
Matt Stanford: We are able to maintain healthy gross margins, while continuing our investment in AI infrastructure to limit the success of our ongoing cost optimization efforts.
Matt Stanford: Adjusted EBITDA was $87 million, an increase of 14% year over year.
Adjusted EBITDA margin was 44% in the quarter, approximately 200 basis points higher than the prior quarter.
Matt Stanford: This increase quarter over quarter was primarily driven again by our ongoing operating cost discipline.
Matt Stanford: Diluted net income per share was 33.
Matt Stanford: 65% increase year over year and non-GAAP diluted net income per share was 52 sets, an 18% increase year over year.
This increase is directly a result of our ability to increase our per share profitability levels.
To drive operating leverage while mitigating dilution through share buybacks.
Matt Stanford: Finally, Q3, adjusted free cash flow was $26 million or 13% of revenue.
This is lower than the prior quarter by approximately 600 basis points due to the timing of capital expense payments as we continue to make investments capitalize on the AI opportunity to fuel future growth.
Matt Stanford: As a reminder, quarterly free cash flow margin will vary given the timing of capital spend and other working capital impacts.
The lower free cash flow in Q3 does not change our expected full year free cash flow margin.
Matt Stanford: Turning to our customer metrics, the number of builders and scalar that our platform those who spend more than $50 per month was approximately 163000, representing an increase of 6% year over year. The revenue growth associated with builders and scalar was 15% year over year ahead of our overall revenue grew.
Matt Stanford: <unk> rate of 12%.
Matt Stanford: The number of builders and scaling on our platform, which together represent 88% of our total revenue increased by 2260 quarter over quarter.
Matt Stanford: The continued growth of our largest spending cohorts is a direct result of our focused product development much of which was driven by direct customer feedback and the customer success and go to market investments that are concentrated on these builders and scalar.
Matt Stanford: Our overall revenue mix continued to shift more towards our higher spend and higher growth customers and we saw total <unk> increased 11% year over year to $102 51.
Matt Stanford: Our balance sheet remains very strong as we ended the quarter with $440 million of cash and cash equivalents.
Matt Stanford: We also continued to execute against our share repurchase program with $11 million of repurchases in the quarter, bringing total share repurchases to $29 9 million during the first three quarters of the year.
Matt Stanford: With our healthy cash position and ongoing free cash flow generation, we are well positioned to continue to balance investments in our organic growth with share repurchases, while moving towards our two five to three times net leverage target and maintaining appropriate flexibility to address our 2026 convert at the appropriate time.
Matt Stanford: Moving onto guidance.
Based on our performance year to date, we are increasing the bottom end of our full year 2020 for revenue guidance by $5 million and the top end by $2 million.
Matt Stanford: <unk> revenue to be in the range of $775 million to $777 million.
Matt Stanford: $3 $5 million increase in the midpoint of our guidance range, which would represent year over year growth of approximately 12%.
Matt Stanford: This full year guide implies Q4 revenue to be in the range of $199 million to $201 million representing.
Matt Stanford: Approximately 11% year over year growth at the midpoint of our guidance range.
While we're not yet going to provide 2025 revenue guidance, we expect to enter 2025 with baseline growth in the low to mid teens.
Matt Stanford: As demonstrated throughout 2024, we remain committed to driving continued operating leverage in our core digital auction platform <unk>.
Matt Stanford: Given our solid performance throughout the first three quarters of the year, we are raising our adjusted EBITDA margin guidance for the full year to be in the range of 40% to 41%.
Matt Stanford: This full year adjusted EBITDA guidance implies Q4, adjusted EBITDA margins to be in the range of 34% to 38%.
Matt Stanford: For the full year, we expect non-GAAP diluted earnings per share to be $1 70 to $1 75.
Matt Stanford: This implies Q4 non-GAAP diluted earnings per share to be 27 to 32 based on approximately $103 million to $104 million and weighted average fully diluted shares outstanding.
