Q1 2025 DigitalOcean Holdings Inc Earnings Call
Good day and welcome to the digital Ocean in Q1, and 25 earnings Conference call.
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mentally straight: I like to welcome mentally straight head of Investor Relations to begin the conference.
Over to you.
Speaker Change: Thank you and good morning. Thank you all for joining us today to review digital Ocean first quarter 2025 financial results. Joining me on the call today are parties Srinivasan, our chief Executive officer, and not sign for it our Chief Financial Officer.
Speaker Change: Before we begin let me remind you that certain statements made on the call today may be considered forward looking statements, which reflect managements best judgment based on currently available information and 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.
Speaker Change: Our filings with the SEC as well as those referenced in todays press release that is posted on our website.
Speaker Change: Digital Ocean expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any forward looking statements made today.
Speaker Change: Additionally, non-GAAP financial measures will be discussed on this conference call and reconciliation 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 and webcast of today's call is also available in the IR section of our website.
Speaker Change: And with that I will turn the call over to Patty.
Patty: Thank you Melanie and good morning, everyone and thank you for joining US today as we review our solid first quarter 2025 results.
Patty: Top line growth momentum, we generated in 2024 continued into Q1 and the results provide further evidence of our continued execution of our strategy.
Patty: This strategy as outlined on slide four of our earnings presentation include scaling with our digital native enterprise customers by helping them run large and complex workloads on our cloud platform and continuing to democratize the axis of AI for both new generation AI native startups as well as for our existing 600000 plus customer.
Patty: Marissa.
Patty: I am very pleased to share today, the excellent progress we are making on both of these strategic priorities. My comments today will include a quick recap of our first quarter results.
Patty: Tell us on the progress we are making for our customers as we invest in product innovation and go to market for both core cloud and AI platforms.
Patty: And a quick summary of the progress we're making on our financing strategy that Matt will detail later in the call.
Speaker Change: Let me start with the first quarter financial results and turning to slide five of our owning staff.
Speaker Change: We had another solid quarter as revenue growth increase from the first quarter to 14% year over year to $211 million.
Speaker Change: With our AI IRR, continuing to grow north of 160% year over year.
Speaker Change: Q1, net dollar retention rate, our MBR improved 100% for the first time since Q2 of 2023, and we expect India to remain in a similar range as the last two quarters for the remainder of the year.
Speaker Change: In addition, we made further progress with our continued focus on our higher spending digital native enterprise customers, increasing revenue from customers, who are at $100000 plus annual run rates up 41% year over year and to 23% of total revenue.
Speaker Change: This is well above market growth rate and was driven by a 27% year over year increase in customer count and a 11% increase in their average spend with digital ocean.
Speaker Change: This improved growth was not confined to just this segment as our highest spend customers as a whole which includes our builders scalar and <unk> plus customers grew to over 170000, a number and their revenue grew 16% year over year, making up 88% of our total revenue.
Speaker Change: The growth of these customers is a clear sign that our product innovation efforts and investments in strategic and targeted go to market motions are helping digital native enterprises scale rapidly on our platform.
Speaker Change: While we continued investments and drove higher growth, we did so while delivering healthy profitability metrics, including 61% gross margin and 41% EBITDA margins in Q1.
Speaker Change: Our 61% gross margins in Q1 is 200 bps higher than the prior year, an improvement that came from cost optimization that mitigated the near term increase in cost of revenue that comes with the incremental capacity that we brought online.
Speaker Change: In our new Atlanta data Center.
Speaker Change: This new data center post multiple AI inferencing fabrics, some of which are already live for customers powering real world customer inferencing workloads and as the first step in our long term data center optimization strategy, which includes both our cloud and AI workloads, giving us a path to further gross margin optimization.
Speaker Change: Our 2025 capital program was heavily front loaded in Q1, which drove the decline in quarterly adjusted free cash flow margin.
Speaker Change: While lumpy. This plant was contemplated in our full year 2025 plan and we remain on track for our full year free cash flow margin guidance.
Speaker Change: Yes.
Speaker Change: Having this new AI inferencing infrastructure in place and the New Atlanta data Center enables us to go even faster on our AI initiatives, helping us observe and learn from these customer workloads ultimately, enabling us to innovate faster in this rapidly evolving space.
Speaker Change: It also enables us to win even larger inferencing workloads like the $20 million plus multiyear inferencing commitment, we closed with a strategic customer and partner early in Q2.
Speaker Change: With our focus now on large digital native enterprises.
Speaker Change: Our push to win large workload migrations from other cloud and our funnel of larger AI Native inferencing workloads, we are now seeing and winning larger and even multimillion dollars deals than we have in the past. While this is consistent with our strategy and we are excited about its near and long term growth potential.
Speaker Change: Deals require larger amounts of capacity to be available for the customer.
Speaker Change: To support these types of scale global workload, while maintaining our strong free cash flow generation. We are exploring additional funding strategies that Matt will explain in greater detail in his commentary that will increase our ability to more rapidly deploy new capacity to drive growth, while minimizing the near term.
Speaker Change: <unk> on free cash flow.
Matt: Let me now give you some updates on product innovation that we're delivering for our digital native enterprise customers, starting with the enhancements to our core cloud computing platform.
Matt: Offline in page six of our earnings deck. If you are following along.
Matt: In Q1, we continued our torrid pace of innovation and release more than 50, new products and features which is more than five times, what we released in Q1 of the prior year.
Matt: We accomplished this with no appreciable increase in R&D spend as a percentage of revenue, which is a testament to deals engineering talent and our increasing use of AI for accelerating development and improving our operational posture.
Matt: AI helped developers improving coding output by up to 40% and we also saw gains in our fleet help through AI based predictive maintenance.
Matt: The new cloud capabilities, we introduced in the quarter remain hyper focused on addressing the needs of our larger footprint customers to help them scale on the digital auction platform.
Matt: Let me highlight a few of those.
Matt: We announced the GE of digital Ocean partner network connect and secure high performance connectivity solution that simplifies multi cloud and hybrid cloud networking.
