Q4 2024 DigitalOcean Holdings Inc Earnings Call

February 25, 2025

<unk> fourth 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 that time simply press star followed by the number one on your telephone keypad and if you'd like to withdraw that question.

Speaker Change: Again press Star one. Thank you I would now like to turn the conference over to Melanie straight head of Investor Relations. Melanie you may begin.

Melanie Straight: Thank you and good morning. Thank you all for joining us today to review digital Ocean <unk> fourth quarter and full year 2024 financial results. Joining me on the call today are Patti for any Boston, Our Chief Executive Officer, and Matt Steinberg, Our Chief Financial Officer before we begin let me remind you that certain statements.

Melanie Straight: On the call today may be considered forward looking statements, which reflect managements best judgment based on currently available information our actual results may differ materially from those projected in these forward looking statements, including our financial outlook I direct your attention to the risk factors contained in our filings with the SEC, including our most recent annual.

Melanie Straight: Report on Form 10-K filed today as well as those referenced in todays press release that is posted on our website digital ocean expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any forward looking statements made today.

Melanie Straight: Additionally, non-GAAP financial measures will be discussed on this conference call and reconciliations to the most directly comparable GAAP financial measures can be found in today's earnings press release as well as in our investor presentation that outlines the financial discussion on today's call.

Melanie Straight: Webcast of todays call is also available in the IR section of our website and with that I will turn the call over to Patti.

Patti: Thank you Melanie and good morning, everyone and thank you for joining US today as we review our fourth quarter and full year 2024 results.

Patti: We concluded the year with strong momentum and continued to successfully execute on the initiatives we laid out at the beginning of the year.

Patti: Our accomplishments included building out our executive and senior leadership team significantly improving the pace of product innovation augmenting our product led sales motion with new strategic go to market enhancements.

Patti: And continuing to accelerate the early success of our AML platform, all of which together have positioned us with momentum heading into 2025.

Thank you Melanie and good morning, everyone and thank you for joining US today as we review our fourth quarter and full year 2024 results. We concluded the year with strong momentum and continued to successfully execute on the initiatives we laid out at the beginning of the year.

Patti: In my comments today, I will briefly recap our fourth quarter and full year results reiterate our strategy and priorities.

Patti: Several product innovation and customer use cases across both core.

Patti: Core cloud.

Our accomplishments included building out our executive and senior leadership teams significantly improving the pace of product innovation augmenting our product led sales motion with new strategic go to market enhancements.

And AI ml that demonstrate the progress we're making against our priorities.

Patti: First I will briefly summarize our fourth quarter and full year 2024 financial results revenue.

Patti: Revenue growth accelerated in the fourth quarter to 13% year over year to $205 million with one of our biggest growth levers net dollar retention improving to 99% from 96% in Q4 of the prior year.

Continuing to accelerate the early success of our AML platform, all of which together have positioned us with momentum heading into 2025.

In my comments today, I will briefly recap our fourth quarter and full year results reiterate our strategy and priorities share several product innovation and customer use cases across both.

Patti: Our efforts to improve growth and MBR in 2024 are evident in our Q4 results as MTR with our traditional cloud services reached 100% in Q4 for the first time since June of 2023 on the back of our rapid product roadmap execution and our investments in several strategic go to market.

Our cloud and AI ml that demonstrate the progress we're making against our priorities.

First I will briefly summarize our fourth quarter and full year 2024 financial results.

Patti: Motions.

Revenue growth accelerated in the fourth quarter to 13% year over year to $205 million with one of our biggest growth levers net dollar retention improving to 99% from 96% in Q4 of the prior year.

Patti: From these efforts we saw increased expansion from our higher spend customers as we continue to focus both of our product.

Patti: Go to market effort on these top customers.

Patti: Our highest spend customers, which has traditionally included our builder and scalar cohort now represent 88% of total revenue and grew 16% year over year in Q4.

Our efforts to improve growth in endear in 2024 are evident in our Q4 results as endear with our traditional cloud services reached 100% in Q4 for the first time since June of 2023 on the back of our rapid product roadmap execution and our investments in several strategic go to Mark.

Patti: We have now further disaggregated, our scalar disclosing our highest spend customer cohort.

Patti: <unk>, plus which are customers, who were at 100, K plus annual run rate during the quarter.

Motions.

From these efforts we saw increased expansion from our higher spend customers as we continue to focus both our product.

Patti: The scale of plus customers, who are critical to our growth trajectory, increasing count by 17% year over year and were 22% of the total company revenue in Q4.

Go to market effort on these top customers.

Our highest spend customers, which has traditionally included our builder and scalar cohort now represent 88% of total revenue and grew 16% year over year in Q4.

Patti: We reached over 500 of these customers for the first time in the company's history and more importantly, we saw a 37% year over year increase in revenue from Zscaler plus customers.

We have now further disaggregated, our scalar and are disclosing our highest spend customer cohort scale.

Patti: It is clear evidence of both the wallet share opportunity, we have with these customers and our demonstrated ability to scale with them.

Scalar <unk>, plus which are customers, who were at 100, K plus annual run rate during the quarter.

Patti: We also made material progress on our other major growth lever, our AML platform and closed the year with continued momentum exceeding the three points of overall growth contribution from our AML platform that we had guided for 2024 with Q4, just north of 160% IRR growth, while staying true to our AI <unk>.

The scalar plus customers, who are critical to our growth trajectory, increasing count by 17% year over year and were 22% of the total company revenue in Q4.

We reached over 500 of these customers for the first time in the Companys history and more importantly, we saw a 37% year over year increase in revenue from scalar <unk> plus customers.

Patti: <unk> and pursuing durable AI revenue.

Patti: We are very encouraged with the rapid growth.

Which is clear evidence of both the wallet share opportunity, we have with these customers and our demonstrated ability to scale with them.

Patti: And customer adoption of our newly launched AI products and I'll talk about them later in my comments.

Patti: On top of the increase in growth signals profitability remained strong as we delivered healthy 42% adjusted EBITDA margin, both Q4 and for the full year, maintaining our cost discipline, while we continue to invest to fuel future growth.

We also made material progress on our other major growth lever, our AI ml platform and closed the year with continued momentum exceeding the three points of overall growth contribution from our AML platform that we had guided for 2024 with Q4, just north of 160% IRR growth, while staying true to our AI strategy.

Patti: Looking forward, our 2025 guidance reflects this ongoing momentum with full year revenue growth at low to mid teens and high teens free cash flow margins above our preliminary 15% to 17% indication.

And pursuing durable AI revenue.

We are very encouraged with the rapid growth.

And customer adoption of our newly launched AI products and I'll talk about them later in my comments.

Patti: We continue to prioritize and rebalance our investments driving improved operational efficiencies, while shifting resources towards our top growth initiatives.

On top of the increase in growth signals profitability remained strong as we delivered healthy 42% adjusted EBITDA margin, both Q4 and for the full year, maintaining our cost discipline, while we continue to invest to fuel future growth.

Patti: Our upcoming Atlanta data Center is a good example of both these priorities.

Patti: The upfront investment in that facility, which will come online in Q1, not only provides us with incremental capacity for both AI and our core cloud offerings, but also gives us a lower cost facility and as part of a longer term data center optimization strategy.

Looking forward, our 2025 guidance reflects this ongoing momentum with full year revenue growth at low to mid teens and high teens free cash flow margins above our preliminary 15% to 17% indication.

Patti: Mark will walk you through more detail on our financial results and guidance later in the call.

Speaker Change: My first tier added solution, we had several very clear priorities as we start to accelerate growth.

We continue to prioritize and rebalance our investments driving improved operational efficiencies, while shifting resources towards our top growth initiatives.

Speaker Change: We needed to double down on product innovation to address key gaps in our core cloud platform.

Our upcoming Atlanta data Center is a good example of both these priorities.

Speaker Change: Better address the needs of our larger customers.

The upfront investment in that facility, which will come online in Q1, not only provides us with incremental capacity for both AI and our core cloud offerings, but also gives us a lower cost facility and as part of our longer term data center optimization strategy.

Speaker Change: Net dollar retention to a tailwind rather than a headwind and build the foundation for our longer term growth strategy.

Speaker Change: Made material progress on each of these objectives and continued to deliver on our promise of making complex cloud and AI technologies simple.

Mark will walk you through more detail on our financial results and guidance later in the call.

Speaker Change: We also made substantial progress on making our platform, even more scalable enhancing our ability to meet the needs of larger customers.

Speaker Change: In my first year added solution, we had several very clear priorities as we start to accelerate growth we.

Speaker Change: And finally, we doubled down on our heritage of being the most approachable public cloud provider by continuing to invest in support of open source AI models, and even hosting our developer conference deploy in January.

Speaker Change: We needed to double down on product innovation to address key gaps in our core cloud platform.

To address the needs of our larger customers return net dollar retention to a tailwind rather than a headwind.

Speaker Change: And build the foundation for our longer term growth strategy.

Speaker Change: Let me now give you some updates on the core cloud computing platform.

Speaker Change: Made material progress on each of these objectives and continue to deliver on our promise of making complex cloud and AI technologies simple.

Speaker Change: In Q4, we continued to accelerate the pace of innovation as we released 49, new products and features throughout the quarter.

Speaker Change: We also made substantial progress on making our platform, even more scalable enhancing our ability to meet the needs of larger customers.

Speaker Change: Which is more than four times, what we released in Q4 of the previous year.

Most of these products and feature enhancements directly address the needs of our largest spend customers as we continue to remove blockers and implement the capabilities that they need to further scale on our platform I.

Speaker Change: And finally, we double down on our heritage of being the most approachable public cloud provider by continuing to invest in support of open source AI models, and even hosting our developer conference deploy in January.

Speaker Change: I will highlight several of these product releases that we have made to help our customers grow their businesses using digital ocean.

Speaker Change: Let me now give you some updates on the core cloud computing platform.

Given that our larger customers run significant global workloads, they need the ability to securely connect different parts of their network, so that their systems and applications and separate environment and various data centers and different countries can securely communicate without using the public internet to improve speed and efficiency, while keeping their data.

Speaker Change: In Q4, we continued to accelerate the pace of innovation as we released 49, new products and features throughout the quarter.

Speaker Change: It is more than four times, what we released in Q4 of the previous year.

Speaker Change: Most of these products and feature enhancements directly address the needs of our largest spend customers as we continue to remove blockers and implement the capabilities that they need to further scale on our platform I.

Speaker Change: To secure to address this need in Q4, we announced virtual private cloud peering or BPC peering for short, which is now generally available for all our customers.

Speaker Change: I will highlight several of these product releases that we have made to help our customers grow their businesses using digital ocean.

Speaker Change: BPC peering enables customers to connect their separate private cloud and establish seamless communication between resources hosted in these clouds using private IP addresses keeping their information safe by traversing through the dissolution backbone rather than through the public internet.

Speaker Change: Given that our larger customers run significant global workloads, they need the ability to securely connect different parts of the network, so that their systems and applications and separate environment and various data centers and different countries can securely communicate without using the public internet to improve speed and efficiency, while keeping their data.

Speaker Change: Our larger customers also need the ability to distribute traffic across resources.

Speaker Change: While still keeping it within a secure private network to support this we introduced a new feature called internal load balancer, which enhances security by ensuring that internal workloads remain isolated from public internet, making it ideal for applications that require highly scalable private communications.

Speaker Change: Secure to address this need in Q4, we announced virtual private cloud peering or BPC peering for short, which is now generally available for all our customers.

