Good day and thank you for standing by. Welcome to the DigitalOcean Q4 2021 Earnings Conference Call. At this time, all participants are in listen-only mode. [Operator Instructions] I would now like to hand the conference over to your speaker today, Mr. Rob Bradley, Vice President of Investor Relations. Please go ahead.

Thank you, and welcome, everybody, to DigitalOcean's fourth quarter and full year 2021 earnings conference call. Joining me today is Yancey Spruill, our Chief Executive Officer; and Bill Sorenson, our Chief Financial Officer. Before we begin, I want to cover our safe harbor statement. During this conference call, we will be making forward-looking statements, including our financial outlook for the first quarter and full year, as well as statements about goals and business outlook and industry trends, market opportunities and expectations for future financial performance and similar items, all of which are subject to risks, uncertainties and assumptions. You can find more information about these risks and uncertainties in the Risk Factors section of our filings with the SEC. We remind everyone that our actual results may differ, and we undertake no obligation to revise or update any forward-looking statements. Finally, we will be discussing non-GAAP financial measures today. Reconciliations between our GAAP and non-GAAP financial results can be found in our earnings press release, which was issued earlier this morning. With that, let me turn the call over to our CEO, Yancey Spruill. Yancey?

Thanks, Rob. Good morning and thank you for joining us. I'm excited to share some insights about the incredible year we had in 2021, as well as preview our plans for 2022. We are fortunate to be able to serve the large and growing market of developers, startup entrepreneurs through small and medium-sized businesses. Collectively, per IDC, they spend roughly $70 billion annually today on infrastructure and Platform-as-a-Service, and this spend is projected to grow to over $140 billion in the next few years. Our customer base reflects this large global trend of individuals building software for any sort of application and given the low cost and high performance of cloud computing, launching businesses that enable them to pursue a dream of entrepreneurship. DigitalOcean is purpose-built to serve this opportunity, with global infrastructure and software services that leverage offerings that are relevant from the early testing of ideas through the needs of scaling and SMB. I want to frame the review of the strong year that was 2021 within the context of transformation. Not only did we transition from being a privately held to a publicly traded company in 2021, but we also executed on the transformation of our business across every key indicator, resulting in growth accelerating, profitability improving, capital intensity declining, which cumulatively have resulted in achieving our first year of positive free cash flow. Let me share a few details on just how much we have improved our positioning to capture this limitless opportunity. Beginning with our top line, revenue growth in 2020 was 25%. And today, we are reporting full year 2021 revenue growth of 35%, and we exited the year growing even faster with Q4 at 37% growth. Our growth acceleration was driven by an 1,100 basis point improvement in net dollar retention and 900…

Thanks Yancey. Good morning everyone and thanks for joining us today to discuss our strong quarter and finish to our first year as a public company. Once again, we saw another quarter of strong performance in all of our key operating metrics in terms of revenue, customer acquisition and retention, cost management, and free cash flow generation. Investments we've been making are clearly paying off, and I'm pleased with the successes that we achieved in 2021, which set us up well on our path towards achieving $1 billion in revenue in 2024 and generating $200 million in free cash flow. I'd like to begin my remarks with comments on our financial improvements in 2021, followed by some color on KPI gains before turning to our financial outlook for this quarter and year. As we've discussed in the past, our key operating metrics of total revenue growth, ARR, NDR, and ARPU formed the foundation of our balance scorecard and we achieved high marks in 2021. And while annual results were very encouraging, the quarterly results and progression are what is particularly exciting and which clearly display the acceleration that we are seeing. Revenue growth for the year was 35% and we exited 2021 growing even faster at 37% for the second consecutive quarter. Annual recurring revenue, or ARR, grew faster than revenue for the full year and was up 37% for the year and the fourth quarter. In total, we added $133 million of new ARR in 2021 versus $72 million added in 2020. In addition to solid topline results, we have also continued to make progress in operating efficiency and profitability while still making incremental investments in key areas. As mentioned previously, we've been focused on reducing the cost of delivering our product by working closely with our key vendors…

Thank you. [Operator Instructions] Your first question comes from Tim Horan from Oppenheimer. Your line is open.

Thanks guys. Can you update us on your thinking on value-added services? Maybe what's the total percentage of revenues now? And where that can go to and how does that compare to -- how do the margins compare on that versus your core products? And then are there many other new products that you can kind of roll out on top of what you have now? Thanks.