Matt: This service enables our customers to establish private connections between digital Ocean servers and other cloud providers are even on premise data centers.
Matt: Bypassing the public Internet it enhances security reduces latency and Optimizes multi cloud and hybrid cloud networking.
Matt: Our recent product updates over the last three quarters and enterprise grade availability are now attracting more complex workloads migrating from Hyperscale.
Matt: And this new capability of partner network connect simplifies these by enabling a stage migration process by establishing secure connection between digital ocean and other cloud providers, allowing customers to run workloads across multiple clouds.
Matt: These solutions Kubernetes service or <unk> for short now scales up to a thousand nodes supporting complex workloads with optimized network routing for enhanced speed and reduce latency.
Matt: Developed with heavy customer inputs. This enhancement allows for infrastructure scaling to handle unexpected traffic surges with minimal manual effort.
Matt: <unk> provides robust cross cluster creation with optimized default settings, several GPU and.
Matt: CPU and GPU droplet choices and integrated cloud resources, enabling customers to manage large fluctuating workload, while maintaining high availability and performance as their digital ocean usage growth.
Matt: Our managed database offerings for my sequel, and post Chris sequel, now feature significantly expanded scalable storage options.
Matt: Factor in Q1.
Matt: We have doubled our storage for managed my sequel plans to 20 terabytes.
Matt: Managed Postgresql sequel, now supports up to 30 terabytes also doubling from its previous capacity.
Matt: These enhancements enable our customers to seamlessly scale their database storage as their businesses grow accommodating both increasing demands of existing workloads and also migrations from self managed databases with greater flexibility.
Matt: Another product release that I want to highlight its network load balancing which was developed in response to strong demand from our larger digital native enterprise customers.
Matt: It enables companies to distribute traffic efficiently across multiple servers.
Matt: This feature automatically scales resources, increasing capacity during peak loads and decreasing it during slower periods.
Matt: In Q1, we augmented these product innovations with increased support and engagement of our top customers with complementary go to market motions.
Matt: We expanded named account coverage to our top 3000 customers by revenue, which is double the coverage. We had in 2024, we now have accounting coverage for our top 3000 accounts that includes a technical account manager who ensure that these customers leverage our platform to the fullest.
Matt: Solution architect who helps with the actual adoption and a growth account manager who manages the overall relationships and looks for new workloads run on deal.
Matt: This new named account engagement model and all the new product innovations enabled us to accelerate the traction with rapidly scaling in larger digital native enterprise customers.
Matt: To raise the visibility of these advanced features we also launched a new webinar series called sale to success to drive product awareness and adoption featuring real World case studies and topics, including the best practices and migrating workloads to deal and building real world applications using our Gen II platform.
Matt: Using advanced capabilities like Guardrails, AI knowledge bases and so forth.
Matt: We're also publishing numerous case studies and are averaging about a case study a week to provide reference materials on how our digital native enterprise customers are taking advantage of the expanding breadth of our platform.
Matt: On the last call I talked about a new migrations program and a small dedicated team to support it and I am very pleased to share that in Q1, we facilitated 79 migrations to the new solution platform.
Matt: While these workloads will continue to grow in footprint. The average annual run rate from these migrations is already in the tens of thousands of dollars.
Matt: Our migrations team along with specialized partners help these customers with planning architecture and the actual technical work to make these migrations smooth and ensure that the most appropriate architecture is deployed to get the best ROI from our platform.
Matt: In one such example, we won all workloads for pro Mobi SaaS company known for its solutions and enterprise mobility management that host electronic protected health information, our EPA AI workloads on this solution.
Matt: At bright and open source platform that helps developers quickly build and scale back and applications signed a two year commitment with us in Q1.
Matt: Their platform supports core backend services like authentication database storage and messaging across multiple frameworks and languages.
Matt: <unk> chose digital ocean over Hyperscale is due to our superior price performance and our ability to rapidly deploy spaces in their preferred geographic regions.
Matt: Another example of a customer that has rapidly adopted our new enterprise grade features the sentra and leading e-commerce platform that leverages, our role based access control <unk>.
Matt: <unk> auto scaling global load Balancers, BPC peering and more.
Matt: Now turning to our AML initiatives, which is covered in page seven of our earnings deck.
Matt: We are progressing on our strategy of democratizing access to AI.
Matt: I strongly believe that we are entering an era of AI everywhere in which every software application is going to have AI as a core component of our functions.
Matt: For our target customers the digital native enterprises. This translates into a heavy use of AI inferencing mode.
Matt: The strong growth of AI in Q1, the majority of our customers AI workloads are now in inferencing mode, giving us an early glimpse into an AI world dominated by use cases that are serving the needs of end customers and solving real world problems.
Matt: Okay.
Matt: To take advantage of the growing traction that we're seeing with inferencing workloads, we are optimizing our AI stack to serve inferencing by continuing to deploy capabilities across the infrastructure platform and AI late agent players of our stack.
Matt: Let me breakout or advancements down a little bit more starting with the infrastructure layer.
Matt: In Q1, we announced that disclosure customers now have access to Nvidia had gx.
Matt: Hedged 200 Gpus, our deployment of these servers allows our customers to use them as standalone machines are multi node clusters.
Matt: Deepening our AMD partnership in April we announced that our customers now have access to a highly performing and cost effective solution for AI inferencing workloads with the AMD instinct, <unk> 300, ex Gpus with <unk> software.
Matt: These leading of Gpus are now available in single tenant bare metal configurations for customers seeking control and raw computing power to power AI inferencing.
Matt: The demand is outpacing the supply for our AI products that leverage these leading a GPU types and media head gx hedged two hundreds and AMD instinct <unk> 300, ex Gpus, which is further validation of our decision to invest in this growth capital and add material increment.
Matt: <unk> capacity through our Atlanta data center.
Matt: One real real World example of a customer already leveraging our Nvidia head Gx hedged 200 service offering.
