DigitalOcean Holdings, Inc.

increase over Q1 of last year. We are pleased with our progress but remain focused on continuing these accelerating trends as we progress through 2021. The key levers driving accelerated growth can best be viewed through the core measures of customer growth, net dollar retention, and revenue per customer. And I will share some thoughts on our progress to date against each. First, customer growth. Increasing the rate at which new customers join and stay on our platform are important indicators of our long-term growth potential. There are over 100 million SMBs globally, with 14 million new businesses added each year. We are relevant to all those seeking a digital presence, and growth in our customer base is a strong proxy for sustained growth acceleration. Our unique self-service go-to-market model is ideally suited to attract and onboard massive numbers of customers at low cost. And we are making significant progress in making that engine ever more efficient to fuel our growth. Additionally, we are adding a sales capability to focus on larger SMV customers whose needs are a little too complex for onboarding via self-serve. In Q1, we made good progress as customer growth accelerated to 7% year over year. Second, net dollar retention, or NDR, is an important driver of the quality and sustainability of our growth, and we are focused on improving it from recent years in the 100% area. In Q1, NDR was 107%, a 600 basis point improvement over Q1 last year. This metric is a strong indicator of the quality of our service to our customers and their willingness to stay and expand with us. We remain focused on specific initiatives to improve fulfillment of customer needs on our platform and believe they will deliver improving NDR as we progress through 2021. Third, revenue per customer, or ARPU, is an indicator of our ability to drive growth within our customer base. and is reliant both on our ability to continue to add new products and capabilities to our platform, as well as our success in adding larger SMBs through our nascent sales effort. Our product initiatives enable us to more deeply embed in the evolving workflow of existing and new customers. In Q1, ARPU improved by 20% to $53.68 as new products and better expansion and new customers growth continue to drive better economics for customers. We are laser-focused on continuing to make progress on these three measures, and as we do so, we will be able to achieve and then sustain a higher growth rate than we are reporting today. To help illustrate the power of these trends, I'd like to highlight a customer that migrated to DigitalOcean Q1. The customer is a social networking and live streaming platform that caters to more than 200 million global users. With a customer base of that magnitude, a major portion of their cloud spend is on bandwidth. As they scaled with one of the larger cloud players, their costs became unpredictable. They found customer support lacking and contract terms onerous. These pain points led them to DigitalOcean. We invested the time to understand the requirements, and won their trust through a personalized onboarding approach involving their internal team and ours. As a result, they migrated in Q1 and are currently running over 200 droplets across multiple data centers that host their production workloads. Better yet, in the coming months, they plan to migrate their core infrastructure over to DigitalOcean as well. The initial migration was completed in about 90 days and demonstrates how the combination of our robust capabilities with compelling price can result in DigitalOcean supporting larger SMBs. In Q1, we generated $30.7 million of adjusted EBITDA, which represented 33% margins. This was a 740 basis point improvement as compared to Q1 last year. We're focused on sustaining consistent operating leverage as we accelerate revenue growth by prioritizing our activities to those that generate the highest benefit to customers and deprioritize activities that are below threshold. In Q1, we drove CapEx down to 25% of revenue versus 44% in Q1 2020, an improvement of 1,900 basis points. We are better matching our customer's utilization of our platform with the growth in capital we deploy to serve them. Our team is working on a number of initiatives that puts us on a path for a sustained reduction in capex intensity in 2021 and beyond. Importantly, on the way down to our longer-term target margins, we will be managing our capex spend within narrow ranges to avoid lumpiness. very encouraged about the path ahead to materially reduce this important measure of the fundamental economics of our business. We believe that growing faster with higher margins and free cash flow generation are not mutually exclusive. In fact, as we are demonstrating, they are complementary. Our recent IPO is a testament to our company coming together to execute better. Since I joined in the summer of 2019, We have implemented a lot of change up and down and across the business in terms of people, processes, and prioritization with the goal to grow faster and improve efficiency to grow smarter. Not to mention in the last year, we all did this remotely due to the pandemic. I couldn't be prouder of our entire team for driving improved execution in the midst of this change. This is a great testament to how we grow together. Finally, I want to touch on something that is foundational to the spirit of DigitalOcean and demonstrates our commitment to our values. The first of which is our community is bigger than just us. Last spring, we launched Hub for Good to donate our infrastructure to individuals and organizations that were helping their communities during the COVID-19 pandemic. Since then, we have expanded the breadth of the program to include over 1,100 projects across a variety of use cases. There are so many heartwarming examples of DigitalOcean being used for good. It has been inspiring and a great encouragement to both our customers and employees during this challenging time. In connection with our initial public offering, we joined the Pledge 1% movement and will be allocating 1% of our valuation at the IPO over the next decade to expand our Hub for Good program. Just before our recent IPO, one of the founders of Hub for Good suddenly passed away. She was a beloved member of our DigitalOcean family, and to honor her legacy to our company and our commitment to community, we have renamed Hub for Good to Holly's Hub for Good. We're proud to continue Holly's legacy as we leverage our capabilities as a force for good because our community is bigger than just us. In sum, it was a strong quarter that has set us up for an even stronger 2021. We are excited for this next phase as we continue to focus on our mission to simplify cloud computing so developers and businesses can spend more time creating software that changes the world. I'd now like to turn the call over to our Chief Financial Officer, Bill Sorenson, who will provide detail on our financial results in Q1 and our outlook for the balance of this year.