Speaker Change: BPC peering enables customers to connect their separate private cloud and establish seamless communication between resources hosted in these clouds using private IP addresses keeping their information saved by traversing through the dissolution backbone rather than through the public internet.

Speaker Change: We also have several large customers.

Speaker Change: With volatile traffic patterns that need mechanisms to handle this massive spikes in volume very smoothly, while still optimizing cost and scaling them down when the demand is slower to address this we announced the general availability of droplet auto scale pools to ensure that the right resources are available to handle.

Speaker Change: Our larger customers also need the ability to distribute traffic across resources.

Speaker Change: <unk> workloads during these surges in traffic scale.

Speaker Change: Scaling up automatically to meet demand, while also helping minimize costs by scaling them back down with the traffic surge of solar.

Speaker Change: We also introduced flexible management capabilities to our App platform, which is our platform as a service offering for more granular lifecycle management, including archive and restore functionality and maintenance mode. During the applications full lifecycle.

Speaker Change: We also have several large customers.

Speaker Change: With volatile traffic patterns that need mechanisms to handle these massive spikes in volume very smoothly, while still optimizing cost and scaling them down when the demand is slower to address this we announced the general availability of droplet auto scale pools to ensure that the right resources are available to handle.

Speaker Change: Next customers of spaces, which is our fast growing <unk> III compatible object storage service have long asked for the ability to grant granular permission to different users or teams without exposing full account one account wide credentials.

Speaker Change: <unk> workloads during these surges in traffic scale.

Speaker Change: Scaling up automatically to meet demand, while also helping minimize costs by scaling them back down with the traffic surges over.

Speaker Change: The sponsor.

Speaker Change: Launched first bucket access keys for spaces.

Speaker Change: We also introduced flexible management capabilities to our App platform, which is our platform as a service offering for more granular lifecycle management, including archiving restore functionality and maintenance mode. During the applications full lifecycle.

Speaker Change: This highly sought after feature provides customers with identity based bucket level control over access permissions, helping enhance their data security and ultimately simplifying management overhead.

Speaker Change: Complementing this accelerated pace of product delivery of sophisticated capabilities was one of our new go to market motion, where we bolstered our engagement with our top 500 customers.

Speaker Change: Next customers of spaces, which is our fast growing <unk> III compatible object storage service have long asked for the ability to grant granular permissions to different users or teams without exposing full account one account wide credentials.

By helping take these new innovations to our customers and tightly orchestrating a close loop between the various digital ocean teams and our top customers. This motion increased awareness and adoption of our new product capabilities facilitating migration of cloud workloads from other cloud studio.

Speaker Change: In response, we.

Speaker Change: Launched first bucket access keys for spaces.

Speaker Change: This highly sought after feature provides customers with identity based bucket level control over access permissions.

Speaker Change: Serving as a catalyst for both our improved MBR and faster growth rate of scalar plus customers.

Speaker Change: <unk> enhanced data security and ultimately simplifying management overhead.

Speaker Change: Complementing this accelerated pace of product delivery of sophisticated capabilities was one of our new go to market motions, where we bolstered our engagement with our top 500 customers.

Speaker Change: Our highest spend customers have quickly started adopting many of these features that I just talked about that we've released over the back half of 2020 for over 50% of our top 100 customers have adopted at least one of the features that we released in Q3, and we anticipate similar adoption levels for our Q4 features over time.

Speaker Change: By helping take these new innovations to our customers and tightly orchestrating a close loop between the various digital ocean teams and our top customers. This motion increased awareness and adoption of our new product capabilities facilitating migration of cloud workloads from other cloud studio and serving as a catalyst for both our <unk>.

Speaker Change: Together the breadth of these new features and the pace at which we are executing our product roadmap is enabling our highest spend customers to grow on digital ocean and is enabling us to win more of their workloads that today reside on other hyperscale or cloud.

Speaker Change: Improved NTR and faster growth rate of scalar plus customers.

Speaker Change: Our highest spend customers have quickly started adopting many of these features that I just talked about that.

Speaker Change: As we discussed last quarter, we've been focused on helping our customers seamlessly migrate more workloads to us and scale efficiently on deal. One example of this is a customer call digital platform a strategic software solutions development company that was experiencing high costs and latency issues with the cloud.

Speaker Change: That we released over the back half of 2024.

We're 50% of our top 100 customers have adopted at least one of the features that we released in Q3, and we anticipate similar adoption levels for our Q4 features over time.

Speaker Change: Leveraging.

Speaker Change: Which was impacting their application performance.

Speaker Change: Through our customer facing team, we were able to fully migrate workloads to digital ocean, leveraging our optimized database infrastructure to improve their performance, while providing them with substantial cost savings.

Speaker Change: Another example is Hulu.

Speaker Change: As we discussed last quarter, we've been focused on helping our customers seamlessly migrate more workloads to us and scale efficiently on deal. One example of this is a customer called digital platform a strategic software solutions development company that was experiencing high cost and latency issues with the cloud theyre leveraging.

Speaker Change: And provider of enhanced documentation with features and tools made for assisting managed service providers and it departments.

Speaker Change: <unk> has been a <unk> customer since 2019, and they continue to scale and grow on our platform.

Speaker Change: <unk> was an early adopter of our kubernetes manage databases snapshooter and premium support products.

Speaker Change: Which was impacting their application performance.

Speaker Change: Through our customer facing team, we were able to fully migrate their workloads to digital ocean, leveraging our optimized database infrastructure to improve their performance, while providing them with substantial cost savings.

Speaker Change: As a result of the ease of use of our platform <unk> been able to focus on their own scalability and have grown as a business over 870% since 2021.

Speaker Change: Another example of our customers' ability to scale with this solution its moments of fitness and wellness platform that manages bookings communications and memberships.

Another example is Hulu and.

Speaker Change: A provider of enhanced documentation with features and tools made for assisting managed service providers and it departments.

Speaker Change: Moments needed a larger instance to house their database to meet the requirements of their rapidly growing customer base and continue leveraging our platform.

Speaker Change: <unk> has been a <unk> customer since 2019, and they continue to scale and grow on our platform.

Speaker Change: The dissolution team was able to provide architectural guidance by crafting a solution with existing products, while delivering a new product. They requested a 48 week CPU storage optimized droplets with scalable storage.

Speaker Change: <unk> was an early adopter of our kubernetes manage databases snapshooter and premium support products.

Speaker Change: As a result of the ease of use of our platform <unk> been able to focus on their own scalability and have grown as a business over 870% since 2021.

Speaker Change: Let me now switch gears and give you a quick update on our AI initiatives.

Speaker Change: Another example of our customers' ability to scale with dissolution its moments of fitness and wellness platform that manages bookings communications and memberships.

Speaker Change: We remain committed to and are executing well against our AI strategy that we articulated last year.

That context, I'm very encouraged by the emerging innovations in this space like deep sea the drive down the cost of AI adoption and improve the quality of open source model.

Moments needed a larger instance to house their database to meet the requirements of their rapidly growing customer base and continue leveraging our platform.

Speaker Change: The <unk> team was able to provide architectural guidance by crafting a solution with existing.

Speaker Change: That will ultimately enable more customers to use AI.

Speaker Change: We see innovation, such as deep sea and even reports of some hyperscale is potentially moderating their datacenter commitments as reinforcing our conviction that while a lot of action to date has been at the infrastructure layer.

Speaker Change: Products, while delivering a new product they requested.

Speaker Change: 48, <unk> CPU storage optimized droplets with scalable storage.

Speaker Change: Let me now switch gears and give you a quick update on our AI initiatives.

Speaker Change: That innovation and value creation will occur at the platform and application layers.

Speaker Change: We remain committed to and are executing well against our AI strategy that we articulated last year in.

Speaker Change: Where we are highly differentiated and well positioned to grow as we democratize AI for our customers.

Speaker Change: In that context, I am very encouraged by the emerging innovations in this space like deep sea the drive down the cost of AI adoption and improve the quality of open source model, which will ultimately enable more customers to use AI.

Speaker Change: Our prudent approach to AI investment also allows us to ramp investment, where we see customer demand.

Speaker Change: And as a case in point, we are increasing our allocation of our GPU capacity for our GPU droplets, where we quickly ran out of capacity after launching at the beginning of Q4.

Speaker Change: <unk> innovations such as deep sea and even reports of some hyperscale is potentially moderating their datacenter commitments as reinforcing our conviction that while a lot of action to date has been at the infrastructure layer.

Speaker Change: Each of these three layers infrastructure platform and AI applications at their purpose.

Speaker Change: That innovation and value creation will occur at the platform and application layers.

Speaker Change: And very distinct customer targets and also most of the action is still on the infrastructure layer. We are now starting to see more narrative in the market around the higher layers of the stack in platforms and Agentic applications, which is a good validation of our AI strategy that we laid out last year.

Speaker Change: Where we are highly differentiated and well positioned to grow as we democratize AI for our customers.

Speaker Change: Our prudent approach to AI investment also allows us to ramp investment, where we see customer demand.

Speaker Change: And as a case in point, we are increasing our allocation of our GPU capacity for our GPU droplets, where we quickly ran out of capacity after launching at the beginning of Q4.

Speaker Change: We've been making excellent progress enhancing our AI infrastructure offerings as well as innovating at the Gen II platform and agent application layers as we build towards our goal of democratizing AI by enabling our customers to quickly experiment and build AI into their real world applications.

Speaker Change: Each of these three layers infrastructure platform and AI applications have their purpose and very distinct customer targets and also most of the action is still in the infrastructure layer. We are now starting to see more narrative in the market around the higher layers of the stack in platforms and agent take applications, which is a.

Speaker Change: On the infrastructure side, we're seeing strong adoption of GPU droplets, which we made generally available to all our customers in October.

Speaker Change: As a remainder reminder.

Speaker Change: GPU droplets allowed this solution customers to leverage on demand and fractional access to Gpus and a self service way and just a few minutes.

Speaker Change: Good validation of our AI strategy that we laid out last year.

Speaker Change: We've been making excellent progress enhancing our AI infrastructure offerings as well as innovating at the Gen II platform and agent take application layers as we build towards our goal of democratizing AI by enabling our customers to quickly experiment and build AI into their real world applications.

Speaker Change: Vastly simplifying a very complex series of steps.

Speaker Change: Let me now give you a couple of real world Examples protein a company specializing in integrating gen. Gen generate of AI into their own applications.

Speaker Change: Leverages These solutions GPU infrastructure globally to efficiently manage their own products.

Speaker Change: On the infrastructure side, we are seeing strong adoption of GPU droplets, which we made generally available to all our customers in October.

Speaker Change: Protein accelerates generation speeds offering an easy to use API for AI powered image generation.

As a remainder reminder.

Speaker Change: GPU droplets allow this solution customers to leverage on demand and fractional access to Gpus and a self service way and just a few minutes vastly simplifying a very complex series of steps.

Speaker Change: Another example of an AI ml infrastructure company is commodity whether group a company that provides advanced weather model forecast to their clients.

Speaker Change: <unk> AI based weather models to enhance decision, making with additional insights there.

Speaker Change: Let me now give you a couple of real world examples.

Speaker Change: We also leverage Dissolutions AI infrastructure for its scalability and ease of use.

Speaker Change: <unk> a company specializing in integrating Tien tsin generate of AI into their own applications.

Speaker Change: These are just a few examples of how our customers are leveraging our infrastructure to develop and sustain data intensive software to be able to meet the needs of their own customers.