Matt: As an emerging AI startup focused on developing next generation search and recommendation solutions for E. Commerce. This customer runs AI searches that scan billions of items and websites in real time, delivering curated recommendations tailored to their customers fashion needs and transforms search result into <unk>.
Matt: Stunning visual recommendations all of this is powered by digital auctions in media head Gx X 200 Gpus.
Speaker Change: Another example on the AI infrastructure site is wind-borne, a company, whose mission is to help mitigate and manage the destructive aspects of climate change and extreme weather and weather uncertainty.
Speaker Change: <unk> achieved this by instrument the environment and advance the weather forecast.
Speaker Change: Wind-borne leverage.
Speaker Change: Digital oceans, GPU droplets to build a record breaking Lee accurate deep learning based global medium range forecast model called whether mesh, which predicts wind speed temperature do point cloud cover precipitation geopotential height and more.
Speaker Change: Okay.
Speaker Change: Moving up the stack to the platform layer I'm very excited about the progress, we're making and the adoption we are driving on our Gen II platform.
Speaker Change: Which is our fully managed solution designed to help digital native enterprises build and scale generate of AI applications with east.
Speaker Change: It now supports state of the art models from providers like and Tropic meta Mistral deep Sea open AI and others.
Speaker Change: And offers advanced capabilities, such as retrieval augmented generation function, calling secure guardrails and more to ensure reliable in context of our outputs.
Speaker Change: Developers can now integrate <unk> into their workflows, using apis or embed chat interfaces directly into their applications.
Speaker Change: The platform.
Speaker Change: Also include.
Speaker Change: Server less model endpoints vector database integration and token based billing, allowing companies to go from prototype to production without managing complex infrastructure.
Speaker Change: While this platform is still in beta we already have over 5000 customers leveraging the platform and over 8000 agents have been created on it since announcing it in January.
Speaker Change: More than 80% of our users for this platform our existing bridge solution customers.
Speaker Change: Clearly showing the potential that we have within our existing customer base.
Speaker Change: One such customer example is Phoenix secure a leading India based GPS tracking and fleet management provider daily.
Speaker Change: <unk> leveraged digital lotions, and AI platform to create and integrate sales AI agents into their GPS tracking platform to enhance lead management.
Speaker Change: Now let me also cover the AI agent declare.
Speaker Change: One of my favorite case studies on impactful AI agent applications is our own cloud waste copilot offering which is currently in public preview.
Speaker Change: Cloud based co pilot is an AI powered assistant integrated into our managed hosting platform that is designed to streamline server management and optimize website performance for growing small and medium businesses.
Speaker Change: This helps our customers automate tasks monitor performance and provide them with insights to help keep their web sites up and running smoothly.
Speaker Change: Cloud based copilot currently has over 250 customers leveraging the tool with over 90% accuracy rate.
Speaker Change: One specific customer leveraging cloud based co pilot is create a web design agency that specializes in creating and maintaining web site to effectively represent the client's brand.
Speaker Change: Create has been able to improve productivity by leveraging the insights feature to quickly and accurately identify issues that otherwise would have been only found a found at all through manual processes and review of logs.
Speaker Change: Another example is courtesy of digital marketing agency based in Australia that specializes in helping small businesses enhance their online presence through personalized and strategic digital solutions.
Speaker Change: Cloud based copilot provides precise insights that empower courtesy to quickly pinpoint and resolve e-commerce store issues.
Speaker Change: Problem solving time from hours to just minutes.
Speaker Change: Let me now give you an update on the financing matters.
Speaker Change: In addition to the great progress we've made on topline growth initiatives. We've also made material progress on our balance sheet and capital structure priorities.
Speaker Change: We announced this morning that we have taken the first step in addressing our outstanding 2026 convertible debt having entered into a new secured five year credit facility agreement of $800 million.
Speaker Change: With a $500 million term loan a that we will leverage to refinance a portion of our existing convertible notes.
Matt: Matt will walk you through.
Matt: More details on our financial results refinancing actions and guidance later in the call.
Matt: In closing this solutions Q1, 2025 demonstrates significant progress in executing the strategy, we outlined at our recent Investor day.
Matt: We achieved accelerated revenue growth consistent improvement in net dollar retention and substantial advancement in our strategy to scale with the digital native enterprises.
Matt: Our product innovation remains strong with over 50, new releases, specifically designed for the sophisticated needs of our growing digital native enterprise customers.
Matt: Notably, we're also observing a clear increase in inferencing.
Matt: Signifying the evolution of customer workloads towards practical real world AI applications and strong adoption.
Matt: Of our Gen II platform.
Matt: Strategic go to market investments and product innovation drove a 41% year over year over year increase in revenue from customers spending over $100000 annually.
Matt: These results demonstrate clear progress towards our strategic goals and bolster our confidence in achieving our ambitious long term objectives.
Matt: Additionally, we are proactively started addressing our financing strategy by initiating debt refinancing.
Matt: <unk> us for sustained growth with the growing needs of our digital native enterprises.
Matt: The momentum generated in Q1 provides a solid base for the remainder of the year and underscores our mission of simplifying cloud and AI. So that digital native enterprise customers can focus on creating software that changes the world.
Matt: Thank you and now over to Matt.
Matt: Thanks, Barry Good morning, everyone and thanks for joining us today.
Matt: Terry discussed we are very pleased with our Q1 2025 performance as we continue to execute against our key strategic priorities and deliver strong financial results.
Matt: In my comments I'll walk through our Q1 results provide an update on our balance sheet and financing strategy and share our second quarter and full year 2025 financial outlook.
Matt: Starting with the top line revenue in the first quarter was $211 million in annual run rate revenue or <unk> was $843 million, both up 14% year over year.
Matt: We added $23 million of incremental <unk> in the quarter, which is 50% higher compared to incremental <unk> in the same quarter last year.
Matt: We continue to focus our product innovation and go to market investments on our digital native enterprise customers and the momentum we have generated with this target customer base continues to grow.