This is a huge area for us. We talked about the growth of, for example, our database as a service into the mid-20s in ARR ending last year. That's just in 2 years. And so we found is adding a database, those companies go from scaling their businesses, they need a database tool. They need -- as they go their engineering headcount, they need deployment tools like Kubernetes and serverless. And then our marketplace also supplements the infrastructure to enable them to grow and scale as their workforce and teams growth. So this is a core aspect of our strategy. We exited the year approaching 20% of total revenue of these services. We'll continue to add targeted capabilities. We'll have serverless -- will expand our services as we mentioned with the Nanea tools coming online here customers now, but generally available producing revenue beginning in Q2. Look, there are other areas that we will look to invest in. But it's important we'll be adding relevant and sort of targeted capabilities given our customer base is early in the journey. We don't need this long-extended product list. So we do need some incremental capabilities, for example, in AI and sort of tool is one that comes to mind. So, we're looking to do that. We'll have more to say as we move through the year on new areas. And we'll look at both organic innovation around new services as well as leveraging the balance sheet and M&A, so we can do more in the same period of time by moving parallel with both organic and organic. So we'll prioritize it in that fashion. We would expect over time, as we get to that first $1 billion in a couple of years, for these services to supplement the IS part of the portfolio in the mid-20s to upper 20s would be a good target. And that's probably where we would land on longer term because as companies grow and scale, they consume more infrastructure in addition to using the managed services. So they tend to work in a very complementary fashion. And you've seen our growth acceleration hasn't just been as a result of adding these other software and platform services, our IAS growth rate has also accelerated in cost.

And just a comparison, I think you were -- it was closer to 10% of revenue a year ago, and I think we were thinking maybe we can get to 20% of revenue. So it seems to have ramped up much faster than expected or than I expected anyway. Just to be clear?

Tim, just to be clear, there's 2 pieces relative to the revenues that Yancey's speaking to, which is the 20%. They're comprised of 2 areas. There is clearly the value-added service element of it, and there is the optimized elements of it. So if you look at the value added to use your terminology, that's running around 11% or so. And the other optimized, which is more related to our core infrastructure products, is rather 9% to 10%. So we look internally at something we call an innovation index, which includes a little bit of both. So that probably is the reason for the confusion. If we look at that group of the sort of 10% to 11%, that as a whole is basically going up towards 10%. And that's a key piece that will be complemented with the additional focus that Nancy mentioned in terms of new product offerings.

Got it. Thanks for clarification.

Your next question comes from DJ Hynes from Canaccord. Your line is open.

Thanks Yancey and Bill. Good work on the quarter here. So it seems like this cohort of 99,000 kind of high spend customers is really what's powering a lot of the company's ARPU expansion and NRR improvement. And obviously, it's fueling growth. Can you talk a little bit about direct sales investments and product expansion? Can you just double-click on what you're planning to do to kind of nurture and expand this group of customers?

Well, the -- we have -- there's multiple, one, to bring more customers who are larger day one. We're going to add to our sales capability, and we've seen quite a bit of traction over the last two years in doing so and expand that from just inbound, mostly inbound or inside sales of focusing on monetizing the cohort faster to also accelerating investment in outbound, bringing net new customers on the platform. And also a partner channel. So there's customer acquisition side of it. We're expanding sort of -- the product set really is relevant, adding these new capabilities is for businesses. So the product strategy really supports, enabling customers to go from testing to launching and scaling businesses on the platform. The more other services we have, the more runway they have. And what we found is customers, we're getting the lion's share of a lot of the cloud spend for most of these customers. And what makes us attractive is the relevant capabilities are simple, easy to use, obviously, competitive price we offer great documentation, tutorials to help them when they get stuck. We have a support model, which is another pillar in our value differentiation, every customer gets support and the larger customers have a more customized support experience, which they highly value and it's a huge differentiation from alternative platforms. And that's a critical aspect to supporting nurturing the SMB customer on the platform. So net new capabilities on sales and channel. Our product strategy really supplements and gives people a longer runway to do more on our platform as they're building these businesses, like the customer case study we just cited and then our support model is so foundational to the experience for customers where they feel like they can get help and have a partner in helping them build their business on DigitalOcean.