Matt Stanford: Turning to adjusted free cash flow, we expect adjusted free cash flow margins for the full year to be in the range of 15% to 17%.
Matt Stanford: With what we guided in the prior quarter.
Matt Stanford: Free cash flow margin will continue to vary quarter to quarter, we anticipate remaining at a similar 15% to 17% range on a rolling average quarterly basis in 2025, as we continue to accelerate the pace of product innovation to make disciplined investments to expand our emerging AI capabilities.
Matt Stanford: That concludes our prepared remarks, and we'll now open up the call for Q&A.
Thank you we will now begin the question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad to raise your hand and joined the queue. If you would like to withdraw your question simply press Star one again.
Speaker Change: Your first question comes from the line of Raimo <unk> from Barclays. Your line is open.
Raimo: Perfect. Thank you.
There was a lot of product innovation.
Raimo: As discussed.
Raimo: Can you talk a little bit about how we have to think about this new.
Raimo: Innovations around product and how that feeds into the installed base in terms of like what's the uptake there what's the timing Dara and.
The financial number unmatched Madison as well look at it.
Raimo: Alright, Thank you, 7% placebo, but it seems to get a little bit of a disconnect could you maybe talk to kind of timing et cetera, and I had one follow up for Matt.
Speaker Change: Thank you Raimo for the question.
Speaker Change: Yes, we are.
Raimo: We're seeing a lot of product innovation across the board both in the core cloud Thats why I spend so much time, explaining all the things they are pumping out, especially the <unk> that are on sailors and allowing them or enabling them to one larger workloads on digital ocean.
Raimo: As you know from a timing and sequence point of view there is no.
Raimo: Magical answer that we can provide which.
Raimo: <unk>, our product innovation to adoption and hence.
Raimo: Impact on our financial performance, but we see.
Raimo: We have to do this.
Raimo: To enable our customers more.
Raimo: Many of their larger workloads that they're currently running in other clouds.
And <unk>.
Raimo: Make it super compelling for them to ramp those workloads on the <unk> platform and.
Raimo: As they did.
A few minutes ago, we will get into a habit of explaining some very concrete examples of customers that are starting to do that so the examples I gave.
We are now starting to sign customers into multi year contracts, but commitments on our platform. We are also starting to see a steady dose of migrations coming from other cloud, especially the hyperscale or so.
Raimo: We are playing.
We have to ensure that we have patients in terms of building. These capabilities. We are starting to see the green shoots in terms of customer adoption and translation of that into.
Leading indicators and I have no question, if we keep doing it for a handful of quarters, we are going to start seeing the translation into other lagging indicators, including some of the ones that you just mentioned raimo.
Speaker Change: Yes, okay.
That's correct.
Speaker Change: So in terms of the MTR I think Matt alluded to this fact that we have what we are seeing.
Speaker Change: From a core the MBR of our core business is trending.
A little bit ahead of what we were.
Speaker Change: We are reporting on a blended basis. So it gives us enough reasons to believe that what we're doing is.
Speaker Change: Starting to be appreciated by our customers and as you know this this takes time for the adoption to happen I have to keep reminding ourselves that we have 638.
Raimo: Plus customers. So it takes time for.
Raimo: For the the propagation to happen across the board with our customer base.
Speaker Change: Okay perfect. Thank you and then one for you if you look on the EBITDAR.
Speaker Change: One we're kind of at the moment outperforming quite a bit could you talk a little bit about that how do you achieve that like how sustainable are the atypical question Darren.
Speaker Change: Okay. If you think about like more services coming on stream, you probably want to support them more and then obviously.
Speaker Change: He is coming as well thank you.
Raimo: Thanks Raimo.
I'd say from a cost standpoint, Q3 was definitely a good a good quarter from an EBITDA margin perspective.
Raimo: As we brought on our new executives that we have.
Raimo: Talked about so implicit in our guidance for the full year, we were making sure that we had enough room to.
To enable them to two two.