Matt: In Q1 revenue from our customers, whose annualized run rate revenue in the quarter was greater than 100000, who we refer to as scalar plus and who represent 23% of overall revenue grew 41% year over year with a 27% year over year increase in customer count as our largest customers continue their strong adoption of our core.
Matt: Cloud and AI products.
Matt: Q1 revenue growth was driven by improvements in both customer acquisition and customer expansion.
The enhancements we've made to our product led growth engine are paying off in improved customer acquisition with revenue growth from customers in their first 12 months on our platform continuing to accelerate in Q1.
Matt: Our product innovation and go to market efforts are also having an impact on customer expansion as our Q1 net dollar retention ticked up to a 100% up from 97% in the same quarter last year, which is a major accomplishment as we have largely eliminated the net expansion headwind we faced last year we.
Matt: We expect <unk> to remain in a similar range as the last two quarters for the remainder of the year.
Matt: Increasing customer expansion was also evident in increased average spend as average revenue per user or <unk> grew at 14% year over year.
Matt: Turning to the P&L gross margin for the fourth quarter was 61%, which was 200 basis points higher than the prior year.
Matt: The improved gross margin is driven by our ongoing cost optimization efforts with revenue growth at 14% year over year outpacing cost of revenue growth of 8%.
Matt: And by the improved utilization and extended useful life of our servers from five to six years.
Matt: Adjusted EBITDA was $86 million, an increase of 16% year over year.
Matt: Adjusted EBITDA margin was 41% in the first quarter, approximately 100 basis points higher than the prior year.
Matt: As shown in our current results and historical adjusted EBITDA margins, we continue to balance disciplined growth investments with ongoing gains in operational efficiency.
Matt: non-GAAP diluted net income per share was <unk> 56.
Matt: A 30% increase year over year.
Matt: This increase is a direct result of expanding per share profitability by driving ongoing operating leverage and offsetting dilution through consistent share repurchases.
Matt: GAAP diluted net income per share was 39.
Matt: 160% increase year over year as we continue to both drive operating leverage and prudently manage stock based compensation.
Matt: Q1, adjusted free cash flow was effectively breakeven.
Matt: As we discussed last quarter, our 2025 capital plan is heavily front end loaded and when coupled with normal Q1 specific cash outflows caused Q1, adjusted free cash flow to be significantly lower compared to Q4.
Matt: The lower Q1, adjusted free cash flow level was expected and is fully contemplated in our projected 16% to 18% free cash flow margins for 2025. It does warrant an explanation of how we view growth investments and how they have been and can be funded in the future.
Matt: As a public cloud company, we invest each year in assets, such as servers and network switches that underpin, our simple and scalable cloud and AI solutions and the software that our customers consume for our infrastructure and platform as a service offerings.
Matt: These assets have long useful lives and not only support our current customer usage and revenue, but also will support future customer usage and revenue for years to come.
Matt: The amount of capital that we invest each year in these assets is a function of two drivers.
Matt: The first driver of capital spend is the need to replace existing infrastructure that has reached the end of its useful life.
Matt: Each year, we buy new equipment to replace aged servers and networking gear that has been supporting our existing customers and their usage.
Matt: This capital spend is considered maintenance cap.
Matt: As it is required to maintain the health and stability of current platform and revenue.
Matt: We have continued to improve our maintenance capital efficiency over time by extending the useful life of our infrastructure and by leveraging the natural improvements in price performance of compute and storage infrastructure over time.
Matt: Maintenance capital is generally less than 20% to 30% of our annual capital program were approximately 5% of revenue in a typical year.
Matt: This is an important point for us to emphasize as it implies that the steady state adjusted free cash flow margin can be approximated by including only our maintenance capital and our adjusted free cash flow calculations.
Matt: For reference in 2024, this would have reflected a steady state adjusted free cash flow margin in the mid <unk>.
Matt: This maintenance capital dynamic, where a small portion of annual capital is required to support the existing business is a sign of strong economics and is similar to what you see in datacenter and tower companies, where very little capital is required to maintain their profitable platforms.
Matt: The second and primary driver of capital is the need to provide incremental capacity for both existing customers as they expand their usage and for the new customers that we acquire.
Matt: This capital spend is considered growth capital and it enables growth not only in the current year, but also in the years to come.
Matt: Paybacks on our growth capital are attractive with core cloud growth capital paying back in less than two years NII growth capital, having paybacks around three years.
Matt: The amount that we spend on growth capital will vary from quarter to quarter based on our demand outlook and deployment timing, but it's typically at least 70% to 80% of our capital program and approximately 15% of revenue.
Matt: As the company grew from the IPO to $840 million in IRR, we elected to fund all of our maintenance and growth capital ourselves using our balance sheet and strong cash flow generation to buy and own servers and other equipment that we use to run our business.
Matt: All of the Companys capital expenditures since IPO have been funded by organic cash generation alone as the $1 5 billion in convertible debt and a $723 million net proceeds from the IPO. We're all effectively used to fund $1 6 billion in share repurchases over $450 million in M&A.
Matt: And repayment of approximately $260 million of debt.
Matt: Looking forward as we work to reach and exceed $1 billion in revenue. It is even more important to understand the dynamics of our growth capital investments.
Matt: Our strategy is squarely focused on both serving larger digital native enterprises and pursuing our differentiated AI.
Matt: Both of these initiatives created opportunities for us to accelerate our growth as we are seeing and winning larger workloads individual customers and partnership opportunities and then we have seen in the past as evidenced by the $20 million plus two year commitment with a strategic customer and partner that Patty had referenced earlier in his remarks.
Matt: With these larger growth opportunities come more and longer customer commitments, but also larger capacity and capital requirements.
Matt: It also changes the dynamics of how we plan for and provision for growth as we can no longer rely solely on broad utilization trends to trigger growth capital investments and instead have to have capacity available or be quickly able to deploy it to meet the needs of rapidly growing enterprises across both our core cloud and AI platforms.
Matt: Said differently when we have an opportunity to win a large workload customers are willing to make long term commitments that they expect that the capacity is immediately available which requires us to have capacity in front of demand more so than we've needed in the past.