Yeah, yeah. Super helpful. Maybe a follow-up, I'd love to hear if you have any thoughts on kind of Akamai's entry in the space. Obviously, they bought Linode. I know that that business is less than one-quarter of the size of DigitalOcean. But any thoughts on implications for the space or DigitalOcean specifically?

Well, I think the validation of people put capital in the sector is always a validation of our thesis and the opportunity. I think it couldn't have been clearer from their comments, their intentions to pivot that infrastructure into the enterprise. I think that was notable. I also thought it was interesting that they quoted the growth rate of Linode being in the mid-teens. So you now have a couple of data points with OVH Cloud, Linode in the teens growth rate. We talk about our $70 billion space for SMB and developer cloud being $70 billion, growing 27%, and we're growing 37%. So we're growing faster in our segment of the market for cloud. And you could see that being validated by some of the growth statistics that you see for OVH in the node. So I think that it speaks to, our strategy is working to capture share in the part of the cloud infrastructure and PaaS market where we operate. And so, I thought that, that was interesting to note that from the call last week.

Yes, yes. That’s super helpful. Thank you, guys.

Thank you, DJ.

Your next question comes from Wamsi Mohan from Bank of America.

Hi. Yes. Thank you. Yancey, you mentioned this outbound sales motion focus. So clearly, you're going to be targeting larger customers that have a need for support and take some of the share from existing cloud providers. So can you give us maybe some early thoughts on how you intend to go develop this pipeline? And its wasn’t clear to me, why you thought that the sales and marketing intensity won't increase, or maybe I misunderstood that? And I have a follow-up.

Well, at current percentage of revenue, if we could keep it flat or -- and it may go up a little bit. That depends on our ability to drive growth. And if we can see substantial acceleration and we obviously want to get this business into the 40%-plus area. And if sales is helping us do that. We'll take it up from current levels as a percentage of revenue. But not much, because our customer acquisition model is so efficient on self-serve. But if we spend 37 -- we grow spend at 37%, it doesn't change as a percentage of total revenue. If we grow a little bit more than 37%, it might change a little bit. So that was what the reference to was, to not changing materially as a percentage of the overall sales and marketing spend. But we're just focused regionally in terms of outbound calling, and we're getting traction both in the Europe, Asia, South America. And again, we're focusing on small businesses. And trying to leverage a partner channel as well to go after that opportunity with a very differentiated sort of message to customers to come on to this platform. So that's really the strategy. It's targeted and focused on our segment of the market. It will be regional in nature. It will be sort of outbound, direct and channel. And we're excited to make those investments and are optimistic they're going to continue to see the traction. And sales have gotten about 3% of total revenue last year. We expect to move that into the upper single digits as a percentage of our total revenue, and that will be a tailwind of the growth rate as we move forward.

Okay. Thanks, Yancey. And then, if I have a follow-up. Your overall customer growth decelerated. And I appreciate the segmentation details that you're providing here. But I think last quarter, you called out the deceleration is a function of some bad actors that you meaningfully didn’t want on your platform. What are the dynamics there? And do you think that, that overall number can still get back to a, call it, a high single-digit growth rate given that, that still acts as part of the pipeline that -- of customers that you incubate and eventually scale?

Yes. Well, our growth rate for customers last quarter is in line with expectations we set at the last call with some of the headwinds we talked about in Q3. So – and we expect it to sort of start to lap that and outgrow it as we get through this year and certainly into next year. So we certainly expect to be back in the upper single digits. And we still have a target longer term to get to a sustained 10% or better. And again, the relevance and importance of that number is that, that sets the table for the smaller customers. The vast majority of customers we onboard the platform are in that $10, $15, $20 a month area, where they sit and we nurture. We incubate them, if you will. And the more of those customers we get on the platform, the more option value we have on them graduating into an SMB like the case study we cited on the call. So we haven't – we still expect to get back to upper single digits, hopefully double digits over time. And that's going to be a big tailwind to us supporting a long-term growth objectives that we have. And – but our customer growth last quarter was in line with what we expected. And we expect to be in that sort of range near-term. And then I think as we get in the back half of this year, we'll start to see some lift from that. However, from those $50 or above, which essentially drives the economics of the business, we expect to see growth rates in the ranges we've been experiencing recently.