Speaker Change: Leverages Dissolutions GPU infrastructure globally to efficiently manage their own products.

Speaker Change: Prolia accelerates generation speeds offering an easy to use API for AI powered image generation.

Speaker Change: All while leveraging the simplicity of these solutions AI ml infrastructure.

Speaker Change: Moving up the stack I'm very excited about our Gen II platform, which is now in public beta.

Speaker Change: Another example of an AI ml infrastructure company is commodity whether group a company that provides advanced weather model forecast to their clients and ramp AI based weather models to enhance decision, making with additional insights.

Speaker Change: The dissolution Gen. AI platform is one of the simplest platform to create deploy and integrate AI agents into real world applications.

Speaker Change: They also leverage Dissolutions AI infrastructure for its scalability and ease of use.

Speaker Change: Stepping back for a second AI agents are software applications designed to autonomously perform multi step tap that involve reasoning and decision, making leveraging AI and ml.

Speaker Change: Our new AI platform gives customers everything they need to build AI into their own applications without the need for advanced expertise in AI or machine learning.

Speaker Change: Moving up the stack I'm very excited about our journey II platform, which is now in public data.

Customers can easily and quickly build AI agents leveraging deals infrastructure by adding their data.

Speaker Change: The dissolution Gen. AI platform is one of the simplest platforms to create deploy and integrate AI agents into real world applications.

Speaker Change: To their pre train third party G&A AI models and can seamlessly integrate those agents into their own application via secure endpoints, our chatbot plugging.

Speaker Change: Stepping back for a second AI agents are software applications designed to autonomously perform multi step task that involve reasoning and decision, making leveraging AI and ml.

Speaker Change: In the four weeks since we made the <unk> AI platform beta public we've seen well over a thousand agents created on the platform with the most encouraging fact being that roughly 90% of these agents were created by existing customers, which is further validation of our belief that our typical video customer wants to leverage AI into their <unk>.

Speaker Change: Our new <unk> AI platform gives customers everything they need to build AI into their own applications without the need for advanced expertise in AI or machine learning.

Speaker Change: Customers can easily and quickly build AI agents leveraging deals infrastructure by adding their data.

Speaker Change: Software stack and are willing to do it if you make it very very simple and integrated with the rest of our cloud platform.

Speaker Change: To their pre trained third party Gen AI models and can seamlessly integrate those agents into their own application via secure endpoints, our chatbot plug ins.

Speaker Change: In our latest version of the dissolution current customer trends report that we published earlier. This month, we found that almost 80% of our target customers are interested in leveraging AI, but over 70% of them said that cost and lack of expertise are the two major impediments to AI adoption.

Speaker Change: In the four weeks since we made the <unk> AI platform beta public we've seen well over a thousand agents created on the platform with the most encouraging fact being that roughly 90% of these agents were created by existing deal customers, which is further validation of our belief that our typical <unk> customer wants to leverage AI into their source.

Speaker Change: Our journey II platform makes it very simple by abstracting out most of this complexity associated with creating agents by having template ice agents click through results and so on and by providing easy access to a variety of open source models, including Lama deep seek and Mistral.

Speaker Change: <unk> and are willing to do it if we make it very very simple and integrated with the rest of our cloud platform.

In our latest version of the dissolution currents at customer trends support that we published earlier. This month, we found that almost 80% of our target customers are interested in leveraging AI, but over 70% of them said that cost and lack of expertise are the two major impediments to AI adoption.

Speaker Change: At the application layer, we introduced cloud based copilot and public data, which is a suite of AI solutions designed to bring intelligent managed hosting to small and medium businesses.

Speaker Change: Starting with AI powered diagnostics to give customers recommendations and alerts to fix issues before they become problems.

Our journey II platform makes it very simple by abstracting out most of this complexity associated with creating agents by having temperatures staging clickthrough wizards and so on and by providing easy access to a variety of open source models, including Lama deep seek and with strong.

Speaker Change: This helps our customers automate tasks monitor performance and provide them with insights to keep their web sites up and running smoothly.

Speaker Change: One such example is ticket.

Speaker Change: Our web design and development agency, which is already leveraging the newly announced cloud waste copilot and AI.

Speaker Change: At the application layer, we introduced cloud based co pilot in public beta, which is a suite of AI solutions designed to bring intelligent managed hosting to small and medium businesses.

Click it is finding a forex reduction and the time spent manually handling issues and taking care of web servers.

Starting with AI powered diagnostics to give customers recommendations and alerts to fix issues before they become problems.

Speaker Change: We also started using gen AI agents for our own internal digital Ocean cloud operations for a variety of operational incident. Gen. AI agents are invoked which analyzed our service logs to determine the root causes. This has resulted in a 39% improvement in our time to resolution and is one of the most.

Speaker Change: This helps our customers automate tasks monitor performance and provide them with insights to keep their web sites up and running smoothly.

Speaker Change: One such example is clicking.

Speaker Change: Our web design and development agency, which is already leveraging the newly announced cloud based copilot and AI.

Speaker Change: Sophisticated uses of <unk> agents in the industry today.

Speaker Change: We are building these agents and using them not just to improve our own operations.

Speaker Change: Click it is finding a forex reduction and the time spent manually handling issues and taking care of web servers.

Speaker Change: But also to deeply understand the pain points and complexities of building AI agents. So that we can incorporate these learnings into our journey II platform and making it even more simpler for our customers to use.

Speaker Change: Beyond our product and customer progress. Another recent highlight was the deploy conference we hosted in January in Austin, Texas.

Speaker Change: This event brought together customers partners and some did solution employees amplifying our presence in the developer in AML space and building out on our strong position as the most approachable public cloud.

Speaker Change: Sophisticated uses of <unk> agents in the industry today.

Speaker Change: We are building these agents and using them not just to improve our own operations.

Deploy we introduced a slew of new product capabilities.

Speaker Change: Launched in AI variant of our popular startup incubator program called Hatch and hosted many of our technology and channel partners.

Speaker Change: Deploy we also launched a new migrations program designed to seamlessly transition cloud workloads from the Hyperscale as to this solution.

Speaker Change: Beyond our product and customer progress. Another recent highlight was the deploy conference we hosted in January in Austin, Texas.

Speaker Change: This program will eliminate migration related complexity deliver lower operational costs and provides seamless technology assistance through our partner ecosystem and a newly formed this solution team of solution architect kill that migrating cloud workloads.

Speaker Change: This event brought together customers partners and some dissolution employees amplifying our presence in the developer in AML space and building out on our strong position as the most approachable public cloud.

Speaker Change: Deploy we introduced a slew of new product capabilities launched in AI variant of our popular startup incubator program called hatch and hosted many of our technology and channel partners.

Speaker Change: To recap as I close my prepared remarks, we entered 2025 with increasing momentum in Q4 alone we released more than four times as many products and features.

Speaker Change: And the Premier previous year increased net dollar retention to 99% grew revenue, 13% year over year and deliver 18% adjusted free cash flow margins.

Speaker Change: And deploy we also launched a new migrations program designed to seamlessly transition cloud workloads from the Hyperscale as to this solution.

Speaker Change: This program will eliminate migration related complexity delivered lower operational costs and provide seamless technology assistance through our partner ecosystem and a newly formed this solution team of solution architect kill that migrating cloud workloads.

Speaker Change: Our focused efforts on our highest spend customers and our continued traction in AI drove quarterly revenue for our top 500 plus customers.

Speaker Change: Representing 22% of our total revenue to grow at 37% year over year.

Speaker Change: To recap as I close my prepared remarks, we entered 2025 with increasing momentum in Q4 alone we released more than four times as many products and features.

Speaker Change: This shows clear progress on our strategy and builds on our leading position as the simple scalable and approachable cloud.

Speaker Change: Before I turn the call over to Matt I am very excited for our upcoming Investor day, which we will be hosting at the New York Stock Exchange on April 4th starting at nine a M eastern time.

Speaker Change: And the premier previous year increased net dollar retention to 99% grew.

Speaker Change: <unk> grew revenue, 13% year over year and deliver 18% adjusted free cash flow margins are.

Speaker Change: During this investor day, we will share more on our longer term strategy, including more details on our progress in key metrics and we'll share a view of our long term financial outlook.

Speaker Change: Our focused efforts on our higher spend customers and our continued traction in AI drove quarterly revenue for our top 500 plus customers.

Speaker Change: I will now hand, it over to Matt who will provide some additional detail on our recent financial results and our outlook for Q1 and full year 2025 over to you Matt. Thanks Patti.

Speaker Change: Representing 22% of our total revenue to grow at 37% year over year.

Speaker Change: This shows clear progress on our strategy and builds on our leading position as the simple scalable and approachable cloud.

Speaker Change: Morning, everyone and thanks for joining us today.

Matt Steinberg: As Patti discussed we delivered a solid Q4 and full year 2024 on all financial metrics and made meaningful progress on our key initiatives and goals, we set in place at the beginning of the year.

Matt Steinberg: In my comments I will review, our Q4 results in detail and cover the full year 2024 financial highlights before sharing updated first quarter and full year 2025 financial outcome.

Speaker Change: I will now hand, it over to Matt who will provide some additional detail on our recent financial results and our outlook for Q1 and full year 2025.

Matt Steinberg: Revenue in the fourth quarter was $205 million up 13% year over year.

Matt Steinberg: Annual run rate revenue for <unk> in the fourth quarter was $820 million as we added $26 million of incremental <unk> in the quarter up from $24 million in new <unk> in Q3 of <unk>.

Matt: <unk>. Thanks.

Matt: Thanks, Patty and good morning, everyone and thanks for joining us today.

Matt: As Patti discussed we delivered a solid Q4 and full year 2024 on all financial metrics and made meaningful progress on the key initiatives and goals, we set in place at the beginning of the year and.

Matt Steinberg: Note, we made a methodology change to how we report IRR.

Where are we now calculate IRR by multiplying the quarterly revenue times four rather than the final month of the quarter times 12 wells.

Matt: In my comments I will review, our Q4 results in detail and cover the full year 2024 financial highlights before sharing updated first quarter and full year 2025 financial outcome.

We decided to use aggregate quarterly revenue to calculate <unk>.

Matt Steinberg: To reduce potential volatility in this metric given the project based nature of some of the training workloads customers are running on our AI ml platform.

Revenue in the fourth quarter was $205 million up 13% year over year.

Matt: Annual run rate revenue for <unk> in the fourth quarter was $820 million as we added $26 million of incremental <unk> in the quarter up from $24 million in new <unk> in Q3 of.

Matt Steinberg: More details on this as well as a reconciliation between the old and new methodologies can be found in our Form 10-K.

Matt Steinberg: Revenue from our builders and scalar which are our highest spending customer cohorts and represent 88% of total revenue grew 16% year over year and customer count customer count increased 6% year.

Matt: Of note, we made a methodology change to how we report IRR, where we now calculate IRR by multiplying the quarterly revenue times four rather than the final month of the quarter times 12.

Matt Steinberg: This quarter. We also began to disclose further disaggregation within our scalar <unk> cohort and are now separately disclosing our largest spending customer cohort for scalar is plus or customers.

Matt: We decided to use aggregate quarterly revenue to calculate <unk> to reduce potential volatility in this metric given the project based nature of some of the training workloads customers are running on our AI ml platform.

Matt Steinberg: Monthly spend is more than 8333 per month during the quarter, which is more than 100000 on an annualized run rate basis.

Matt: Details on this as well as a reconciliation between the old and new methodologies can be found in our Form 10-K.