Matt: The investments we made in Q1 to add capacity in Atlanta are a great example of this upfront growth capital investment.
Matt: With Atlanta, we are bringing on a larger amount of incremental capacity to serve our growing AI pipeline and we're doing so in a lower cost facility that will improve our long run gross margin profile.
Matt: As we look ahead at our growth potential in the second half of 2025 and beyond we anticipate an increasing portion of our growth to come from our larger digital native enterprises and from larger interest anymore.
Matt: Both of which will come with more committed contracts to accelerate growth beyond our current outlook, while maintaining healthy free cash flow. We are actively evaluating adding additional funding tools for growth capital that are similar to those currently deployed by our public Hyperscale appears.
Matt: With our plan to have fully addressed our balance sheet by the end of this year and with our ongoing adjusted free cash flow generation.
Matt: Certainly can and will continue directly funding growth capital ourselves. However.
Matt: However, we are also exploring adding additional funding financing options to our funding toolkit, where we could leverage the strong appetite from capital partners to support cloud and AI growth capital investment through leasing arrangements.
Matt: Pursuing such a strategy will enable us to maintain or improve our strong cash flow generation, while also reducing the upfront capital required to take advantage of the tremendous growth potential we see in both serving larger digital native enterprises and growing AI inferencing workloads.
Matt: We are early in this evaluation and with only Leverages financing tool if it enabled us to accelerate growth beyond our current outlook.
Matt: We will share more on this potential strategy as we advance our thinking over the coming months and quarters.
Matt: Shifting back to Q1 results, we continued to maintain material cash and cash equivalents and ended the quarter with $360 million in cash.
Matt: We continued to execute our share repurchase program in the quarter with $59 million of repurchases in Q1 buying back approximately one 6 million shares.
Matt: This brings our cumulative share repurchases since IPO to $1 6 billion and $34 1 million shares through March 31 2025.
Matt: At the end of Q1, we had $23 million remaining on our share repurchase authorization.
Matt: We remain well positioned to continue investments in both organic growth and share repurchases, while we actively address our existing debt.
Matt: On the debt front, we announced this morning that we have entered into a secured five year credit facility agreement consisting of a 500 million nine months delayed draw term loan a as.
Matt: As well as a $300 million revolving credit facility.
Matt: This new loan bares interest on the drawn amount in the range of sofa, plus 175% or just over 6% based on the Sterling net leverage.
Matt: We will use the proceeds from this facility to refinance a portion of our existing convertible notes that are maturing in December 2026.
Matt: This loan is the first step in 2025 to fully address the 2026 converge before the existing facility goes correct.
Matt: With our strong balance sheet growing adjusted EBITDA and cash flow generation, we have multiple attractive options available to us that we're considering including convertible debt term loan b and high yield auctions.
Matt: We will continue to evaluate these options over the balance of this year to fully address the 2026 convert and optimize our long term cost of debt.
Matt: Moving onto guidance I will now share our financial outlook for the second quarter of 2025 and for the full year.
Matt: For the second quarter of 2025, we expect revenue to be in the range of $215 five to $217 $5 million, representing approximately 12, 5% year over year growth at the midpoint.
Matt: For the full year 2025, we are maintaining our revenue guidance in the range of $870 million to $890 million, representing approximately 13% year over year growth at the midpoint.
Given our strong Q1 performance and our visibility into our customers' usage trends, we remain confident in our full year guidance. Despite the uncertainty in the current economic and geopolitical environment.
Matt: For the second quarter of 2025, we expect our adjusted EBITDA margins to be in the range of 38% to 40%.
Matt: For the full year, we maintain our adjusted EBITDA margin guide, which is in the range of 37% to 40%.
Matt: For the second quarter of 2025, we expect non-GAAP diluted earnings per share to be 42 to 47.
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: Turning to adjusted free cash flow, we maintain our guidance adjusted free cash flow margins for the full year at 16% to 18%.
Matt: We intend to take advantage of the nine months delay draw feature of our new $500 million term loan a and do not anticipate drawing that facility until late in 2025 and as such do not anticipate material interest expense on that facility in 2025.
Matt: Consistent with our historical guidance practice, we are not providing adjusted free cash flow guidance on a quarter by quarter basis, given is heavily influenced by working capital timing as you saw in our Q1 results.
Matt: That concludes our prepared remarks, and we will now open up the call to Q&A.
Matt: If you wish to ask a question. Please press star followed by one on your telephone and wait for your name to be announced that is star. One if you wish to ask a question.
Matt: We ask that you limit your questions to one per person. So we are able to take as many questions as possible.
Speaker Change: Your first question comes from the line of Jason Ader from William Blair. Your line is open.
Matt: Thank you.
Jason Ader: Sorry, just on the Gen. II platform can you give us a sense of why now.
Jason Ader: It is expected to be generally available I know, it's still essentially like a beta situation now and then and then just related to that you talked about sort of the differentiated AI opportunity.
Jason Ader: For digital Ocean can you just.
Jason Ader: Walk us through how you think about.
Jason Ader: Digital osha's differentiation within that.
Jason Ader: Landscape. Thank you.
Jason Ader: Thank you Jason.
Jason Ader: On your first question.
Jason Ader: Yes, the den AI platform, we announced in January and we have been progressively adding a lot of new features while still in.
Jason Ader: In private beta in public beta now.
Jason Ader: We expect to go live sometime.
Jason Ader: By end of Q2, beginning of Q3, it's just a function of how many additional capabilities we can.
Jason Ader: Add to the platform.
Jason Ader: Making it super comprehensive for customers to be able to deploy a real world Agentic workloads on it.
Jason Ader: I gave several examples of companies that are leveraging it in production environments today.
Jason Ader: And we are getting excellent feedback from customers, both our existing customers as well as new AI native startups in companies that are giving us excellent feedback.
Jason Ader: So and I guess.
Jason Ader: The sum.