Thanks, Yancey. Appreciate it.

Thanks, Wamsi.

Your next question comes from Michael Turits from KeyBanc.

Hey, guys. Good morning, guys and what a great metrics. One question, one thing that was interesting that ARR seemed to accelerate a little bit more than revenue. And you also commented that NRR seemed to do really well in December. So anything in particular that seem to be having happening more positively towards the very end of the quarter that might be indicating even stronger growth in the next year?

I don't – net ARR was roughly the same as revenue growth in the quarter. So looking at ARPU just for the month that slightly ahead of where we were. Yeah. I mean, we see acceleration in ARPU over time. Net dollar retention was very strong. And I think it creates a great floor. We did take our growth expectations up on this call from the last call. So we are seeing a stronger business and outlook. And certainly, over the year, we're seeing a business growing much faster today than it was as we were about ready to go public this time last year. So I don't think there's – and that's coming from this cohort of SMBs, who are scaling on the platform. They have more tools. We'll invest and add more tools this year that will fuel that ARPU and expansion of those customers on our platform. And we'll hope to add other capabilities that will capture more share as they grow and expand. So that's the strategy. And – and then adding those smaller customers, the more that we get on that platform, they graduate. And so those are all working right now, and we're excited to get into this year and continue to drive the business growing well into the 30s.

Thanks, Yancey. And Bill, just on CapEx last miss it, did you give a CapEx target for 2022 as a percentage of revenue? And also if you do, are you able to help us with that maybe making sure we're defining it the right way?

Yes. What we're doing this quarter, Michael, is we're moving away from some of the other metrics that we have done before, which is trying to sort of equate to the terminology that a lot of folks look at in terms of comparing performance of other companies in the technology space. So we're moving more to sort of the non-GAAP operating income, less CapEx to get us to a free cash flow margin. If however, you want to look at it in the traditional way, CapEx this year as a percentage of revenue is probably going to be down around low 20%, 21%, 22%. The continued progression you're going to see in that number, which is going to allow us to continue to improve free cash flow. And the other thing I think worth calling out is that if you look at our margins, you're going to start seeing the benefit of the efficiencies, not only in terms of the overall CapEx. But when you look at our GAAP profit margins, you're seeing those in Q4 move above 60%. You'll see a steady progression of that margin up towards 70, lower costs relative to the services we're acquiring is lowering our D&A. And we're also continuing to get traction on our efforts to increase monthly revenue per server, which is a key metric for us and drives our payback period, which I know you've heard us say before, we've reduced down to around eight to nine months, down from around 15 previously. So your simple requestion probably 21%, 22% but then a number of other factors that are working to improve overall free cash flow margin up towards 10%, as Yancey mentioned earlier.

That's helpful. And just to clarify, you said your GAAP gross margins, sounds like heading steadily up towards 70% at this point from where we were?

That's correct. And you saw that clearly in Q4, where we crossed over 60%. You'll see that continuing to improve in the year ahead.

Thanks a lot, guys.

Thanks, Michael.

Your next question comes from Mark Murphy from JPMorgan. Your line is open.

Yes, thank you. And I'll add my congrats on a nice finish to the year. So Yancey, DigitalOcean has always been known for very attractive pricing. You've had these prices that can be 20% to 50% lower than AWS at times. I'm wondering philosophically, how do you approach pricing in this environment, which is extremely inflationary. And do you sense at all that your customers perhaps would expect to be seeing some price increases actually when they're seeing their own salaries rising and real estate costs kind of rising all around that?

Well, I think the core premise of the cloud isn't about inflation, about productivity deflation. But I think our price is staying competitive on price and creating a compelling alternative to more complex, larger platforms is a real value lever for us, especially as we add services to the platform and robustness to our infrastructure. I think that's a core value proposition. At the same time, it allows us to stay at a modest premium to the Linode, Vultr, OVH at the small end of our segment of the market. So our differentiation around simplicity and community, our support model orient open source are actually real differentiators. And I think being competitively priced reinforces that. And we view pricing, you see ARPU growing in the upper 20s. We're a consumption-based model, a big aspect of our ARPU growth as our customers growth organically. And then we're able to supplement or turbocharge that growth with other services they can buy as their employees base grow their work complexity grows and they could do more of that on our platform. So I think that's foundational to how we grow and sort of outrun, if you will, the macro. And we've seen opportunities like our launch of a premium droplet last year at a 20% price uplift through the lever of packaging or giving more alternative use cases through product and packaging as a pricing lever, if you will, and we would expect to see some of that over time. But I think being competitively priced creates a compelling value proposition for us. And as you can see, we're free cash flow positive today and we're driving leverage in this macro environment -- and we're able to do that from operational efficiencies and all the things we do to manage the business and do it in this environment successfully.