Matt: Revenue from our builders and scalar which are our highest spending customer cohorts and represent 88% of total revenue grew 16% year over year and customer count customer count increased 6% year.

Matt Steinberg: In Q4 revenue from scalar plus who represent 22% of overall revenue grew 37% year over year, driven by 17% year over year increase in scalar plus customer count coupled with their expanded usage of our core cloud services and continued growth of our AI related solutions.

Matt: This quarter. We also began to disclose further disaggregation within our scalar <unk> cohort and are now separately disclosing our largest spending customer cohort for <unk> plus <unk>.

Matt Steinberg: The net expansion increase we saw from our top customers drove our Q4 net dollar retention rate up to 99% up from 97% for the first three quarters of 2020 for the.

Matt: Our customers.

Matt: Monthly spend is more than 8333 per month during the quarter, which is more than 100000 on an annualized run rate.

Matt Steinberg: The increases we are seeing in our net expansion levels, coupled with churn that has remained stable for the last two years is moving us closer to reaching and exceeding 100% NTR and shifting MTR from a growth headwind to a tailwind.

Matt: Basis in.

Matt: In Q4 revenue from scalar plus to represent 22% of overall revenue grew 37% year over year, driven by a 17% year over year increase in scalar plus customer count coupled with their expanded usage of our core cloud services and continued growth of our AI related solutions.

Matt Steinberg: Within this overall improvement in VR, we saw the MTR rate of our traditional cloud services reached 100% in the first quarter for the first time since June of 2023.

Matt: The net expansion increase we saw from our top customers drove our Q4 net dollar retention rate up to 99% up from 97% for the first three quarters of 2020 for the.

Matt Steinberg: All of this progress is despite the fact that we are still lapping a few headwinds from our managed hosting products that we've spoken about previously and this progress gives us confidence in our baseline growth rate heading into 2025.

Matt: The increases we are seeing in our net expansion levels, coupled with churn that has remained stable for the last two years is moving us closer to reaching and exceeding 100% NTR and shifting MTR from a growth headwind to a tailwind.

Matt Steinberg: Turning to the P&L gross margin for the quarter was 62%, which was 300 basis points higher than the prior quarter and 500 basis points higher than the prior year.

Matt Steinberg: The increase in gross margin quarter over quarter and year over year is primarily driven by the increase in revenue as well as the change in the useful life for our servers from five to six years as we've been able to extend the utilization of our equipment.

Matt: Within this overall improvement in VR, we saw the MTR rate of our traditional cloud services reached 100% in the first quarter for the first time since June of 2023.

Matt: All of this progress is despite the fact that we are still lapping a few headwinds from our managed hosting products that we've spoken about previously and this progress gives us confidence in our baseline growth rate heading into 2025.

Matt Steinberg: More details on this change in useful life can be found in our Form 10-K.

Matt Steinberg: Adjusted EBITDA was $86 million, an increase of 17% year over year.

Matt Steinberg: Adjusted EBITDA margin was 42% in the fourth quarter, approximately 200 basis points less than the prior quarter, but 100 basis points higher than the prior year.

Matt: Turning to the P&L gross margin for the quarter was 62%, which was 300 basis points higher than the prior quarter and 500 basis points higher than the prior year.

Matt Steinberg: We feel confident in our ongoing ability to appropriately balance our growth investments with our efforts to improve operating efficiency.

Matt: The increase in gross margin quarter over quarter and year over year is primarily driven by the increase in revenue as well as the change in the useful life of our servers from five to six years as we've been able to extend the utilization of our equipment.

Matt Steinberg: As evidenced by our continued delivery of healthy adjusted EBITDA margins.

Matt Steinberg: Q4, adjusted free cash flow was $37 million or 18% of revenue.

Matt: More details on this change in useful life can be found in our Form 10-K.

Matt Steinberg: This is higher than Q3 by approximately 500 basis points due to timing of capital investment payments, which will continue to create quarters core variations and adjusted free cash flow margins.

Matt: Adjusted EBITDA was $86 million, an increase of 17% year over year.

Matt: Adjusted EBITDA margin was 42% in the fourth quarter, approximately 200 basis points less than the prior quarter, but 100 basis points higher than the prior year.

Matt Steinberg: Finally, non-GAAP diluted net income per share was <unk> 49.

Matt Steinberg: 11% increase year over year.

Matt: We feel confident in our ongoing ability to appropriately balance our growth investments with our efforts to improve operating efficiency as is evidenced by our continued delivery of healthy adjusted EBITDA margins.

Matt Steinberg: This increase is a direct result of our ability to increase our per share profitability levels by continuing to drive operating leverage while mitigating dilution through share buybacks.

Matt Steinberg: For 2024, total revenue increased 13% year over year to $781 million.

Matt: Q4, adjusted free cash flow was $37 million or 18% of revenue. This.

Matt: This is higher than Q3 by approximately 500 basis points due to timing of capital investment payments, which will continue to create quarter to quarter variations and adjusted free cash flow margins.

Matt Steinberg: This growth came primarily from continued strength in our durable customer acquisition engine, which in 2024 was augmented by new customer revenue on our AI platform and from growth in our highest spend customer cohorts.

Matt: Finally, non-GAAP diluted net income per share was <unk> 49.

Matt Steinberg: Given our 98% MTR in 2020 for the vast majority of our revenue growth in 2024 came from customer acquisition, and new customers, including those who consumed our newly launched AI services, which delivered north of 160% <unk> growth in Q4.

Matt: 11% increase year over year.

Matt: This increase is a direct result of our ability to increase our per share profitability levels by continuing to drive operating leverage while mitigating dilution through share buybacks.

Matt: For 2024, total revenue increased 13% year over year to $781 million.

Matt Steinberg: Despite the <unk> headwind in 2024, our scalar and scalar plus customer cohorts collectively contributed approximately $445 million and 57% of total revenue in 2024 and grew revenue 18% year over year.

Matt: This growth came primarily from continued strength in our durable customer acquisition engine, which in 2024 was augmented by new customer revenue on our AI platform and from growth in our highest spend customer cohorts.

Matt Steinberg: Turning to the P&L, our gross margin for the year was 60%, which was 3300 basis points higher than the prior year, which I noted earlier in my comments is primarily driven by revenue growth that is faster than our growth in Cogs as we delivered further operating leverage.

Matt: Given our 98% MTR in 2020 for the vast majority of our revenue growth in 2024 came from customer acquisition and new customers, including those that consumed our newly launched AI services, which delivered north of 160% <unk> growth in Q4.

Matt Steinberg: On the profitability front, we delivered healthy adjusted EBITDA margins in 2024 at 42% up 200 basis points from 2023.

Matt: Despite the <unk> headwind in 2024, our scalar and scalar plus customer cohorts collectively contributed approximately $445 million and 57% of total revenue in 2024 and grew revenue 18% year over year.

Matt Steinberg: We generated 17% adjusted free cash flow margin in 2024 down as we had planned going into the year 500 basis points from 2023 margins as we ramped our investment in a compelling growth opportunity.

Matt: Turning to the P&L, our gross margin for the year was 60%, which was 3300 basis points higher than the prior year, which I noted earlier in my comments is primarily driven by revenue growth that is faster than our growth in Cogs as we delivered further operating leverage.

Matt Steinberg: On our customer metrics as I mentioned previously this quarter. We are now disclosing further disaggregation of our scalar customer cohort into scalar and <unk> plus as these higher spend customers are the focus of our investments and their performance is key to our growth strategy.

Matt: On the profitability front, we delivered healthy adjusted EBITDA margins in 2024 at 42% up 200 basis points from 2023.

Matt Steinberg: In Q4, the number of scalar surplus grew 17% year over year and the revenue growth from scalar plus grew 37% year over year.

Matt: We generated 17% adjusted free cash flow margin in 2024 down as we had planned going into the year 500 basis points from 2023 margins as we ramped our investment in a compelling growth opportunity.

Matt Steinberg: We're also seeing an increase in average spend within scalar plus where average revenue per user or ARPA grew 18% year over year.

Matt Steinberg: The traction we're seeing with our highest spending customers as a result of our continued efforts across product development Tom.

Matt: On our customer metrics as I mentioned previously this quarter. We are now disclosing further disaggregation of our scalar customer cohort into scalar <unk> and <unk> plus as these higher spend customers are the focus of our investments and the performance is key to our growth strategy.

Matt Steinberg: <unk> targeted customer success and account management motions and new go to market investments that are all focused on these customers and this is an encouraging sign of our ability to drive future growth.

Matt: In Q4, the number of scalar surplus grew 17% year over year and the revenue growth from scalar plus grew 37% year over year.

Matt Steinberg: Our balance sheet remains very strong as we ended the quarter with $428 million of cash and cash equivalents.

Matt Steinberg: We continued to execute against our share repurchase program in the quarter with $28 million of repurchases in Q4, bringing total share repurchases to $57 million in fiscal year, 2024, and bringing our cumulative share repurchases since IPO to $1 5 billion and $32 6 million shares through December 31.

Matt: We're also seeing an increase in average spend within scales, plus where average revenue per user or ARPA grew 18% year over year.

Matt: The traction we're seeing with our highest spending customers as a result of our continued efforts across product development Tom.

Matt: Targeted customer success and account management motions and new go to market investments that are all focused on these customers and this is an encouraging sign of our ability to drive future growth.

Matt Steinberg: 2024.

Matt Steinberg: With our healthy cash position and ongoing free cash flow generation, we are well positioned to continue investments in both organic growth and share repurchases, while maintaining appropriate flexibility to address our 2026 convertible notes at the appropriate time, which is likely before it goes current at the end of this year.

Matt: Our balance sheet remains very strong as we ended the quarter with $428 million of cash and cash equivalents.

Matt: We continued to execute against our share repurchase program in the quarter with $28 million of repurchases in Q4, bringing total share repurchases to $57 million in fiscal year, 2024, and bringing our cumulative share repurchases since IPO to $1 5 billion and $32 6 million shares through December 31.

Matt Steinberg: Moving onto guidance I will now share our financial outlook for the first quarter of 2025 and for the full year.

Matt Steinberg: For the first quarter of 2025, we expect revenue to be in the range of $207 million to $209 million, representing approximately 13% year over year growth at the midpoint of our guidance range.

Matt: 2024.

Matt: With our healthy cash position and ongoing free cash flow generation, we are well positioned to continue investment in both organic growth and share repurchases, while maintaining appropriate flexibility to address our 2026 convertible notes at the appropriate time, which is likely before it goes current at the end of this year.

Matt Steinberg: For the full year 2025, we expect revenue to be in the range of $870 million to $890 million also representing approximately 13% at the midpoint of our range.

Matt Steinberg: As was the case with our 2020 for guidance for 2025 guidance is underpinned by our baseline growth Foundation as we entered the new year.

Matt: Moving onto guidance I will now share our financial outlook for the first quarter of 2025 and for the full year.

Matt Steinberg: Our primary 2025 growth levers are bolstering customer acquisition and continuing to drive customer expansion.

Matt: For the first quarter of 2025, we expect revenue to be in the range of $207 million to $209 million, representing approximately 13% year over year growth at the midpoint of our guidance range.

Matt Steinberg: Customer acquisition includes revenue from any new customer, including new AI ml customers, who are within their first 12 months on our platform we.

Matt: For the full year 2025, we expect revenue to be in the range of $870 million to $890 million.