Jason Ader: As well in terms of 5000 customers 8000 agencies are tremendous numbers for a product that is not even in GE.
Jason Ader: Currently so we're super bullish about the future of this NII platform and we feel.
Jason Ader: Our full.
Jason Ader: The second part of your question was what is our strategy and differentiation from our AI perspective, So I have been talking about our IP stack infrastructure platform and applications and as I outlined in today's call. We are making good progress on all three layers. The best part about our infrastructure layer is that.
Jason Ader: A majority of the workloads that we're seeing now are on the inferencing side and what is important to.
Jason Ader: Understand on the inferencing layer is that it is powering real world use cases, rather than just proof of concept our experimentation, which means it is serving the needs of end users either an a b to b scenario, a b to C scenario. So.
Jason Ader: I strongly believe that with our infrastructure capabilities today.
Jason Ader: On AMD and in media, we are differentiating ourselves in our ability to run a full stack cloud that powers inferencing assay explain them.
Jason Ader: Investor Day, inferencing needs lot more than just <unk>.
Jason Ader: Bringing gpus online inferencing typically requires a full stack general purpose cloud, which is where we distinguish ourselves from a number of the other neogen <unk> cloud that have emerged over the last few quarters.
Jason Ader: On the platform layer, we just talked about the Gen. II platform. Our strategy there is to democratize, the access and make it super Super easy for.
Jason Ader: Non AI native companies to consume Gen AI in their application stack and the proof is in the numbers I talked about like over 80% of the traction today, we are seeing is from existing.
Jason Ader: Digital Ocean digital native enterprise customers, who are not AI natives, but.
Jason Ader: Recognize the importance of adding gen AI into their application and we are making it super easy for them to build sophisticated Gen. AI features into their platform and finally, the agent declare our cloud ways co pilot is doing really well, we're getting real customer feedback and that should go into GAA sometime.
Jason Ader: The next couple of months as well. So overall that is our AI strategy to democratize access of AI, starting from inferencing on the infrastructure layer two gen AI platform and.
Jason Ader: Agents that will change the cloud experience. So hopefully that gives you a perspective on our infrastructure platform and application layer.
Okay.
Speaker Change: Your next question comes from the line of pendulum Bora from JP Morgan Your line is open.
Pendulum Bora: Oh, great. Thank you congrats on the quarter.
Speaker Change: Paddy maybe talk about just what are you seeing from a macro standpoint, obviously, there's a lot of unfolds.
Speaker Change: Tim do over there, but so far in April and Q2 are you seeing any change in customer buying behavior or any change in the top of the funnel are you seeing people deploy in the cloud optimization efforts back again.
Speaker Change: Both domestically and internationally.
Greg Quintile: Greg Quintile and thank you for the question.
Greg Quintile: Give you the answer for US what are we are observing is reflected in our outlook that Matt talked about.
Greg Quintile: So let me take a step back.
Greg Quintile: And remind everyone that our customers are digital native enterprises right.
Greg Quintile: And we had a really solid evidenced in Q1 that our strategy around.
Greg Quintile: The digital natives around builders scalar scalar plus it's growing really robustly at 16% and for digital native cloud as a topline driver right and we have very clear visibility into customer usage on a daily basis, we monitor several utilization trends.
Greg Quintile: Across the world.
Greg Quintile: And we are seeing some pockets of customers.
Greg Quintile: That have unique impacts on their business. So for example at Teck is a vertical that we have seen.
Greg Quintile: That is a little bit more in a heightened.
Greg Quintile: Sense of.
Greg Quintile: Cautiousness, but as you know, we don't have any vertical geographic or even customer concentration.
Greg Quintile: What we are seeing is baked into our outlook and to the second part of your question pendulum.
Greg Quintile: We have several leading indicators we look at we look at the usage patterns of our large customers. We look at the usage patterns of the long tail of our customer base, we look at.
Greg Quintile: The top of the funnel in terms of new business acquisition through our self service funnel, we look at.
Greg Quintile: The pipeline that is being generated by our sales team, but also from our partners we look at.
Greg Quintile: Our AI demand.
Greg Quintile: And from what we can see.
Greg Quintile: We have taken a very appropriately cautious approach to <unk>.
Greg Quintile: Protecting the outlook for the rest of the year, because we don't know exactly how things are going to unfold, but given the lack of concentration of our customers and geography and vertical segments, we feel fairly confident in our full year guidance.
Greg Quintile: Okay.
Greg Quintile: Your next question comes from the line of Gabriela Borges from Goldman Sachs. Your line is open hi, Good morning, Hi, Matt Thanks for the details.
Speaker Change: I'm observing a shift in how you're talking about the business from being mostly reactive to being a little bit more predictable.
Speaker Change: And larger deals and maybe talk a little bit about the $20 million multiyear deal that you signed in particular.
Speaker Change: How do you think about the potential for more deals like that and what is the conversation look like given how quickly AI is changing and in France. In particular is evolving how does how do you get to the point, where our customers comfortable committing to long term what sort of roadmap discussion of that thank you.
Speaker Change: Yes, Thank you Gabrielle a great question.
Speaker Change: So yes as I mentioned in my prepared remarks, we are having a lot of at bats, with these larger digital native enterprise customers and the example that I call that we'll have more details as we start working on the implementation of that.
Speaker Change: Customer commitment, but taking a big step back and looking at the overall landscape.
Speaker Change: This.
Speaker Change: Conversations that we're having with customers for a multiyear.
Speaker Change: Large commitment contract is bolt on AI inferencing as well as on core cloud I think.
Speaker Change: A lot of the functionality that we have released in the one specifically that I highlighted this.
Speaker Change: Earnings call are all lending themselves to having these kinds of conversations and giving our customers confidence that they can now move larger workloads to our platform without having to be all or nothing so the partner connect functionality.
Speaker Change: I, specifically mentioned, how it enables stage migration, where you can run parts of the workload.
Speaker Change: <unk> and multi cloud scenario and move some of the heavier workloads to digital ocean in a staged manner.