Okay. Understood. And Yancey, as a quick follow-up, you had commented that the MongoDB offering will start to materially look your growth rate this year. Can you just give us a quick version of why is that a particular database product scaling quite so rapidly. And I'm not sure what your threshold for materiality is, but -- are you saying that, that could give you a tailwind of point or two maybe of growth in the next year or two?

Definitely going to be a tailwind on the growth rate. And I meant material is real many millions of dollars into this year. So that's what I meant. But it's going to be a material driver. The database capability is growing several times what our overall growth rate is. It's a foundational. When somebody goes from having their first customer, tenth customer 50 customers, you can manage that on a napkin Excel spreadsheet. But at some point, to start having more sophisticated tools and a database is a foundational next level capability for an early-stage business that's ramping. And so that's why you're seeing such incredible adoption of that. And so Mongo just supplements that. We'll look to add other services. We won't have dozens of database capabilities because our customer base doesn't need that expansive of the product set. But Mongo is one of the more popular certainly for digital businesses, and we're seeing that uplift in traction and validation of why we've decided to launch that and partner with Mongo last year.

Excellent. Thank you.

Thanks Mark.

Your next question comes from Raimo Lenschow from Barclays. Your line is open.

Thank you. Can I actually stay on that subject, Yancey? If I think about Mongo is like it's obviously a very popular database offering, et cetera. But like it's only one with the database, but is there a lot of other things that we could think about. Can you just talk a little bit about how you see this evolving between adding more products to increase the ARPU versus kind shying away from becoming a complex AWF? That’s my first question. And the second question is more on the steel effort, I'm just understand it better. If I look at other guys like, for example, Mongo, they use the service to kind of get a customer base and then they use the sales effort to kind of target those kinds in -- kind of, big customer base that you have to see, like those are real customers that would benefit from sales efforts to adding an up-sell, cross-sell better. Sounds more like this is more like getting new customers. Can you kind of elaborate on that a little bit because it was confusing to me? Thank you and congrats. Great numbers.

Thanks, Raimo. I'll have to re-ask the second question. But on the first question, we will add -- there's a couple of other databases that our typical profile of a customer might use that we don't have, but that's not right. And when you look at the enterprise, it's so complex in terms of the industry, scope and scale, geography business models, The bigger platforms will have more alternatives because their customers are more complex. Our customers tend to the then diagram overlap of our businesses, customers tend to be pretty tight. So, we can add one or two other databases over the next year or two, but we don't need much more than that. And so that's what I was mentioning. The second aspect to your question is fundamental. Simplicity is core. Simplicity may be the most valuable attribute of our platform in that it's simple, easy to use, the experience across the products, the integration of the products, the ease at which customers can onboard and grow and scale and test and grow and loan is foundational as a value proposition. And so when our product team -- across our business, when we think about the customer experience, simplicity is in the middle of the room, the elephant in the room all the time. So that's -- and that's why I say we'll add more database engines over time, but it's a small handful, not a lot. And what will be critical is maintaining simplicity and the experience for the customer, having documentation tutorials, the support experience that's integral and also reinforces simplicity and of course, will be open source tools that reinforce the entire experience for our customers. So we will not -- that's the benefit, I think, of being able to focus on this SMB developer ecosystem. They demand simplicity. So, even if we sort of wanted to get out and do something beyond that, that's not interesting for them. And so we're going to stay very focused on them and through our roots around simplicity. So, no need to worry that adding to the product set. We've been able to do that over the last few years and obviously see significant revenue uplift and traction because we're making it easy for customers to adopt new capabilities on the platform. If you can repeat, I wasn't clear what your second question?

Yes. You talked about more direct deals or more investment in kind of direct sales. And I'm just wondering, are these be kind of going back into your installed base and kind of trying to upsell and kind of work those customers better, or is this kind of an additional new customer effort?