Raimo: To really improve the pace of innovation and layer on additional go to market motion, but at the same time, we were evaluating okay. What costs do we have now that just arent, earning a return on and can we clean those out before.
The team gets going with the new expenses. So we I think did a really good job of optimizing for that and we also made some decisions to.
Raimo: Make sure that we were appropriately pacing the increases to see if we're getting a return on investment as we did it. So I'd say it was just disciplined cost management in Q3 and as you saw from the guide in Q4, we are expecting to ramp our expenses heading into next year I don't think it's going to be a meaningful.
Raimo: Kind of a change in the overall expense level, we feel we feel pretty good about the kind of the trailing.
Raimo: The trailing margin profile that we have and being able to continue that into next year.
Speaker Change: Okay perfect. Thank you.
Speaker Change: Our next question comes from the line of Mike <unk> from Needham Your line is open.
Speaker Change: Hey, Thanks for taking the question guys and I think the first would go to Matt just coming off of Ramos question, there, but if I look at the EBITDA guide that we have today.
Speaker Change: The 34% to 38% margin guide in Q4 is the widest range that I think we've had in recent memory and just wanted to get a little bit more granular there as far as.
Speaker Change: I guess what needs to go wrong or right or what you guys are waiting for that gets you to 34% margin versus the 38% margin in the December quarter.
Speaker Change: Yes, it's a good question, Mike I think a part of it is as we've been ramping the particular on the R&D spend.
Speaker Change: We're evaluating kind of surge resources using contractors for the accelerated a handful of things on the product roadmap and the timing of that which again I view that as a.
Speaker Change: A relatively lumpy potential investment in the timing of being able to get that spun up and.
Speaker Change: And fully staffed and moving whether that hits in Q1 or where it hits in Q4, I think that's really what's causing.
Speaker Change: The range again, I think on a on a go forward basis, we don't anticipate.
Speaker Change: Material change in the overall kind of R&D as a percent of revenue, but we are advancing expense. So in any one quarter. It may be a little bit lumpier, but again over a longer period of time, but we don't know because we grow into that and some of that in some surge resource.
Speaker Change: Terrific and just another follow up I know that you guys aren't providing.
<unk> guidance for calendar 'twenty five here.
Speaker Change: I do appreciate the qualitative commentary just wanted to see.
Speaker Change: What gives you the confidence to kind of put that bogey out there for the baseline growth and then how should we be thinking about.
Speaker Change: What it takes for digital auction to be entering the year with that kind of baseline growth that you would comment to that.
Speaker Change: Yes, I think it's very similar to what we described at the beginning of this year. What can you comment on what you can count on the growth from the <unk> funnel and we're a little bit better doing a little bit better than that on that year to date, and we had outlined at the beginning of the year.
Speaker Change: We've got the managed hosting business, which is.
Speaker Change: Kind of returning to growth after lapping some some difficult comps we've got AI ml that we had said would contribute.
Speaker Change: Around three points of growth, it's a little bit ahead of that through the year and then MBR, while it's frustrating that we've had the print.
Speaker Change: A bunch of 97th in a row.
Speaker Change: He said the core deal and the art is actually ahead of that actually got a little bit of a headwind for managed hosting that's going to be in place for the next call.
Call it through the first quarter of <unk>.
Speaker Change: Next year and so if you take all those together we've moved up a couple of points from the baseline growth that we had described.
Speaker Change: Coming into the year and none of it is.
Speaker Change: On the back of <unk>.
Speaker Change: Macro improvements, it's all just steady kind of improvement.
Speaker Change: Continuing to deploy products that our customers need and so as we look at that trajectory, we feel comfortable kind of.
Speaker Change: At the pace of growth that we're at right now and hopefully continuing to improve MTR.
Speaker Change: Every month going into next year and beyond to essentially get it could be above 100. So I'd say, we're just making sure that folks understand that we can feel pretty comfortable with the baseline growth.