Thanks, Yancey, and thanks to all of you for joining us this morning for DigitalOcean's first earnings conference call. This is an exciting day for the company as we share with you the progress that we're making against all the key operational metrics we discussed with many of you during our recent IPO process, and that clearly demonstrate the company's improving performance. In every important category, DigitalOcean showed progress in Q1. We saw continued acceleration of revenue growth, improving profitability as measured by our adjusted EBITDA margin, and increasing free cash flow potential by reducing capex as a percentage of revenues to just 25%. I'll keep my remarks brief today, but I want to elaborate on the key metrics that I mentioned above, what's driving those improvements, and the actions we're taking to continue to drive further improvement. After that, we'll open the call to take your questions. As Anthony mentioned, revenue growth accelerated to 29% year-over-year, up from 26% just last quarter. An important driver of the acceleration was a substantial improvement in net dollar retention, or NBR, to 107%, up 200 basis points from Q4 and 600 basis points year-over-year. As we've detailed, as our customers grow, their usage of our offerings grow alongside them. That's usage of our original offering of compute storage and bandwidth, and increasingly the adoption of new products launched over the past several years, such as Kubernetes and managed databases, as well as our recently introduced high-performance droplet types. Expanding our product set along with the continued focus on 24-7 support and customer service are key components of how we can drive better customer attention and further revenue growth acceleration. We continue to invest in each of these areas in people, systems, and processes to make DO the go-to service for today's developers and small businesses. We believe that all of these efforts will help us retain our customers long into the future. Along with revenue growth acceleration, DigitalOcean continues to drive greater profitability, as reflected in our adjusted EBITDA margin, which increased to 33% in Q1. That's more than a 700 basis point improvement year over year. Contributing to the year over year change were higher gross margins, continued efficiency in our marketing spend, and executional focus on all operating expenses across our organization. We also saw a 200 basis point reduction in bad debt expenses year over year. An additional contributing factor was that hiring was behind our internal plan. That said, as we ramp new hires during the year to help with our growth objectives, we expect some moderation and adjustability without margin from our current levels, but the company's profitability will still be materially higher in the prior year. Improving EBITDA has also led to a healthy increase in cash flow from operations, which reached $20 million, or 21% of revenue in the first quarter. This was a meaningful step up from the first quarter of last year and an encouraging signal of the potential for our business. The final pillar in our operating focus is increasing the efficiency of our capital expenditure investments. through improvement in our procurement muscle and our technical capabilities in managing the utilization of our capacity. For the quarter, we had a meaningful reduction in CapEx's percentage of revenues to just 25% of revenue down from 44% of revenue in the first quarter of 2020. As we continue to pursue revenue acceleration, we intend to manage our expenses as efficiently as possible, with the goal of driving our CapEx investment even lower. This combination should be beneficial for cash flow generation, and as such, we expect to be cash flow positive as we go forward. As we discussed, Q1 results clearly reflect the improvements we are making in the operating performance of DigitalOcean as we pursue this $100 billion-plus market opportunity, and we're really excited about the journey ahead. One exciting milestone to quickly note is that during the quarter, we did indeed achieve a long-term objective of becoming a public company. This achievement provided the company with access to a new group of long-term shareholders, as well as capital to help us pursue our goals. Our sale of 16.5 million shares resulted in proceeds to DigitalOcean of over $700 million. Using those proceeds, we reduced all outstanding borrowings to zero, but still retained borrowing capacity, if needed, under the terms of our revolver. However, given the improvement in our cash-generating capability, we anticipate that we will fund our CapEx requirements from internal funds. Finally, let me share with you our Q2 and full-year outlook. For the second quarter, we expect revenue to be in the range of $97 to $99 million. We expect adjusted EBITDA margin to be in the range of 30 to 31%. diluted weighted average shares outstanding will be in the range of $117 to $119 million, which reflects the impact of new shares issued during the month of March. For the full year, we expect revenue to be in the range of $405 million to $409 million, which represents 28% growth at the midpoint. We expect adjusted EBITDA margin to be in the range of 30% to 31%, For the year, we reject our CapEx as a percentage of revenues to be between 25% and 26%. And finally, the fully diluted weighted average shares outstanding will be in the range of $115 million to $117 million. Weighted average shares outstanding are lower for the year given the impact of the timing of the IPO at the end of Q1. Thank you all for your continued support and for joining us today, and now let's turn our attention to the questions that we've received from our analysts.

Thanks, Bill, and thanks to all of you for joining us today. As Bill mentioned, we collected questions ahead of time, and we'll answer those first, and then time permitting, we'll have a few minutes to let other panelists ask questions. So the first question came from Chris Merwin at Goldman Sachs, and he asked, how are things going with the cross-sell motion? Are you continuing to see improving attach rates for your database and managed Kubernetes offerings, particularly among higher spending customers?