Matt Steinberg: We anticipate customer acquisition and revenue from new customers to again contribute the majority of our growth in 2025, but by continuing to improve MTR in 2025 and by expanding usage by our existing AI customers that will soon have been on our platform for more than a year, we expect customer expansion to improve and to have a new.

Matt: <unk>, representing approximately 13% at the midpoint of our range.

Matt: As was the case with our 2024 guidance. Our 2025 guidance is underpinned by our baseline growth Foundation as we entered the new year.

Matt: Our primary 2025 growth levers are bolstering customer acquisition and continuing to drive customer expansion.

<unk> to slightly positive impact in 2025, where it was a headwind in 2024.

Matt Steinberg: For the first quarter of 2025, we expect our adjusted EBITDA margins to be in the range of 38% to 40%.

Matt: Customer acquisition includes revenue from any new customer, including new AI ml customers, who are within their first 12 months on our platform.

Matt Steinberg: For the full year, we expect adjusted EBITDA margins to be in the range of 37% to 40%.

Matt: We anticipate customer acquisition and revenue from new customers to again contribute the majority of our growth in 2025, but by continuing to improve MTR in 2025 and by expanding usage by our existing AI customers that will soon have been on our platform for more than a year, we expect customer expansion to improve and to have a <unk>.

Matt Steinberg: For the first quarter of 2025, we expect non-GAAP diluted earnings per share to be 41% to 46.

Matt Steinberg: Based on approximately $103 million to $104 million and weighted average fully diluted shares outstanding.

Matt Steinberg: For the full year 2025, we expect non-GAAP diluted earnings per share to be $1 85 to $1 95 based on approximately $104 million to $105 million and weighted average fully diluted shares outstanding.

Matt: <unk> to slightly positive impact in 2025, where it was a headwind in 2024.

Matt: For the first quarter of 2025, we expect our adjusted EBITA margins to be in the range of 38% to 40%.

Matt Steinberg: On adjusted free cash flow, we expect adjusted free cash flow margins for the full year to be in the range of 16% to 18% slightly ahead of the preliminary indication for 2025 that we provided last quarter.

Matt: For the full year, we expect adjusted EBITDA margins to be in the range of 37% to 40%.

Matt: For the first quarter of 2025, we expect non-GAAP diluted earnings per share to be 41% to <unk> 46.

Matt Steinberg: Consistent with our historical guidance practice, we are not providing adjusted free cash flow guidance on a quarter by quarter basis, given its heavily influenced by working capital timing.

Matt: Based on approximately $103 million to $104 million and weighted average fully diluted shares outstanding.

Matt: For the full year 2025, we expect non-GAAP diluted earnings per share to be $1 85 to $1 95 based on approximately $104 million to $105 million and weighted average fully diluted shares outstanding.

Matt Steinberg: However, we would like to highlight that our 2025 expenditures will be front end loaded which is driven by additional AI related capital expense as we scale. Those services, one time startup costs to get our Atlanta data Center online and the usual Q1 cash expense events, including bonus payments and higher payroll taxes.

Matt: On adjusted free cash flow, we expect adjusted free cash flow margins for the full year to be in the range of 16% to 18% slightly ahead of the preliminary indication for 2025 that we provided last quarter.

Matt Steinberg: Given this front end loaded investment and expense Q1, adjusted free cash flow margin will decline from Q4 levels, but we will quickly return to higher adjusted cash flow margins in Q2 and across the balance of the year and we remain very confident in our ability to deliver the 16% to 18% full year adjusted free cash flow margin.

Consistent with our historical guidance practice, we are not providing adjusted free cash flow guidance on a quarter by quarter basis, given its heavily influenced by working capital timing. However, we would like to highlight that our 2025 expenditures will be front end loaded which is driven by additional AI related capital expense as we scale those services.

Matt Steinberg: In our guidance.

Matt Steinberg: That concludes our prepared remarks, and we will now open the call to Q&A.

One time startup costs to get our Atlanta data center online and the usual Q1 cash expense events, including bonus payments and higher payroll taxes.

Speaker Change: Thank you we will now begin the question and answer session. If you would like to ask a question. Please press star one on your telephone keypad to raise your hand and join the queue and if you'd like to withdraw that question again press Star. One. We also ask that you limit yourself to one question for any additional questions. Please re queue.

Matt: Given this front end loaded investment and expense Q1, adjusted free cash flow margin will decline from Q4 levels, but we will quickly return to higher adjusted cash flow margins in Q2 and across the balance of the year and we remain very confident in our ability to deliver the 16% to 18% full year adjusted free cash flow margin in our <unk>.

Speaker Change: And your first question comes from Josh Baer with Morgan Stanley. Please go ahead.

Speaker Change: Great. Thanks for the question.

Matt: Hi.

Speaker Change: At your recent deploy conference you talked about several customers.

Matt: That concludes our prepared remarks, and we will now open the call to Q&A.

Speaker Change: We're disappointed with their experience at the Hyperscale orders and ended up migrating to digital platforms. I was hoping you could expand on that and touch on what types of customers you are targeting what types of workloads.

Matt: Thank you we will now begin the question and answer session. If you would like to ask a question. Please press star one on your telephone keypad to raise your hand and join the queue and if you'd like to withdraw that question again press Star. One. We also ask that you limit yourself to one question for any additional questions. Please re queue.

Speaker Change: And then I have a follow up.

Speaker Change: Yeah. Thank you Josh for the question so yes.

Speaker Change: What we highlighted during the conference was a handful of customers that are <unk>.

Speaker Change: And your first question comes from Josh Baer with Morgan Stanley. Please go ahead.

Speaker Change: Looking at alternatives.

Matt: Great. Thanks for the question.

Speaker Change: Primarily for two reasons one is.

Speaker Change: At your recent deploy.

The simplicity of running.

Speaker Change: You talked about that real customers.

Speaker Change: A fairly sophisticated workload on our hyperscale or it's not an easy undertaking and a specialist for many of the nuances like storage and networking and compute and so forth and also the total cost of ownership, especially if you have spiked key workloads.

Speaker Change: We are disappointed with their experience at the Hyperscale orders and ended up migrating to digital platforms. I was hoping you could expand on that and touch on what types of customers you are targeting what types of workloads.

Speaker Change: I have a follow up.

Speaker Change: Loads.

Speaker Change: Yeah. Thank you Josh for the question.

Speaker Change: And you're unwilling or unable to commit to.

Speaker Change: What we highlighted during the conference was a handful of customers that are looking.

Speaker Change: Really long term contracts.

Speaker Change: It is substantial.

Speaker Change: Amount of minimum commitment then it becomes a really onerous thing to keep running your workloads on some of these hyperscale cloud so.

Speaker Change: Looking at alternatives.

Speaker Change: Primarily for two reasons one is.

Speaker Change: The simplicity of running.

Speaker Change: What we are offering as part of the migration program that I was just talking about is a couple of things one is the ability to.

Speaker Change: To get our partner ecosystem involved to facilitate a smooth transition of the workloads.

Speaker Change: But more importantly provide.

Speaker Change: Super compelling scalable platform, which is far easier for most of the mainstream.

Speaker Change: Are unwilling or unable to commit to.

Speaker Change: Really long term contracts.

Speaker Change: It is substantial.

Speaker Change: Workloads to run and operate on the <unk> platform. So we're seeing all kinds of customers Josh.

Speaker Change: Amount of minimum commitment then it becomes a really onerous thing to keep running your workloads on some of these hyperscale cloud so.

Speaker Change: And we are staying true to our.

Speaker Change: Target customer segments, which is tech.

Speaker Change: What we are offering as part of the migration program that I was just talking about is a couple of things one is the ability to.

Speaker Change: <unk> native digital native.

Speaker Change: Howard application software companies.

That are running globally.

Speaker Change: Globally distributed workloads that are typically network and bandwidth intensive some of them require.

To get our partner ecosystem involved to facilitate a smooth transition of the workloads.

Speaker Change: But more importantly provide.

Speaker Change: Bursty.

Speaker Change: Super compelling scalable platform, which is far easier for most of the mainstream.

Speaker Change: Spikes and their traffic patterns, so that needs to be supported in a very elastic manner.

Speaker Change: And what attracts them to us is our.

Speaker Change: Workloads to run and operate on the <unk> platform. So we're seeing all kinds of customers Josh.

Speaker Change: Our core value proposition of being simple yet scalable, but most importantly, a very approachable cloud that really cares about them.

Speaker Change: And we are staying true to our.

Speaker Change: Target customer segments, which is tech.

Speaker Change: Thanks, Patty and just wondering on the EBITDA guidance initial EBITDA guidance for this year was 36% to 38% year ended at 42.

Speaker Change: <unk> native digital native.

Speaker Change: Howard application software companies.

Speaker Change: That are running globally.

Speaker Change: Globally distributed workloads that are typically network and bandwidth intensive some of them require.

Speaker Change: Was hoping you could provide.

Speaker Change: Provide.

Speaker Change: High level.

Speaker Change: The drivers of that degree of outperformance and then how we should think about that level of conservatism in the initial 25.

Speaker Change: Bursty.

Speaker Change: Spikes in their traffic pattern, so that needs to be supported in a very elastic manner.

Yeah.

Speaker Change: And what attracts them to us is our.

Speaker Change: That's a great question, Josh So I think we said this publicly last quarter that with all the new executives that came on in with the acknowledgment that we needed to accelerate the product roadmap.

Speaker Change: Our core value proposition of being simple yet scalable, but most importantly, a very approachable cloud that really cares about them.

Speaker Change: We built in some cushion in Q4 for the R&D team in particular to surge resources that they wanted to bring in contractors et cetera, and what we were able to do was we took a real hard look at the spend that we have and we were able to reallocate resources and brought to the team did a phenomenal job of prioritizing on the.

Speaker Change: And just wondering on the EBITDA guidance initial EBITDA guidance for this year was 36% to 38% year ended at 42.

Speaker Change: Was hoping you could.

Speaker Change: Provide.

Speaker Change: Just high level.

Speaker Change: The drivers of that degree of outperformance and then how we should think about that level.

Speaker Change: Conservatism.

Speaker Change: The top initiatives getting the key products out and so we didn't we didn't need that surge youll note that from.

Speaker Change: The initiatives.

Josh Baer: Great question, Josh So I think we said this publicly last quarter that with all the new executives.

Speaker Change: From a full year and even for the first quarter. The guide is still pretty wide on on EBITDA.

Josh Baer: And with the acknowledgment that we needed to accelerate the product roadmap.

Speaker Change: And so what we're signaling is a little bit of what don't get Super fixated on what EBITDA is one quarter versus the next because we may be pulling expenses ahead.

We built in some cushion in Q4 for the R&D team in particular to surge resources that they wanted to bring in contractors et cetera, and in what we were able to do was we took a real hard look at the spend that we have and we were able to reallocate resources and brought to the team did a phenomenal job of prioritizing on the.

Speaker Change: We find efficiencies and we don't need to but what I would focus on is our commitment we raised the free cash flow guide from our preliminary indication too.

Speaker Change: From 15 to 17 to 16 to 18 in and that's what we're managing more aggressively towards.

Josh Baer: The top initiatives getting the key products out and so we didn't we didn't need that surge youll note that.

Speaker Change: View EBITDA.

Speaker Change: It'll be a little bit more that will move a little bit more but we're very committed to driving improvements in gross margin were very committed to driving operating efficiencies and <unk>.

Josh Baer: Full year and even for the first quarter. The guide is still pretty wide on on EBITDA.

Josh Baer: And so what we're signaling is a little bit of both.