Speaker Change: That will deliver.
Speaker Change: Great answer thank you very much guys.
Speaker Change: Your next question comes from the line of James Fish from Piper Sandler Your line is open.
James Fish: Hey, guys.
James Fish: Patti for you you guys have seen adoption are.
James Fish: Are you seeing adoption of the GPU droplet with more of the builders and scalar is or more net new customers and how should we think about the mix between on demand versus multiyear contracts and what you guys are seeing around supply availability with Gpus.
Speaker Change: Yeah great.
Speaker Change: Thank you Jim for the question. So in terms of the adoption, we are seeing adoption across the board.
Speaker Change: Lot of new customers, which we absolutely love that are kicking the tires and also as I explained on the call building real world applications on our GPO infrastructure.
Speaker Change: Droplets are sellers more.
Speaker Change: More hardened biomarker type of.
Raimo: Services.
Raimo: I would say from between on demand versus contract BC.
Raimo: We see more contracts when the customer is declining.
Raimo: Workloads, whether it's training or in frankly, and sometimes these contracts are fairly short term, but some are longer term and on demand is typically for experimentation which is what we.
Raimo: We had.
Raimo: We would've guessed when we started this journey, but that's where things are and and from an on demand point of view.
Raimo: Also seen a.
Speaker Change: Very nice.
Speaker Change: Take an interest in our journey II platform. So companies that don't have the deep bench in terms of.
Raimo: AML skill set.
Raimo: Have a very easy time, just using our gen II platform standing something up very quickly.
Raimo: Many thanks, and just a matter of few minutes just to see.
Raimo: If they can.
Raimo: Prove to themselves that there is value in integrating <unk> into their platform.
Raimo: So that's what we are seeing broadly from adoption point of view.
Raimo: And promote and alloy chain standpoint.
Raimo: On the supply chain.
Raimo: We don't see the same kind of headwinds that we had seen coming into the year we've got.
Raimo: Orders out for the next generations of the technology and the reach to one hundreds coming keeping an eye.
Raimo: Well as to the timing of that.
And it's certainly not.
Raimo: So tight that you can get it.
Raimo: In a week or two from ordering but it's I'd say the supply chain is opening up that we've been able to get the equipment to the timeframe that we need it and again with our build out of the Atlanta data center coming on.
At the beginning of next year.
Raimo: In good shape from a logistics and scheduling standpoint.
Raimo: Okay.
Speaker Change: Got it and then Matthew.
Speaker Change: Circling back on the 97% net expansion rate.
Speaker Change: The AI side of things turned organic this quarter by my math, it's probably adding about one to two points to Enron.
Raimo: Looks like net new <unk> for AI was up around $10 million. So what's going on with the core business. Specifically you are starting to mention around cloud ways. Obviously, the price increase lapping, but why is that business kind of.
Raimo: Weaker than what you guys are anticipating.
Raimo: And how should we think about the mix of cloud hosting digital ocean versus other cloud platforms.
Speaker Change: That's a great question and good clarification AI products or not.
Speaker Change: So, let's make sure that everybody understands that the revenue from the AI products are not in.
Raimo: Net dollar retention.
It's clear in the definitions that we have a lot of the AI revenue. If you think about it is project based so someone's training something somebody coming in and experimenting.
It's not yet at the point, where people are coming in and running large scale in prints.
Raimo: Workloads, where you could say oh, well that's it.
Raimo: The revenue that you get from that inference workloads should be bigger next year than it was this year because there are spending a lot more customers. If someone comes in and train the model for a month or two and then turns it often does goes and focuses on and protect the revenue is going to be there's going to be lumpy and so at this point.
Raimo: We could reevaluate this going forward, but at this point AI is not reflected in MBR. So contributes nothing to the improvement.
Raimo: What we haven't seen a steady improvement in the quarter.
Raimo: Core cloud business, which we've said is is tracking above the reported MBR cloud ways, which has historically been literally until we lap the price increase it was always a positive contribution to MBR.