Yes. Okay. So, if -- in the 3% of sales over this first couple of years that we launched a sales capability, the predominance of that revenue mix has been inside sales sort of using data analytics tools to go into the cohort and help them get optimizing the platform. For example, you see a customer who may start at $10 to $15, quickly go to $50 or $60. And we will then use some triggers to then engage with them, whereas we might have just waited for them to call into support, we have more proactive effort. So that inside sales effort, and we've been very successful at helping customers get better optimized. Some of early-stage businesses when they get lift off, they're growing so fast that they could use the help. And we found really good innovative ways to engage with them that's been a big driver of that 3%. The direct outbound that we're adding to that and this -- in the back half of last year, this year and our partner is to go out and hunt for existing small businesses, either leveraging partners or other tools, sourcing tools and engage with them about building their business on our platform. : Yeah. That’s clear. Thank you very much.

Thank you.

Your next question comes from James Breen from William Blair. Your line is open.

Thanks for taking the question. Just on the overall sort of growth strategy. I think previously, you sort of moved growth to free cash flow and earnings breakeven level? And given sort of the increases you're seeing the leverage in the business and increases in free cash flow yield, is that sort of still the plan to sort of just plow it back in. And in that case, can we see growth accelerate from current levels? Thanks.

Yeah. Our strategy will be to obviously grow as fast as we can. We'd like to be growing a little bit faster than where we are, and we're investing to do that. And we've been successful at driving growth acceleration, and we'll continue to invest. At the same time, we think that we can manage growth acceleration and also drive operating leverage, free cash flow leverage. And so I think this year is sort of emblematic of what you could expect from us in a typical year where we're going to invest in a faster growth rate and prioritize that across certain areas of the business. This year, we're certainly investing heavily in sales. We'll see leverage in other parts of the business. And obviously, capital intensity, as Bill referenced. And you could see a couple of hundred basis points in operating free cash flow leverage while investing a lion's share of our growth rate back into new capabilities up and down across the business to drive top line and sustain 30%, obviously, better over the long haul and maybe a little bit better than that, obviously, in the near term.

Great. Thanks.

Your next question comes from Pat Walravens from JMP. Your line is open.

Yes. Yancey and team, congratulations on running a tight business and getting the memo on what the new environment needed to see. Yes, it's a hard question, but I think we got to ask it anyway. So obviously, tragically this morning, Russia has invaded the Ukraine. So I think all of our businesses sort of need to look at the situation and the risks and the customers and any employees and partners. And I just wondered if you guys have given thought to that ahead of time, if there are any key points you can make for investors?

Well, in terms of revenue, we do have a small amount of revenue in the Ukraine and in Russia. But a very small percentage of revenue, so not really material in the broader context of what we're generating today. And obviously, our business has helped people through the pandemic. And I expect that, cloud offering will help people in the unfortunate circumstances we have in the war zone there. So that's part of our mission. We help individuals get creative. And I'm sure in difficult circumstances that we're finding themselves there that people need to be creative and will enable people to collaborate and work together on whatever will be helpful. So – but in terms of relevance and materiality of the business, it's not material, I would say, to the overall revenue pie. And we're not seeing or haven't been seeing any dislocation in even that small amount of revenue in recent months as this is built up to what was happened – kicked off today.

Okay. Thank you.

And that concludes the question-and-answer session. I would now like to turn the call over back to Yancey Spruill for the closing remarks.

Thank you, and thank you all for joining us. I know, this is a very tough day for humanity. So don't – it's not lost on us that fact. I do hope it's obvious, though, that we are incredibly excited about the progress we've made in transforming this business. If you look back at where we were a year ago, and where this business is today, it’s in a fundamentally different place. and we are set-up to continue to be rapidly growing business into massive market opportunity to service the entrepreneurs and developers in the cloud and what you are also seeking a windows, as this going to free cash flow machine. So we are solidly on track to generate our first billion dollars of revenue in 2024. And we look forward to continuing this conversation about our business in the weeks and months ahead. And we're working really, really hard to realize what we believe is limitless potential of this opportunity at DigitalOcean. So thank you so much and have a great rest of the day.

This concludes today’s conference call. Thank you all for joining. You may now disconnect.