Speaker Change: Proving the leverage we have in the business, but at the same time, if we see an opportunity to accelerate our product capability that drives revenue.

Josh Baer: Super Fixated on what EBITDA is one quarter versus the next because we may be pulling expenses ahead, or maybe we find efficiencies and we don't need to but what I would focus on is our commitment we raised the free cash flow guide from our preliminary indication too.

We'll do that and that might have a near term impact on EBITDA margins, which is why we provided a wide guide in the fourth quarter and why we provided a wide guide for 2025.

Josh Baer: From 15 to 17 to 16 to 18 in and that's what we're managing more aggressively towards.

Speaker Change: Thanks.

Speaker Change: Your next question comes from the line of Gabriela Borges with Goldman Sachs. Please go ahead.

Josh Baer: <unk> EBITDA.

Josh Baer: It'll be a little bit more that will move a little bit more but we're very committed to driving improvements in gross margin were very committed to driving operating efficiencies and improving the leverage we have in the business, but at the same time, if we see an opportunity to accelerate our product capability that drives revenue.

Hey, good morning, great to see the MTR numbers. Thanks for taking my question, how do you Matt I wanted to follow up on the math you had given us.

Speaker Change: On a quarter on how much.

Speaker Change: Youre able to capture dollar.

Speaker Change: Related Capex, maybe just refresh us.

Josh Baer: We will do that and that might have a near term impact on EBITDA margins, which is why we provided a wide guide in the fourth quarter and why we provided a wide guide for 2025.

Speaker Change: Jackson has.

Matt Steinberg: Are you able to generate more revenue per dollar of Capex, Matt maybe you can comment on the gross margin profile.

Speaker Change: Business as you move into more differentiated performance. Thank you.

Josh Baer: Thanks.

Speaker Change: Your next question comes from the line of Gabriela Borges with Goldman Sachs. Please go ahead.

Matt Steinberg: Both great questions yes.

Matt Steinberg: <unk>.

Matt Steinberg: What we've found is and particularly if you think of.

Gabriela Borges: Hey, good morning, great to see the NAR numbers. Thanks for taking my question, how do you Matt I wanted to follow up on the math you had given us.

Matt Steinberg: The journey II product and this is Ben.

Matt Steinberg: Learning for US and also very very supportive of our strategy somebody comes in and they want to build a chatbot.

Speaker Change: On how much.

Speaker Change: We're able to capture dollar GP related Capex, maybe just refresh us.

Matt Steinberg: <unk>.

Matt Steinberg: They come in with their knowledge base and they come in and they want to.

Speaker Change: Jackson I ask how are you.

Matt Steinberg: Okay. Another model they can certainly take advantage of our journey, our capabilities and the Gen AI capabilities have weight higher margins on their own than do our bare metal or more of the infrastructure layer, but the thing that is probably most compelling to us is how much other revenue that will drive through cloud services because for every chatbot you have you need somewhere to <unk>.

Speaker Change: Are you able to generate more revenue per dollar of Capex, Matt maybe you can comment on the gross margin profile.

Speaker Change: Business as you move into more differentiated functionally thank you.

Speaker Change: Both great questions everyone, yes.

Speaker Change: <unk>.

Speaker Change: What we've found is and particularly if you think of the.

Matt Steinberg: Store your knowledge base, so you need storage you need bandwidth to get that.

Speaker Change: The journey II product and this has been a great learning for US and also very very supportive of our strategy somebody comes in and they want to build a chatbot.

Matt Steinberg: To communicate with the models and and you need a lot of our other database infrastructure. So we think that the amount of pull through revenue that we're going to get from the Gen. AI services kind of orders of magnitude more than the actual revenue itself and so that's very very compelling.

Speaker Change: Build.

Speaker Change: They come in with their knowledge base and they come in and they want to.

Speaker Change: Another model they can certainly take advantage of our gen AI capabilities and the Gen AI capabilities have weight higher margins.

Speaker Change: On their own than do our bare metal or more of the infrastructure layer, but the thing that is probably most compelling to us is how much other revenue that will drive through cloud services because for every chatbot you have you need somewhere to store your knowledge base. So you need storage you need bandwidth to get that.

Matt Steinberg: The margins again on the infrastructure layer.

Matt Steinberg: We've said it is very clear in the market the margins arent spectacular gross margins on just core <unk>.

Matt Steinberg: <unk> as a service and it's.

Matt Steinberg: Very price transparent in the industry, there's a lot of competition to get kind of an initial workloads and the cost even though there are new entrants A&D is out with new capabilities and a lot of others are working on capabilities. In addition to Nvidia, it's still a fairly one vendor dominated industry and the costs are super high so.

Speaker Change: To communicate with the models and and you need a lot of our other database infrastructure. So we think that amount of pull through revenue that we're going to get from the Gen AI services.

Speaker Change: Kind of orders of magnitude more than the actual.

Speaker Change: Revenue itself and so that's very very compelling.

Matt Steinberg: We expect that to come down overtime, and we expect to be able to leverage more of that infrastructure for inferencing overtime, which will drive more consistent and higher margin revenue but.

Speaker Change: The margins again on the infrastructure layer as we've said and it is very clear in the market the margins arent spectacular gross margins on just core.

Matt Steinberg: Think that the path that we're on is towards more of our revenue coming from the higher platform higher layer services and those higher layer services not only on their own have better margins, but they pull through higher margin cloud.

Speaker Change: GPU as a service and it's.

Speaker Change: Very price transparent in the industry. There is a lot of competition to get kind of an initial workloads and the cost even though there are new entrants A&D is out with new capabilities and a lot of others are working on capabilities. In addition to Nvidia, it's still a fairly one vendor dominated industry and the costs are super high so.

Matt Steinberg: Cloud revenue as well.

Matt Steinberg: Thank you.

Speaker Change: Your next question comes from the line of Mike <unk> with Needham <unk> Company. Please go ahead.

Speaker Change: We expect that to come down over time, and we expect to be able to leverage more of that infrastructure for inferencing overtime, which will drive more consistent and higher margin revenue but.

Speaker Change: Great. Thanks for taking the questions guys and great to see the improvement in the or that you're talking to as well.

Speaker Change: First question I had for you was related to the AI ml.

Speaker Change: Great to see the growth there is still remaining triple digits north of 160%.

Speaker Change: Think that the path that we're on is towards more of our revenue coming from the higher platform higher layer services and those higher layer services not only on their own have better margins, but they pull through higher margin cloud.

Speaker Change: Is there any way to give us a little bit more as far as the size of that AI ml.

Speaker Change: Our base today, when it represents as a percentage of the totally or.

Speaker Change: Cloud revenue as well.

And then the second piece on that point would be how.

Speaker Change: Thank you.

Speaker Change: Okay.

Speaker Change: Your next question comes from the line of Mike <unk> with Needham <unk> Company. Please go ahead.

Speaker Change: How do we think about the <unk>.

Our competition today.

Speaker Change: The vast majority of that coming from the scalar plus cohort I know we have these new disclosures that you guys are seeing.

Mike: Great. Thanks for taking the questions guys and great to see the improvement in the or that you're talking to as well.

Speaker Change: Road base adoption, but just interested.

Speaker Change: First question I had for you was related to the AI ml.

Speaker Change: Dollar specifically are coming from for that piece.

Speaker Change: Great to see the growth there is still remaining triple digits north of 160%.

Speaker Change: Yes.

Speaker Change: Question, Mike and thanks, Thanks for the questions.

Speaker Change: We're not disclosing the specific IRR for AI for very clear reason on our side. The revenue is kind of intermingled with like.

Speaker Change: Is there any way to give us a little bit more as far as the size of that AI ml.

Speaker Change: Our base today, when it represents as a percentage of the totally or.

Speaker Change: And then the second piece on that point would be how.

Speaker Change: I was speaking to get rattler.

Speaker Change: When we get a little bit of Gen. AI revenue, we're getting a lot of pull through revenue in other parts of the business and we also don't manage the business.

Speaker Change: How do we think about the <unk>.

Speaker Change: Our competition today is the vast majority of that coming from the scalar close cohort I know we have these new disclosures that you guys are seeing.

Speaker Change: <unk> AI product group and then there is other product groups.

Speaker Change: Road base adoption, but just interested.

Speaker Change: Mingled in terms of whether its compute or some of the other capabilities. So we believe that like we have infrastructure as a service and we had platform as a service managed hosting.

Speaker Change: Dollar specifically are coming from for that piece.

Speaker Change: Yes.

Speaker Change: Question, Mike and thanks, Thanks for the questions.

Speaker Change: We're not disclosing the specific IRR for AI for very clear reason on our side. The revenue is kind of intermingled with like.

Speaker Change: Just another one of our products and so we're not going to disaggregate that.

Speaker Change: At the product level in terms of the amount of AI this with the scalar.

Speaker Change: I was speaking to get rattler.

Speaker Change: When we get a little bit of Gen. AI revenue, we're getting a lot of pull through revenue in other parts of the business and we also don't manage the business.

Speaker Change: Recall that when we acquired paper space several years ago, we came with a lot of customers. It was like 15000 customers or something like that and they had a run rate that was largely.

Speaker Change: <unk> AI product group and there's there's other product groups.

Speaker Change: Small customers that look a whole lot like the digital ocean customer base. So we have a pretty deep.

Speaker Change: Mingled in terms of whether its compute or some of the other capabilities. So we believe that like we have infrastructure as a service and we had a platform as a service managed hosting.

Speaker Change: Set of customers that are smaller that are on the AI platform a lot of them leveraging the.

Speaker Change: The.

Speaker Change: Legacy paper space kind of notebooks capability and a lot of the new customers that are coming on.

Speaker Change: Just another one of our products and so we're not going to disaggregate that.

At the product level in terms of the amount of AI this with the scalar.

Pat: Pat you talked about 90% of the customers that that adopted the.

<unk> product out of the gate, our existing customers and their mix looks a lot like our existing customers. So I'd say, there's a healthy chunk of the AI. That's in the scalar is plus but it's not all of it and it's not not.

Speaker Change: Small customers that look a whole lot like the digital ocean customer base. So we have a pretty deep.

Pat: The majority of it is not in that yet, but there is a healthy chunk.

Speaker Change: Set of customers that are smaller that are on the AI platform a lot of them leveraging the.

Speaker Change: Thank you for that and can I just pick on maybe one more on the on the gross margin just I know that we have the Atlanta data center coming online in Q1, which we're all looking forward to but.

Speaker Change: The.

Speaker Change: Legacy paper space kind of notebooks capability and a lot of the new customers that are coming on.

Speaker Change: Can you help us think about how gross margins are likely to move through the course of the year with that Atlanta data Center.

Pat: Pat you talked about 90% of the customers that that adopted the.

Speaker Change: And then we obviously have the news that the useful server lives are being extended a year.

Pat: <unk> product out of the gate, our existing customers and their mix looks a lot like our existing customers. So I'd say, there's a healthy chunk of the AI. That's in the scalar is plus but it's not all of it and it's not not.

Speaker Change: How do we put those two pieces together when we think about calendar 'twenty five weeks. Thank you.

Speaker Change: It's actually not going to move a ton of it will be a little bit of a.

Pat: The majority of it is not in that yet, but there is a healthy chunk.

Speaker Change: Probably see a little bit of a dip in gross margin in the beginning of the year and then it'll pick back up which is very consistent to what.

Speaker Change: Thank you for that and can I just check on maybe one more on the on the gross margin just I know that we have the Atlanta data center coming online in Q1, which we're all looking forward to but.