Raimo: It's been a headwind to MBR essentially on April and will continue to be probably until next April because of.
Raimo: The guarantees of a lagging metric like MBR, but we expect.
Raimo: <unk>.
Cloud ways that managed hosting business and the core <unk> business, we expect to be able to get those back about 100, and we're certainly working aggressively to accomplish that and we can't tell you exactly when that's going to happen, but we're very encouraged by the green shoots that we're seeing in both businesses on that.
Raimo: Improvement in India.
Speaker Change: Very helpful. Thanks, Matt.
Raimo: Okay.
Speaker Change: Your next question comes from the line of Gabriela Borges from Goldman Sachs. Your line is open.
Gabriela Borges: Hey, good morning, Thanks for taking the question Matt.
Gabriela Borges: Conifer comments for 2025 and more specifically on how we should think about the seasonality of that business given some of the netting pizza safe hot spots.
Gabriela Borges: And any kind of seasonality and a medicine that is fine.
Gabriela Borges: This quarter was about 1% versus 2% last quarter.
Gabriela Borges: Any nuances, we should be aware off there in terms of why the size of the gate with modest quarter. Thank you.
Raimo: Yeah.
Speaker Change: I don't think there is there is any seasonality.
Raimo: And the business that.
Raimo: Would would.
Would reflect that I think that again, we've been we've been very focused on the full year and providing guidance appropriately.
Because of that and that causes Camden bigger when you again.
Raimo: And the quarterly kind of beats rates will be.
More focused I think from a from an annual standpoint.
Raimo: But I think that.
Raimo: We look at the.
Raimo: The business going into next year again going back to my earlier comments, we're very encouraged by the steady growth that we're seeing an improving growth in <unk> versus what we thought would be.
Self serve funnel and feel comfortable about that.
Raimo: Managed hosting business is coming back from against some difficult comps the AI business and slightly ahead of us.
Where we had expected and kind of the last.
Raimo: Turning to move for us, which would give us the confidence to.
Raimo: Yeah.
Raimo: <unk>.
<unk> increased our outlook on the revenue that endear just needs to come up with expense steadily steadily but stubbornly moving up.
Raimo: So I don't think theres anything seasonal that would suggest we get.
Raimo: We would be more or less on an individual quarter.
Speaker Change: Got it Okay and then the follow up.
Speaker Change: So Kim.
Kim: But the change that we're seeing.
Speaker Change: And the GT as a service market, maybe you could walk us through why don't wanted two of the areas, where you feel like you've learned so much over the last three months as it relates tiara II starts with strategy and particularly around our service offerings.
Raimo: Offering how do you think you can differentiate differentiate versus something like a freight Jamaica, alright, bedrock and the long term. Thank you.
Speaker Change: Thank you Anna Great question. So in terms of what we have learned over the last 90 days.
Speaker Change: We have learned a lot as you can see.
Raimo: <unk>.
So shift a lot so.
Raimo: In preparation of that I think we are quite.
Raimo: Quite a bit on all three layers of our platform.
Raimo: I would say for me personally the biggest learning has seen that our customers which are typically.
Raimo: Companies that don't have it.
Raimo: A tremendous bench of deep machine learning data science is a data engineering getting set.
Raimo: They look at the.
Raimo: AI.
AI platform.
Raimo: Almost.
Raimo: In an inverted fashion, what I mean by that is everyone. US included the market everyone looks at it from our infrastructure first and then.
Raimo: That farm and then timely applications, our customers actually look at it.
Top down they look at okay, what applications can.
Can I our agents can I.
Leverage today from Gen AI that mix might have more productive or my customers save money or.
Raimo: Delaware some innovation that was not possible so far so it's almost a realization that beneath us.
More rapidly on the platform.
Raimo: Application layer is why we accelerated some of our.
Raimo: Jen AI platform capabilities, and we already have seen a customer.
Push that into production, which is amazing and the.