Speaker Change: There are so many other things we're doing both on the core infrastructure side, but also in our platform as a service service with <unk> now scaling to 1000 nodes.
Speaker Change: Larger storage in database capabilities with our <unk> sequel, and post stress. So it is a collection of all of these things plus the continuing maturity of our go to market motion that is why I, specifically called out the Webinars case studies, even though they may be they may sound very obvious.
Speaker Change: <unk> for a company like us to be doing that these are some new muscles that we're exercising and also the enterprise sales motion that we now have.
Speaker Change: Putting our arms around our biggest customers and really.
Speaker Change: Give them.
Speaker Change: True Onboarding experience. So it's a collection of all of these things that are giving us better at bats and of course as the quarters go by.
Speaker Change: We are getting better and better at converting a lot of these things and I just wanted to.
Speaker Change: Bring attention to add that this is not a.
Speaker Change: Blue bird by any stretch we are actually starting to see these kinds of deals in hand, we're also evolving our thinking in terms of.
Speaker Change: What we need to bill how we need to support it how we should.
Speaker Change: Sell these capabilities.
Speaker Change: And Matt talked about how we should be financing these things going forward. So it is a whole company kind of <unk>.
Speaker Change: Conscious push towards getting more predictability into our platform, especially as we scale with the larger digital natives.
Speaker Change: Your next question comes from James Fish of Piper Sandler Your line is open.
Speaker Change: Hey, guys just wanted to build off of Gabriel's question, a little bit there, but with the increasing.
Speaker Change: The need to increase capacity for new customers coming on Matt How are you thinking about capex investments for the year and how much are our pipeline for these large strategic deals for the year that requires this level of capex investments that have you kind of having a way all of these options.
Speaker Change: Beyond just refinancing the $1 5 billion really.
Speaker Change: Good question.
Speaker Change: The capex that we accelerated into the first quarter.
Speaker Change: We front loaded into the first quarter was primarily around getting the Atlanta data center up which gave us a tremendous amount of capacity.
Speaker Change: That capacity is what underpins the growth projection in the revenue outlook and the incremental IRR for 2025, and as Pat indicated with that one large customer we have the <unk>.
Speaker Change: Opportunity to fill it in in chunks as well as using kind of the.
Speaker Change: On demand AI capabilities with our GPU droplets.
Speaker Change: Other capabilities around the Gen II platform.
Speaker Change: As we think about the capex requirements going forward again.
Speaker Change: Comfortable with.
Speaker Change: Estimates that we had with the capital we need for this year and the revenue projections that we have for this year, but as we think about it over a longer period of time.
Speaker Change: You got to come back to the fact that we are very very focused on driving revenue growth and doing so while generating strong free cash flow margins.
Speaker Change: As we think about some of the lumpier potential needs for the.
Speaker Change: For capital around that when we win some of these bigger customers. That's why we're thinking about tools like hey, what we could we could lease some of the incremental gear if it accelerated our growth beyond what were already contemplating because we can fund what we are already contemplating.
Speaker Change: Very very cleanly within the free cash flow margins that we've articulated but as we see bigger and bigger opportunities we want to make sure that we have the flexibility to pursue those and so we will add some financing tool.
Speaker Change: Rules to our toolkit to be able to accommodate that so that we can both accelerate growth and.
Speaker Change: Not only maintain but even potentially improve the free cash flow generation of the business.
Speaker Change: Your next question comes from the line of Tom <unk> from Cantor. Your line is open.
Speaker Change: Hi.
Speaker Change: Thanks for taking the question and.
Speaker Change: Gratulation on me.
Speaker Change: Uptick in demand here maybe.
Speaker Change: Just building off of Mr fish questions here.
Speaker Change: What kind of changed from the April 4th Analyst day in terms of what Youre seeing in the market timing I think from an element would be.
Speaker Change: Full here.
Speaker Change: What type of uptick.
Speaker Change: And accelerated growth in the out year Lake.
Speaker Change: Are you kind of seeing from this uptick and what with the makeup.
Speaker Change: Would it be more recurring revenue or would it be more consumption days from a GPU base just a little more color. There just in terms of the what are you seeing in terms of an uptick in the large deals and potential needs for increasing those capex that'd be helpful.
Speaker Change: But what I'd say is tied back to Gabriele earlier.
Speaker Change: Earlier, which is we're now at a point, we got through Investor Day, We've got a lot of the AI capabilities in place we are observing the rapid changes in the market and the shift towards inferencing majority of our AI revenue right now is inferencing and.
Speaker Change: Again, we feel very good about the near term outlook of the business. Despite the economic kind of uncertainty, but as we think about 'twenty six 'twenty seven and beyond and we think about okay. How do we.
Speaker Change: Positioning ourselves to take advantage of even accelerating the growth beyond what we articulated that.
Speaker Change: Investor Day.
Speaker Change: We're just thinking like what are the physics of that and how would we do that and how would we both take advantage of some of these larger lumpier deals, while maintaining our free cash flow improving it.
Speaker Change: That's why we're thinking about.
Speaker Change: Some of these other these other structures and so the demand is one we didn't have the Atlanta data center until just recently literally in the last month or so and so a lot of the bigger opportunities. We didn't have the ability to win those because we didn't have capacity available.
Speaker Change: And so for us as we've turned that capacity up we've been able to get a big win already.
Speaker Change: That's what's really accelerating the thinking about okay.
Speaker Change: We got we feel good about 2025, but we got to start planning and thinking about the ways in which we can we can position ourselves.
Speaker Change: Grow beyond what we had communicated in Investor day in 2026 and beyond and that's why we are.
Speaker Change: Considering the things that we're considering.
Kingsley grief: Your next question comes from the line of Kingsley grief from Canaccord.
Speaker Change: Your line is open.
Kingsley grief: Alright. Thank you on the named account engagement model, how many accounts have you targeted today and then how are you evaluating expanding that program to more prospects as you continue to see nice expansion results with those customers.
Speaker Change: Yes, hiking slate.