Speaker Change: What happened before with the.

Speaker Change: When we did Sidney you get.

Speaker Change: Some upfront expenses, we're haven't fully ramped it clearly with revenue yet so youll see a little bit of a gross margin dip, but we don't see a fundamental shift in kind of the range of gross margin that we're in right now and in fact brought in.

Speaker Change: Can you help us think about how gross margins are likely to move through the course of the year with Atlanta data Center.

Speaker Change: And then we obviously have the news that useful server lives are being extended a year.

Speaker Change: And the teams are working aggressively to drive gross margin improvement over the multiyear period.

Speaker Change: How do we put those two pieces together when we think about calendar 'twenty five weeks. Thank you.

Speaker Change: As we continue our data center optimization strategy, and we must look for ways to better utilize the.

Speaker Change: It's actually not going to move a ton of it will be a little bit of a.

Speaker Change: Probably see a little bit of a dip in gross margin in the beginning of the year and then it'll pick back up which is very consistent to what.

Speaker Change: Infrastructure that we have so I think gross margin if you will see a little bit of.

Speaker Change: A drop in the beginning of the year it will come back.

Speaker Change: What what happened before with the.

Speaker Change: Keep pointing back to but again.

Speaker Change: When we did Sidney you get.

Very confident in our 16% to 18% free cash flow margins for the year. So it will all kind of wash out to better margins as we get.

Speaker Change: Gross margins, sorry, better free cash flow margins as we get through the year.

Speaker Change: And the teams are working aggressively to drive gross margin improvement over the multiyear period.

Speaker Change: Your next question comes from the line of Patrick <unk> with JMP Securities. Please go ahead.

Speaker Change: As we continue our datacenter optimization strategy and we must look for ways to better utilize the.

Patrick: Oh, great. Thank you so.

Speaker Change: So paddy your <unk>.

Speaker Change: Infrastructure that we have so I think gross margin that youll see a little bit of.

Speaker Change: <unk> been here a year right what has gone better than you thought it would.

Speaker Change: A drop in the beginning of the year it will come back.

Speaker Change: His proved a little more difficult.

Speaker Change: Yes, Hello, Patrick Good morning, and thank you for the question.

Speaker Change: Keep pointing back to but again, we're very confident in our 16% to 18% free cash flow margins for the year. So it will all kind of wash out to better margins as we get.

Speaker Change: Yes Super early for you I appreciate you dialing in.

Speaker Change: What has gone better than I expected I think our product innovation.

Speaker Change: Gross margins I'm, sorry, better free cash flow margins as we get through the year.

Speaker Change: Our ability to really understand what our customers need at a deep level has been.

Speaker Change: Your next question comes from the line of Patrick <unk> with JMP Securities. Please go ahead.

Speaker Change: Going better than I expected in the sense that.

Speaker Change: When we look at the adoption the reception from our customers.

Patrick <unk>: Oh, great. Thank you so.

Our hypothesis that our customers really really want to stay with us and we were saying that now we have.

Patrick <unk>: So paddy your you've been here a year right what has gone better than you thought it would and what it is.

Speaker Change: Green shoots to prove that it is the case, if we take care of them theyre going to expand with us. So I think that has been really awesome the thing I wouldn't.

Patrick <unk>: As proved a little more difficult.

Patrick <unk>: Yes, Hello, Patrick Good morning, and thank you for the question.

Patrick <unk>: Yes Super early for you appreciate your dialing in.

Speaker Change: The whole AI landscape debate is unfolding.

Patrick <unk>: What has gone better than I expected I think our product innovation.

Speaker Change: Has been really interesting and I am Super encouraged by the fact that we are staying very disciplined to our AI strategy not getting caught up with that.

Patrick <unk>: Our ability to really understand what our customers need at a deep level has been.

Patrick <unk>: Going better than I expected in the sense that.

Speaker Change: Yeah.

Speaker Change: Deploying.

Patrick <unk>: When we look at the adoption the reception from our customers.

Speaker Change: Too much capacity and running after the GPU farms business model and things like that.

Patrick <unk>: Our hypothesis that our customers really really want to stay with us and we were saying that now we have.

Speaker Change: It has been a really good learning experience for us.

Patrick <unk>: Green shoots to prove that it is the case, if we take care of them theyre going to expand with us. So I think that has been really awesome. The thing I wouldn't so.

Speaker Change: Slowly, but surely our some of our hypothesis in the AI space have also started bearing out in the sense that the cost of.

The whole AI landscape debate is unfolding.

Speaker Change: So the two biggest impediments as I talked about in my remarks were wanted is too complex and number number two it is too expensive for our customers right. So we can really help with the complexity by making it super simple, especially with open source models. It gives us a lot of degrees of freedom to make it even more easier for.

Patrick <unk>: Has been really interesting and I'm Super encouraged by the fact that we are staying very disciplined to our AI strategy not getting caught up with that.

Patrick <unk>: Yeah.

Patrick <unk>: Deploying.

Patrick <unk>: With too much capacity and running after the GPU farms business model and things like that.

Speaker Change: For our customers and then number two is make it super affordable and Thats exactly what we have started doing with the on demand fractional access to Gpus and also our token based servers endpoints with with the Gen III platform, especially with the open source model.

Patrick <unk>: It has been a really good learning experience for us.

Patrick <unk>: Slowly, but surely our some of our hypothesis in the AI space have also started bearing out in the sense that the cost of.

Patrick <unk>: So the two biggest impediments as I talked about in my remarks were one it is too complex and number number two it is too expensive for our customers right. So we can really help with the complexity by making it super simple, especially with the open source models. It gives us a lot of degrees of freedom to make it even more easier.

Speaker Change: That has also started going growing really well for us. So I would say those were the two key learnings for me over the last year.

Speaker Change: Sure.

Speaker Change: Your next question comes from the line of Onesie <unk> Mohan with Bank of America. Please go ahead hi.

Rupal: Thanks for taking my questions, it's rupal filling in for <unk> today.

Patrick <unk>: For our customers and then number two is make it super affordable and Thats exactly what we have started doing with the on demand fractional access to Gpus and also our token based server list endpoint split with the Gen III platform, especially with the open source model.

Speaker Change: I have two first one for Patty.

Speaker Change: You launched a lot of products in 2024, Patti can you talk about the areas of investment in 2025, and thanks for disaggregated the scalar surplus at 22% of revenue how do you see that percent that cohort growing in 2025 and to do that are you happy with the go to market investments, you've made or do you need to hire.

Patrick <unk>: So that has also started going growing really well for us. So I would say those were the two key learnings for me over the last year.

Speaker Change: More sales salespeople and I have a follow up for Matt.

Patrick <unk>: Yes.

Speaker Change: Your next question comes from the line of Onesie <unk> Mohan with Bank of America. Please go ahead hi.

Speaker Change: Okay great.

Speaker Change: Great question, so ill try to go very fast.

Rupal: Thanks for taking my questions, it's rupal filling in for <unk> today.

Speaker Change: <unk>.

Speaker Change: What our product priorities for this year, so I'll break it down into core cloud and AI on core cloud.

Speaker Change: Two first one for Patty.

Speaker Change: You launched a lot of products in 2024, Patti can you talk about the areas of investment in 2025, and thanks for disaggregated the scalar plus at 22% of revenue how do you see that percent that cohort growing in 2025 and to do that are you happy with the go to market investments you've made or do you need to hire more sales.

Speaker Change: We will continue our journey in terms of meeting our larger customers, where they are in terms of there.

Speaker Change: More sophisticated needs in terms, so far whether it is more management capabilities or security capabilities of networking rich.

Speaker Change: Richard.

Speaker Change: A variety of fat droplets that are very specific single purpose droplets and things like that so we still have some amount of work to do to meet our meet the needs of our larger customers and and pave the way for larger workloads to move to this solution from other clouds from an NII perspective.

Speaker Change: Salespeople and I have a follow up for Matt.

Speaker Change: Okay great.

Great question so.

Speaker Change: Go very fast.

Speaker Change: No.

Speaker Change: What our product priorities for this year, so I'll break it down into core cloud and AI on core cloud.

Speaker Change: We will continue our journey in terms of meeting our larger customers, where they are in terms of there.

Speaker Change: <unk> will continue to fortify our infrastructure layer, which is honestly quite robust and very scalable and highly appreciated by our customers now.

Speaker Change: More sophisticated needs in terms of whether it is more management capabilities or security capabilities of networking rich.

AI platform is where we are going to have a lot of innovation to make it super Super simple for everyday software application company to consume and build agents into their applications and finally on the agent declare we have announced or we have launched in.

Speaker Change: Richard.

Speaker Change: A variety of fat droplets that are very specific single purpose droplets and things like that so.

Speaker Change: Still have some amount of work to do to meet our meet the needs of our larger customers and and pave the way for larger workloads to move to this solution from other clouds from an AI perspective will continue to fortify our infrastructure layer, which is honestly quite robust and very scalar.

Speaker Change: In the last couple of months.

Speaker Change: The site reliability engineering co pilot through cloud based first and then we'll make it available more generally.

Speaker Change: And it is our intention to keep pumping out more AI agents that solve real business problems rather than just.

Speaker Change: <unk> highly appreciated by our customers now.

Speaker Change: Then AI platform is where we are going to have a lot of.

Speaker Change: Doing things for R&D sake, we want to solve real world customer problems for our customers.

Speaker Change: <unk> to make it Super Super simple for everyday software application company to consume and build agents into their applications and finally on the agent declare we have announced or we have launched in.

Speaker Change: And in terms of.

Speaker Change: Our go to market as I mentioned in my prepared remarks, we have already bolstered our.

Speaker Change: The way, we do customer engagement with our customers and.

Speaker Change: As we go through the remainder of the year I will give you more updates in terms of additional go to market motions that we are standing up the good news for US is we.

In the last couple of months.

Speaker Change: The site reliability engineering co pilot through cloud based first and then we'll make it available more generally and it is our intention to keep pumping out more AI agents that solve real business problems rather than just.

Speaker Change: Have tens of thousands if not hundreds of thousands of customers that we can go and merchandise, our expanding product platform capabilities and get a bigger chunk of the share of wallet. So as much as it is important to keep hunting for new logos for which we have a very efficient self service.

Speaker Change: <unk> things for R&D sake be want to solve real world customer problems for our customers and in terms of.

Speaker Change: Our go to market as I mentioned in my prepared remarks, we have already bolstered our.

Speaker Change: <unk> growth funnel.

Speaker Change: The way, we do customer engagement with our customers and ASP.

Speaker Change: A lot of our.

Speaker Change: Go to market efforts are intended are aimed at expanding the share of wallet with our existing customers, which is a very different more significantly more efficient go to market motion than trying to find a bunch of new logos. So we will do a combination of both and keep reporting our progress.

Speaker Change: As we go through the remainder of the year I will give you more updates in terms of additional go to market motions that we're standing up the good news for us is <unk>.

Speaker Change: Tens of thousands if not hundreds of thousands of customers that we can go and merchandise our expanding product platform capabilities.

Speaker Change: Throughout the rest of the year.

Speaker Change: Thanks for all the details there petty Matt just a quick follow up on payables. It looks like sequentially. It was up meaningfully is that because of the Atlanta data center investments or do you get a new contract that is driving that up and what would be under the old method.

Speaker Change: We get a bigger chunk of the share of wallet. So as much as it is important to keep hunting for new logos for which we have a very efficient self service product led growth funnel.