Speaker Change: Part two of your question is what makes our Gen II platform standout advantage.
Raimo: Yes.
Like I say, Jamaica, our bedrock.
Raimo: We have very deep expertise in both states maker in bedrock packaged solution today and the biggest differences.
Raimo: Some of our some of the technology as you mentioned are phenomenal.
Raimo: <unk> brought a very powerful.
Speaker Change: You have.
Raimo: A broad set of space available to take all of that and build something fantastic for a very complex landscape.
Raimo: For our customers and us.
Raimo: Customer that I talked about during the prepared remarks, specifically test.
Raimo: <unk>.
Raimo: A variety of different Gen AI platforms and picked us primarily because of how easy it was for them to get started too.
Raimo: To inject their own custom data to build Iraq pipeline too.
Raimo: We ate a knowledge base.
And finally created chatbot bear they could project exactly how much input cost that.
Raimo: And develop a business model that would be friendly to to their customers. So all of these things individually are.
Raimo: Fairly complex, but when you add these different steps to build a <unk> application. It just balloons and its complexity and we have tried to measure everything it takes to simplify the journey for our customers and I think that's how we establish ourselves as a credible.
Raimo: Cloud provider.
Raimo: And Thats, what we are doing to establish ourselves and differentiate ourselves and <unk> and also we should also not forget that there is a lot of differentiation here. They are pushing even in the agent declare as I explained we just came out with our first agent they are working with customers.
Raimo: And earlier availability more so we will learn and innovate on faster.
Raimo: But the combination of the platform and application that gives us the ability to.
Raimo: To make things that are super scalable, but at the same time in order of magnitude simpler to use compared to other ultimate platforms that are available.
Speaker Change: Thank you for the T cell.
Speaker Change: Our next question comes from the line of Jeff <unk> from UBS. Your line is open.
Raimo: Okay.
Speaker Change: Hey, everyone. Thanks for taking the questions first one I wanted to ask is that it's very helpful. Just detailing that AI is not included in the MTR metric but.
Raimo: Maybe with some of the existing AI customers that you've had for a few quarters that may be do have some workloads already in production do you have any sense of like how they are expanding their spend over time, maybe even just on a quarterly basis, where do you typically see those customers kind of launch a workload and that have that spend that's sort of it.
Raimo: Stable level from there.
Speaker Change: We've seen good traction with a.
Speaker Change: A number of our early customers that have come in and experimented on the platform and they may have started with.
Speaker Change: Kind of a small cluster and.
Speaker Change: I would say they tested they've expanded their use of.
Speaker Change: The platform so the <unk>.
<unk> is when we land customers do we see them grow or do we see a big rotation of customers in and out we actually see.
Speaker Change: Fairly healthy.
Speaker Change: Expansion from the customers when they come in but again back to my earlier comment.
Speaker Change: Okay, I'm training, our model I need a court date.
Speaker Change: Nodes and now I'm going to do something more but it's not the.
Speaker Change: The same dynamic because they are still evaluating theres still kind of going through.
Speaker Change: The testing phases, but we've seen very good traction growing customers. The initial customers that we've had on that.
Speaker Change: Okay.
Speaker Change: And Matt one thing I will add to that is.
Speaker Change: It's interesting to note that our AI customers are also very similar to our core cloud customers in defense.
Speaker Change: Most of them if not all of them are.
Speaker Change: <unk> or independent software vendors or digital native application providers.
Speaker Change: So they are taking they are building solutions on our AI platforms, whether it is infrastructure our journey II to.
Speaker Change: To create software solutions for their customers so as they grow and expand they will they are expanding their footprint to match point on our platform. So thats a very.
Speaker Change: Interesting thing for us to notice.
Speaker Change: This is a customer that is coming to build a solution just for their internal use.
Speaker Change: Yeah.
Speaker Change: Got it that's really helpful. And then one just quick follow up on you mentioned earlier about just supply and that's gotten better relative to the beginning of the year more AI investments I'm just curious with the October one launch.