Speaker Change: So right now we are targeting our top 3000 spenders.
Speaker Change: That list has expanded as I mentioned from last year, we covered 500 exiting the year. So we just expanded coverage.
Speaker Change: So we are looking at several.
Speaker Change: Several leading indicators too.
Speaker Change: And farmers when we start scaling it further.
Speaker Change: My philosophy is always to nail before scaling so we are still.
Speaker Change: Going to be in the face of maximizing the ability to engage with these these companies. We also have.
Speaker Change: A different propensity based engagement model with another 5000, or so accounts based on their propensity to spend based on their demographics their usage of certain.
Speaker Change: Aspects of our platform and so forth so think of them as.
Speaker Change: <unk> 5000 customers that look like our top 3000 customers, who have the propensity or the potential to be scalar surplus or spend $100000 or more on our platform, we are proactively engaging with them and.
Speaker Change: And bringing the goodness of our platform to these customers. So between these two I expect us to be busy for the remainder of the year.
Speaker Change: We are still trying to ensure that we have the right sales enablement model right.
Speaker Change: Sales rep productivity metrics and things like that before we plan to expand that.
Speaker Change: We are getting to a point, where we can predict exactly what the productivity of our.
Speaker Change: Single Rep.
Speaker Change: Can be and making sure that we are able to scale that to a reasonable degree will give us the confidence to invest more in the future but for this year, we want to ensure that we're nailing. These two motions.
Speaker Change: Your next question comes from the line of Josh Baer from Morgan Stanley. Your line is open.
Josh Baer: Great. Thanks for the question.
Speaker Change: Really interesting dynamic to explore the alternative financing.
Speaker Change: To enable growth to accelerate beyond your current outlook.
Speaker Change: Just wondering what youre seeing from the supply constraint side, if you could maybe touch on Gpus, but also more broadly on the on the leasing market.
Speaker Change: Tight it is in house.
Mike: Mike commented thanks.
Mike: Yes, Josh on the on the supply side, we remain kind of I'd say.
Mike: And a real healthy position from a supply standpoint, we don't we don't order.
Mike: Gpus Cpus and such massive quantities that we're having to get in line behind.
Mike: Super large orders in general the market as I'm sure you guys have heard.
Mike: It's a lot.
Mike: A lot less supply constrained from a GPU standpoint than it was.
Mike: Last year, so we've not had any issues with getting new capacity and we have a variety of sources, we've got three or four different <unk>.
Mike: Global Oems that we can we can access booked in video.
Mike: AMD Gpus from and clearly a lot of sources for CPU. So.
Mike: We don't really worry too much about the supply chain side on the.
Mike: On the infrastructure side in terms of the leasing alternatives, there's a tremendous amount of interest from whether it's <unk> or.
Mike: It's other kind of capital providers.
Mike: Enter into kind of leasing or similar arrangements. There is a lot of money that around the globe.
Mike: Turning to be put to work in.
Mike: In support of infrastructure in particular, but certainly in our case it will be.
Ann: Hi, Ann.
Ann: The GPU and CPU, so theres a lot of different alternatives and part of the reason that we're bringing it up now proactively as that were engaging in some of these calls and it gives us the ability to talk to a lot of different people and explore options I just wanted to reiterate though we don't we don't need to do this to deliver the growth rates that we're delivering now we generate a ton of cash we've got a really.
Ann: Free cash flow profile, we are going to take care of our our our balance sheet and the convert by the end of this year. We're in a very very good position. This would enable us to grow faster than that without having to compromise.
Ann: Near term free cash flow. So that's why we're interested in and we think theres a lot of Counterparties out there.
Ann: Would be supportive of that kind of.
Ann: Incremental addition to our funding strategy.
Ann: Great. Thank you.
Mark Cheng: Your next question comes from the line of Mark Cheng from Citi. Your line is open.
Mark Cheng: Hey, great. Thanks, guys for taking the question.
Mark Cheng: Obviously nice to see the improvements in traction with enterprise cohort, but really youre holding I guess.
Mark Cheng: Sales and marketing spend pretty steady so keay number one give a sense of how you're really able to achieve incremental local level of leverage, especially given the new programs you are already running.
Mark Cheng: I guess like your customer behavior changes relative to your expectations and number two how should we really think about the spend trajectory from here and when should we maybe see an acceleration of those go to market investments. Thanks.
Mark Cheng: Yes, so I can start.
Mark Cheng: Thank you for the question so I just answered.
Mark Cheng: The question from Kingsley on sales and marketing and our philosophy to investment there I think we are still early in the cycle in terms of understanding the best ways to serve our customers.
Mark Cheng: And largely our customer acquisition engine has been from self service funnel and now we are just expanding it to additional motions like adding a channel partner program getting a small but mighty team in terms of AI outbound sales and also expanding a couple of other parts.
Mark Cheng: Ship funnels, but we.
Mark Cheng: We are learning very very rapidly what it takes to bring in new business through these channels, but also leverage this named account model and farming to expand the footprint of our existing customers. So there is a lot of learning ahead of us in the spirit of nail.
Mark Cheng: Enabling some of these unit economics, so that we understand exactly what the points of leverage are in.
Mark Cheng: <unk> conviction to invest behind this to drive expansion even further.
Mark Cheng: And we also want to be appropriately cautious given.
Mark Cheng: What our customers are dealing with in today's economic climate.
Mark Cheng: I believe there are two.
Mark Cheng: Major factors that are going on one is the economic dislocation that is happening, but also more importantly, a technology dislocation, which is largely positive for digital native customers.
Mark Cheng: We're going to be more technology hungry as part of this so we are.
Mark Cheng: Very cautiously observing these things and we will invest at the right time behind the right unit economics to get more leverage and drive expansion and new business appropriately.
Speaker Change: As we are at the top of the hour I would like to thank all speakers for today's presentation and thank you all for joining us.
Mark Cheng: That concludes today's conference you may now disconnect.
Mark Cheng: Yeah.
Yeah.
Mark Cheng: Yeah.