Speaker Change: A lot of our.

Speaker Change: <unk>, thanks for taking my questions.

Speaker Change: Sure.

Speaker Change: So from a payable standpoint, it's definitely a function of us getting ready for Q1 for the Atlanta data Center, Brooklyn, and team did a phenomenal job of being able to accelerate some of the.

To find a bunch of new logos. So we'll do a combination of both and keep reporting our progress throughout the rest of the year.

Speaker Change: The readiness of some of the.

Speaker Change: The services and so we bought a bit more equipment earlier than what we had expected and so we were able to still able to do that within the within the confines of our free cash flow that we delivered so it was all about getting Atlanta are ready to go and off to a good start and from a <unk> standpoint, I don't have the number of spin.

Speaker Change: Fiscal <unk>, thanks for taking my question.

Typically in front of me it's in the reconciliations in the 10-K it would have been higher.

Speaker Change: Sure.

Speaker Change: In the fourth quarter had we reported December times 12, if we had not changed.

Speaker Change: We approach what we think is again, we've got to remember, we're a consumption based business and a lot of cases, our even our AI is consumption basis.

Speaker Change: The readiness of some of.

Speaker Change: The services and so we.

Speaker Change: Bought a bit more equipment earlier than what we had expected and so we were able to still able to do that within the within the confines of our free cash flow that we delivered so it was all about getting Atlanta are ready to go and off to a good start and from our IRR standpoint, I don't have the numbers specifically in front of me it's in the reconciliation.

Speaker Change: It's not like committed contracts and so if you measure the consumption at any given time and you multiply it by the number youre going to get oscillations in variations based on whatever is going on at that period of time. So.

Speaker Change: It's a more I'd say steady metric if you just average it over the quarter.

Speaker Change: And the 10-K it would have been higher.

Speaker Change: So despite the fact that it made it looked like we had lower IRR. That's I think the right thing to do for the market to give you a metric.

Speaker Change: In the fourth quarter had we reported December times 12, if we had not changed.

Speaker Change: I think more steady and less volatile and that's why we did it.

Speaker Change: We approach what we think is again, we've got to remember, we're a consumption based business and a lot of cases, our even our AI is consumption basis.

Speaker Change: Ladies and gentlemen, as a reminder, please limit yourself to one question. Your next question comes from the line of Mark Zhang with Citigroup. Please go ahead.

Speaker Change: Good contracts and so if you measure the consumption at any given time and you multiply it by the number youre going to get oscillations in variations based on whatever is going on at that period of time, So it's a more.

Mark Zhang: Oh, great. Good morning team. Thanks for taking my question, maybe just thanks for the additional disclosure on the scalar. So how should we think of the behaviors of the scalar plus versus the non path in terms of the pace of upsell cross sell going forward.

Speaker Change: Say steady metric if you just average it over the quarter.

Speaker Change: And so despite the fact that it made it looked like we had lower IRR. That's I think the right thing to do for the market to give you a metric.

Speaker Change: Why are we really see.

Speaker Change: More accelerated pace of growth in the non scalar cohort just given the product and go to market.

Speaker Change: I think more steady and less volatile and that's why we did it.

Speaker Change: First you guys have already implemented and what can drive.

Speaker Change: And ladies and gentlemen, as a reminder, please limit yourself to one question. Your next question comes from the line of Mark Zhang with Citigroup. Please go ahead.

Speaker Change: At least like El Paso or outpaced the growth of builders.

Marc: Thanks, Marc for the question.

Speaker Change: The reason that we broke out the scalar is plus and the 100 K plus customers.

Mark Zhang: Oh, great. Good morning team. Thanks for taking my questions. Maybe just thanks for the additional disclosure on the scalar. So how should we think of the behaviors of the scalar plus versus the non core in terms of the pace of upsell cross sell going forward.

Speaker Change: The single biggest question, we got from whether it was analysts to have direct conversations with investors is do we have a graduation problems like do our largest customers leave us and those of your most valuable customers and you've got a leaky bucket that's leaking from the most valuable part of the customer base and there was I would say there was an element of truth to that that we certainly were.

Mark Zhang: Why are we really seeing more accelerated pace of growth in the non scalar cohort just given the product and go to market.

Speaker Change: Struggling with those customers over the past several years not meeting their needs as well as we could have or should have and that was causing a lot of the depression in the archiving is below 100.

Mark Zhang: You guys have already implemented and what can drive that.

Mark Zhang: At least like El Paso or outpaced the growth of builders.

Marc: Thanks, Marc for the question.

Marc: Isn't that we broke out the scalar is plus and the 100 K plus customers is the single biggest question. We got from whether it was analysts to have direct conversations with investors is do we have a graduation problems like do our largest customers leave us and those of your most valuable customers and you've got a leaky bucket that's leaking from the most valuable part of the customer base.

Speaker Change: With <unk> arrival was brought into arrival with the pace of product innovation that we have is very very squarely focused on those large large customers for us again, a large customer for us is probably not a named account for the hyperscale, but it's material for us and what we've done is we've said we're going to we're going to focus on that cohort, we're going to make sure. We're.

Marc: And there was I would say there was an element of truth to that that we certainly were struggling with those customers over the past several years not meeting their needs as well as we could have or should have.

Speaker Change: Listening to them, we're going to rapidly give them the capabilities they need to scale on our platform and we've done that and the response has been very very positive where now we're talking about migrations for those customers, bringing workloads either back to us or to us for the first time from the Hyperscale and so it's been a dramatic turnaround.

Marc: Was causing a lot of the depression in the archiving is below 100.

Speaker Change: Paddy's arrival was brought into arrival with the pace of product innovation that we have is very very squarely focused on those large large customers for us again, a large customer for us is probably not a named account for the hyperscale, but it's material for us and what we've done is we said we're going to we're going to focus on that cohort, we're going to make sure.

Speaker Change: And we will talk more about this in Investor day in April, but if you look at the endear improvement. If you look at the your over year revenue growth improvement, it's been dramatic within those top customers.

Speaker Change: As Patti and I have said, we think we have a tremendous wallet share opportunity with our customers and clearly as you pointed out while the scalar customers below that 100, K plus arent growing as fast okay, but we haven't gotten there yet and some of those we're trying to with our new go to market motions, how do we pick and find the ones in the customers in that.

Speaker Change: We're listening to them, we're going to rapidly give them the capabilities they need to scale on our platform and we've done that and the response has been very very positive where now we're talking about migrations for those customers, bringing workloads either back to us or to us for the first time from the Hyperscale and so it's been a dramatic turnaround.

Speaker Change: Cohort that have the highest propensity to spend where we got the lowest wallet share and how do we go after those in a scalable way I'd say, what Youre seeing right now is let's say not low hanging fruit because it's very very difficult and is requiring a lot of effort and these are important customers, but we're going after the biggest rocks first the biggest rock was the top spending customers and we're getting to the.

Speaker Change: We'll talk more about this in Investor day in April, but if you look at the NDA or improvement. If you look at the your over year revenue growth improvement, it's been dramatic within those top customers and as Patti and I have said, we think we have a tremendous wallet share opportunity with our customers and clearly as you pointed out while the scalar is the customer's bill.

Speaker Change: The other layers as as.

Speaker Change: As we progress through the year.

Speaker Change: And the only thing I'll add is the scalar and scalar surplus. They all look the same this or this.

Speaker Change: So that 100, K plus arent growing as fast okay, but we haven't gotten there yet and some of those we're trying to with our new go to market motions, how do we pick and find the ones in the customers in that.

Speaker Change: Similar looking customers so that's.

Speaker Change: That's the best news because now we can go in and get and start working on the scales as Matt just talked about and get as many of them graduated into scalar plus and keep expanding their share of wallet and as we've been maintaining mark.

Cohort that have the highest propensity to spend where we got the lowest wallet share and how do we go after those in a scalable way I'd say, what Youre seeing right now is let's say not low hanging fruit, because it's very very difficult and it's requiring a lot of effort and these are important customers, but we're going after the biggest rocks first the biggest rock was the top spending customers and we're getting to the.

Speaker Change: There is a tremendous wallet share opportunity because they are all running substantial workloads just not on us.

Speaker Change: That's a great opportunity for us to go earn the trust of these customers and get more of their workloads.

Speaker Change: The other layers as.

Speaker Change: As we progress through the year and the only thing I'll add is the scalar and scalar surplus. They all look the same these or this very similar looking customers. So.

Speaker Change: Your next question comes from the line of Raimo <unk> with Barclays. Please go ahead.

Speaker Change: Hey, Thanks for squeezing me in one simple one at the end.

That's the best news because now we can go in and get and start working on the scalar.

Speaker Change: How does the what did you see out in the market in terms of the <unk>.

Speaker Change: <unk> how is that helping you for this year. Thank you.

Speaker Change: I, just talked about and get as many of them graduated into scalar plus and keep expanding their share of wallet and as we've been maintaining mark there.

Speaker Change: I'm, sorry could you repeat the question I didn't catch that.

Speaker Change: There is a tremendous.

Speaker Change: Wallet share opportunity because they are all running substantial workloads just not on us so thats a great opportunity for us to go earn the trust of these customers and get more of their workloads.

Speaker Change: I was just asking for what are you seeing in terms of end demand.

Speaker Change: If I look at the small business index et cetera that all starts looking better does that help you or do you see to help coming to you from that one or is that your old mutual for you. Thank you.

Speaker Change: Yeah, So raimo, thanks, and nice to hear from you.

Speaker Change: Your next question comes from the line of Raimo <unk> with Barclays. Please go ahead.

Speaker Change: From an end user demand perspective, we have not modeled any any major variation in our guidance or our plans. So we are expecting it to be stable and just like how.

Speaker Change: Hey, Thanks for squeezing me in one simple one at the end how does the what did you see out in the market in terms of the <unk>.

Speaker Change: <unk> how is that helping you for this year. Thank you.

Speaker Change: Has been over the last few quarters and from our endear improvement perspective, I mean, obviously there is a lot that we have done to control our own destiny and on the right two to keep our customers and keep them expanding on our platform.

Speaker Change: Oh, I'm, sorry could you repeat the question I didn't catch that.

Speaker Change: I was just asking for what are you seeing in terms of end demand.

Speaker Change: If I look at the small business index et cetera that all starts looking better does that help you or do you see to help coming to you from that one or is that sort of old mutual for you. Thank you.

Speaker Change: But hopefully the macro and the end user demand.

Speaker Change: Stays neutral to even positive, but we have not baked in any of that into our projections.

Speaker Change: Yeah, So raimo, thanks, and nice to hear from you.

Speaker Change: From an end user demand perspective, we have not modeled any any major variation in our guidance or our plans. So we are expecting it to be stable and just like how it has been over the last few quarters and from our NDA our improvement perspective, I mean, obviously there is a lot that we have done.

Speaker Change: Okay. Thank you.

Speaker Change: And ladies and gentlemen that does conclude our question and answer session and with that that does conclude today's conference call. Thank you for your participation and you may now disconnect.

Speaker Change: To control our own destiny and on the right two to keep our customers and keep them expanding on our platform.

Speaker Change: Hopefully the macro and the end user demand.

Speaker Change: Stays neutral to even positive, but we have not baked in any of that into our projections.

Speaker Change: Okay. Thank you.

And ladies and gentlemen that does conclude our question and answer session and with that that does conclude today's conference call. Thank you for your participation and you may now disconnect.

Speaker Change: Okay.

Q4 2024 DigitalOcean Holdings Inc Earnings Call

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