Speaker Change: <unk> hundred instances, probably available are you supply constrained at all right now as we're kind of in the fourth quarter or are you able to meet all the demand you currently have as well.
Speaker Change: Yeah.
Speaker Change: We've ordered enough.
Speaker Change: About this in the last earnings call that because we have the ability to.
Speaker Change: Two two.
Speaker Change: See the demand and plan out the.
Speaker Change: The capacity that we've been able to get enough capacity too.
Speaker Change: To meet the demand as we've gone which is a very good sign because we don't have those supply constraints. So we're again, because we're not spending hundreds of millions of dollars on GPU, we can get the quantities that we need.
Speaker Change: Requirements.
And when you have something like a.
Speaker Change: The GPU droplet, which is more on demand and with less committed contract.
Speaker Change: To see kind of what the utilization is and and then.
Speaker Change: Plan your purchases based on that capacity utilization and we've been able to manage that effectively so it hasnt been a drag or a concern to us.
Speaker Change: Got it very helpful. Thank you.
Melanie Straight: Your next question comes from the line of Josh Baer from Morgan Stanley. Your line is open.
Josh Baer: Great. Thanks for the question one for Pat I guess, just thinking about the 42, new product features more than prior period.
Speaker Change: And I think calling out some of them.
Features that Hyperscale customers are generally looking for moving contracts to committed contracts.
Speaker Change: Even migrating workloads from hyper Scaler T O. It looks like in the past the story was more about digital ocean simplicity of the platform it better support lower pricing.
Speaker Change: And maybe a little bit less about sort of getting into the competitive dynamic with Hyperscale was just wondering is the right takeaway that there is a little bit of a shift in focus either up market or a little bit of expansion outside the simplest startups in F&B is just to be a little bit more competitive and.
Speaker Change: The market is there a strategy shift there.
Speaker Change: Yes, Thank you Josh great questions as always.
Speaker Change: The shifts.
Speaker Change: It's essentially following our customer fleet honesty so.
Speaker Change: As I made a point during the prepared statements to make sure that we are not.
Speaker Change: Abandoning or taking our eye off the importance of digital ocean in the developer community. We continue to nurture that in fact, we are doing a lot more with the developer ecosystem. This year compared to the recent past, but at the same time we.
Speaker Change: We do recognize that we have.
Speaker Change: 17000, skaters who on average spend more than $25000 with us that's a big and Thats, 48% of our revenue and if you ask scalar thats almost 88% of our revenue which are growing much faster than our blended average growth rate. So we have a unique opportunity to follow their lead.
Speaker Change: Make sure that we are.
Speaker Change: Delivering capabilities that will enable them to run.
Speaker Change: Our expand their footprint on digital Ocean.
Speaker Change: We are increasingly in a multi cloud world even for smaller customers like the ones we target.
Speaker Change: And there is.
Speaker Change: An opportunity for us to keep expanding our share of wallet with these companies and the example that I shared are just the starting point for what we believe our fair share.
Speaker Change: Slice of.
Speaker Change: Of this enormous market and a fifth keep doing what we're doing now which is <unk>.
Speaker Change: <unk>.
Speaker Change: Compelling feature sets that enable our scalar customers to expand their footprint.
Speaker Change: I think there is.
Speaker Change: A lot of value to be created for our customers on our platform.
Speaker Change: Very clear if I could follow up with one for Matt.
Speaker Change: Just on the.
Speaker Change: Like some of the factors called out the managed hosting tough comp pricing increases the Asia influx of revenue given some of the M&A like how that could be impacting some of the like the net dollar retention rate or the year over year growth if I may.
Speaker Change: Just looking at quarter over quarter net new IRR at a $32 million last quarter and 17 this quarter anything to call out as far as that difference just on a quarter over quarter basis.
Speaker Change: Yes, that's a good point Josh.
Speaker Change: The big difference.
Speaker Change: The availability.
Speaker Change: We brought on a ton of capacity in Q2, which we had pent up demand for so we got a bump.
Speaker Change: Material bump.
Speaker Change: And.
Speaker Change: There are last quarter. If you look at we were around 17 or 18 in the quarter before and then we jumped to 37.
Speaker Change: 17.
Speaker Change: I'd say last quarter was more the anomaly than this quarter clearly, we're looking to add more incremental IRR going forward.
Speaker Change: Most of that change was the result of a surgeon capacity last quarter.
Speaker Change: Got it thank you.
Speaker Change: Okay.
Speaker Change: Our next question comes from the line of pendulum Bora from Jpmorgan. Your line is open.
Speaker Change: Oh great.
Speaker Change: Thanks, guys.
Just one question from me the baseline growth.
Speaker Change: Outlook that you can assure entering drained 25 seats.
Speaker Change: It seems pretty positive.
Speaker Change: It calls for an acceleration from the exit growth rate.
Speaker Change: This year, so wanted to understand that a little bit more.
Speaker Change: Are you seeing some signals that prospects accelerate next year around the core business based on some of the customer conversations what does that assume a 100% MBR.
Speaker Change: Yes.
Speaker Change: One.
Speaker Change: And how should we think about it yes sure.
Speaker Change: Yeah.
Speaker Change: I didn't hear the last part of that question.
Speaker Change: The first part, but let me let me answer and then you can maybe come back with a great question.
Speaker Change: We're seeing a lot of green shoots.
Speaker Change: Around the kind of like as you said the all the product traction that we're getting in some of our larger customers, even being willing to commit to longer term or the long term contracts and commitment contracts, which isn't something that the company has done.
Speaker Change: Extensively in the past.
Speaker Change: But then core MBR is.
Speaker Change: It is improving steadily and we're not assuming that it gets to 100.
Speaker Change: By Q1, but that's not an implicit in it.
Speaker Change: And the kind of.
Speaker Change: Comments that we made regarding next year I mean, we're going to work aggressively to get it to be 100, but we can deliver the growth rates that we've talked about because we're effectively delivering that now picked up at 12% growth with an NDA thats only 97.
Speaker Change: And we expect both the managed hosting MBR and core core.
Speaker Change: Core cloud and Dr to improve as we head into next year, and we'll continue to get growth.
Speaker Change: Positive growth contributions from our <unk>.
Speaker Change: Capabilities.
Speaker Change: That said earlier this year that we thought we'd get 3% of overall growth from AI ml and a little bit ahead of that.
Speaker Change: This year. So that's also positive and encouraging as we think about what the baseline growth is.
Speaker Change: Heading into the next year.
Speaker Change: Understood one quick follow up the multiyear commitments is definitely interesting are you leaning in on any way to drive those commitments is that largely coming from customers are you putting in processes to kind of enable those discussions. Thank you so much.
Speaker Change: Yeah, I can take that.
Speaker Change: We are at this point and were just letting letting it happen organically.
Speaker Change: So we don't have any.
Speaker Change: Pronounced established go to market motion, we are not pushing it on our customers. We're just letting it organically happen. The most important thing for us is to la Luz the pattern launch what kind of technologies they need to build on the migration.
Speaker Change: <unk> itself and things like that and going into next year.
Speaker Change: We of course, we'll look into.
Speaker Change: Packaging is a little bit prototyping, it and also expand our third party ecosystem that can help.
Speaker Change: Orchestrate some of these things so there's a lot of work to be done.
Speaker Change: To scale it but right now we are focused on nailing it.
Speaker Change: And in understanding exactly what it takes to be successful.
Speaker Change: Thank you.
Speaker Change: Yeah.
Speaker Change: And that is all the time, we have for questions. This concludes today's conference call. Thank you for your participation you may now disconnect.
Speaker Change: Okay.
Speaker Change:
Speaker Change: Yeah.
Speaker Change:
Speaker Change: