This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk00: 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. If you require any further assistance, please press star zero. And if you have any questions during the call, please press star one on your telephone keypad. I would now like to hand the conference over to your speaker today, Mr. Rob Bradley, Vice President of Investor Relations. Please go ahead.
spk02: 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 Sorensen, 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 final links 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 Sproul.
spk06: 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 for 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 1100 basis point improvement in net dollar retention and 900 basis point improvement in ARPU growth. Importantly, both NDR and ARPU were much stronger exiting 2021 than entering 2021, which sets us up to sustain robust revenue growth in 2022. We have dramatically improved how we engage, service, and build relationships with our customers. And this results in fundamentally altering the level of NDR we can achieve and the durability of our overall revenue growth rate. ARPU growth acceleration from 20% in 2020 to 29% today has also raised the floor on our sustainable growth rate. As our customers are demonstrating, they have a long runway to evolve their ideas to businesses on our platform in many cases growing from just $10 to $15 in their first few months to tens of thousands of dollars per month as they scale an idea into a business. Another exciting transformation that we have made over the last year is how we've radically altered our CapEx intensity, where we drove a decline from 38% of revenue in 2020 to 26% of revenue in 2021. This enabled us to generate $24 million in free cash flow or margins of 6% as compared to negative $58 million or negative 18% margins in 2020. That's a 2400 basis point improvement in free cash flow margins in a single year. We are actively working on further improvements across our business that will enable us to drive higher operating efficiencies coupled with lower capital intensity to drive significant free cash flow leverage in 2022 and beyond. We are focused on driving free cash flow margins to 20% or better in 2024 when we expect to achieve our first billion dollars of revenue. This year, we will take a big step towards that objective as we target free cash flow margins in the high single digits and approaching 10% for the full year. In the world of cloud software, the standard for efficient growth is a combination of 40 or better for revenue growth rate plus free cash flow margin. Well, in a single year, we've transformed our business from 7% on that score in 2020 to 41 in 2021, a 3,400 basis point improvement. Although we are very happy with our progress, we aren't done with further improvements and are very focused on driving efficient growth over time. and to exceed 50% on growth rate and free cash flow. As you can see, up and down the scorecard, we have fundamentally transformed the economic profile of our business and are now set up for sustained high growth and free cash flow generation. We are still early to realize the potential of this incredible business, and we are just getting started. A key foundation for the growth acceleration has come from customer mix. and specifically a subsegment within our 609,000 paying customers that are driving DigitalOcean's overall growth. In Q4, customers that spent more than $50 per month grew 24% year-over-year as compared to total company customer growth of 6%. Their spend represented roughly 83% of our total revenue in Q4, and that revenue grew 44% year-over-year, well above the company growth rate. In other words, customers start small as they are vetting and testing an idea with the aspiration of turning this idea into a business. As you can see, they are succeeding at rapid rates as thousands of customers graduate on our platform. We fuel this customer journey on our platform by providing a simple, easy-to-use service that has a high degree of support and access to documentation and tutorials to help our customers be successful. We combine that with an evolving set of IaaS capabilities and PaaS applications that are tailored to the needs of developers and entrepreneurs who are earlier in their life cycle of testing code and launching and scaling their business. These PaaS applications support scaling businesses by enabling them to do more of their evolving workflow on DigitalOcean in addition to the natural growth and infrastructure they realize from their organic growth in building their business. We have roughly 100,000 customers in this camp today, and we are adding to that cohort four times faster than our overall 6% customer growth rate. We expect to continue to see improvements in NDR and ARPU as a result of our customer mix evolution, where customers that spend greater than $50 per month with DigitalOcean are driving our revenue growth and acceleration. At the same time, those customers spending less than $50 per month give us an incredible option on their future success, as so many of these customers will launch an idea that they test on DigitalOcean and ultimately turn it into a thriving and rapidly growing business. Our strategy works because we have an incredibly efficient customer acquisition model where the vast majority of our customers self-serve onto the platform. This unique go-to-market model enables us to manage best-in-class sales and marketing spend yet still add tens of thousands of new customers each month. This efficient flywheel customer acquisition engine, coupled with our highly efficient infrastructure, enables us to sustainably generate meaningful free cash flow while generating growth above 30%, even while incubating the majority of our customers at low ARPU as they seek to build a future business on our platform. I'd like to share a customer example that highlights a typical customer journey that nearly 100,000 customers have taken on DigitalOcean today. This customer started on DigitalOcean in 2013 as an eight person startup and today is one of the world's leading web data platforms with more than 400 employees. They have graduated on our platform and perfectly demonstrate the nature of our model for attracting and incubating early stage ideas and then enabling liftoff and scaling of them as they get traction. Initially, their spend with us was $25 per month and grew over time to average about $20,000 per month for several years up to 2019. However, like so many businesses, this customer saw meaningful traction due to the pandemic and their business began growing rapidly along with their usage of our platform. They currently spend $170,000 per month with us a $2 million ARR customer that started day one when they just had a tweak in their eye. This is one of thousands of examples we could share about the high spend customers driving our top line growth who began their journey on DO as an idea that ultimately emerged as a high growth SMB. We continue to see rapid adoption of our managed Kubernetes, managed databases, app platform, and marketplace services. In Q4, they represented 17% of revenue, up from 15% in Q4 2020. Adding to that new product acceleration is our managed MongoDB offering. Launched in late June of 2021, Uplift has been very strong and will start to materially impact our growth rate as we move through this year. Customer adoption has been similar to our other managed database offerings, and we have more than 3,000 customers actively using our managed MongoDB as of Q4. Our managed database services exited 2021 with north of a $26 million ARR in Q4, and it's growing several times the growth rate of our overall revenue growth rate. We expect managed MongoDB to be a strong pillar in our managed DB strategy and a material contributor this year. Our serverless product acquired through the Nimbella acquisition in Q3 last year is now in beta, and we expect it to be generally available in the first half of this year. Serverless has been one of the top requests of customers to add to our platform, and we expect to see rapid adoption and contribution to growth in the second half of this year and beyond. Product innovation that is relevant to our developer and SMB ecosystem is our highest priority. Broadening our product portfolio is a critical aspect of our strategy to create the set of services most needed by developers to test their ideas and early-stage businesses to rapidly ramp their growth. We expect to leverage both organic and inorganic investments in new products to build our portfolio and are excited to leverage both to be able to have the right velocity to help sustain our high-growth targets. I'm also excited to share that we are going to invest further in our outbound sales motion this year. This is an exciting opportunity. We know that we are in the earliest stages of this incredible opportunity to supplement our highly efficient, high-volume self-serve model. Self-serve generates large numbers of customers earlier in their journey, tens of thousands each month. It takes time for these customers at $15 to $20 per month to get traction on their idea and grow meaningfully on our platforms. Direct sales efforts bringing customers that out of the box tend to be thousands of dollars of monthly revenue. This presents an incredible opportunity to maximize our reach to include bringing existing SMBs onto the platform day one versus solely incubating future SMBs who are early in the journey. The traction on our sales efforts has been very good in the past two years since launch as they generated 3% of total revenue in our second full year. Sales have contributed to revenue growth acceleration and in the improvement in our NDR and ARPU growth and expect it to continue to accelerate these metrics during 2022. In the first two years, we've been principally focused on upselling existing SMB customers through inside sales. We expect by adding more direct outbound calling effort and a channel partners effort, we can capture more growth and can take our sales revenue mix to upper single digit percentages in the next two to three years. Importantly, our investment in continuing to build our sales capability is targeted to bring more existing SMBs onto our platform through an outbound calling effort that is regionally focused on use cases that will benefit from our platform. Similarly, our investment in channel is also focused on bringing more SMBs to DigitalOcean, leveraging the efficient network of a select group of partners. We don't expect the build-out of a sales capability to materially change our sales and marketing spend margins. Rather, we will invest at or just above the rate of revenue growth, and we expect it will yield sustainable growth acceleration while maintaining our unique go-to-market economic model. In summary, 2021 was a year of great transformation, and the fourth quarter was a strong exclamation point as we saw excellent results across our key performance indicators. I couldn't be prouder of our entire DigitalOcean team for feeling the change required to set our company up for enduring success. We are excited to increase our outlook for revenue growth and to introduce guidance for free cash flow, a measure that's core to how we manage this business. We are building a unique business serving the $70 billion plus market for developers in SMB's cloud infrastructure. We have momentum as we have transformed the fundamental economics of our business and our poise for sustained growth in free cash flow with a focus on achieving our first billion dollars in revenue in 2024. Before concluding, I'd like to comment on today's stock buyback announcement targeted to offset dilution from internal equity grants over the next few years. Given the strength of our operating model and balance sheet and our ability to generate significant free cash flow, This is an opportune time to manage dilution through a $300 million share buyback. We view this as a way to create shareholder value by generating strong revenue growth and free cash flow while managing common stock dilution from equity grants to employees over time. I'd now like to turn the call over to Bill Sorensen, our Chief Financial Officer, who will provide details on our financial results and our outlook for this year.
spk11: 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 balanced 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 21 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 top-line 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 focusing on reducing the cost of delivering our product by working closely with our key vendors in hardware, data centers, and bandwidth. At the same time, our infrastructure and engineering teams are improving the design and configuration of our services in order to increase revenue output. Their efforts are really paying off as demonstrated by a substantial increase in our gross profit year over year to 60% up from 54% in 2020. We'll continue to focus on driving this number higher in 2022 and beyond. Driven in part by a higher gross margin combined with cost discipline and focused investment, adjusted EBITDA improved notably with 160 basis points year-over-year increase from 30% to 31.6%. We were able to maintain sales and marketing at roughly 10% of revenues netting out stock-based comp, while still investing in a sales team that achieved stellar results last year, increasing their contribution to overall revenues by 100%. These results continue to demonstrate the efficiency of our self-serve model, We increased R&D spend to focus on the key areas of serverless and storage, and were able to offset this by reducing our total G&A. We continue to manage expenses carefully in order to achieve one of our management mantras, which is to grow smarter. Of note, moving forward, we will be focusing the investment community on our non-GAAP operating margin rather than adjusted EBITDA, as we believe it more closely aligns with how our peers report their results. This measure includes the impact of depreciation and amortization, but excludes stock-based compensation. From my vantage point, the most notable and exciting financial improvement in 2021 was becoming free cash flow positive. Improved profitability combined with efficient capital investment has allowed us to achieve this important milestone. In the year, we delivered $24 million of free cash flow, or 6% of revenue. This was a roughly $90 million improvement from the prior year and was a direct result of better management of our CapEx, which decreased to 26% of revenue from 38% in 2020. Even while growing the business $111 million year over year and accelerating some investments originally targeted for 2022 into our 2021 spend, we reduced our capex in absolute dollars by $10 million during that same period. Clearly, our focus on efficiency improvements is paying off, and we will continue to make improvements as we drive towards our goal of sub-20% capex as a percentage of revenues. This, combined with continued improvements in profitability, will drive our free cash flow yield towards 20%. Turning to our other key performance indicators, in 2021, we saw excellent improvement in our net dollar retention, ARPU, and total customers, especially those in the higher spend cohort, which I'll touch on momentarily. These three indicators have all been instrumental in our top-line accelerations. Net dollar attention for the full year was 113%, which is a 1,000 basis point improvement. Even more exciting, in Q4, it was 116%, and higher than that in December alone. Customers are expanding faster and churning less. With a monthly recurring model, achieving an NDR of 116% is a testament to the strength of that model. and its improvement over the past year, and is central to our confidence in the durability of our long-term growth. ARPU is another key of our long-term growth calculus. As we have broadened our product set to include a premium droplet, a variety of the most popular database offerings, and a managed Kubernetes service, ARPU growth has been very strong. and average ARPU for the full year grew 25%. And yet again, we saw our fourth quarter growth exceed our full year rate at 29%. We see ample runway for ARPU to continue to grow as our customers scale on our platform, and we continue to expand our functionality for them. We're encouraged by the early adoption of our new managed Mongo database offering, which we introduced at the end of June, And as Yancy mentioned, we will be launching our serverless offering in the coming months from our acquisition of Nimbella last fall. Both of these will help our customers grow on our platform and in kind contribute to ARPU growth. Customer growth was another highlight that helped us deliver 35% revenue growth in 2021. For the year and the quarter, we grew total customers 6%. As you've seen in our press release, we've provided additional detail on the performance of our higher spend customers, which is a key to our continued strong performance. Customers who spend greater than $50 per month or more than $600 per year represent 16% of our total customer base and drive 83% of our revenues. This cohort grows much faster in terms of customer acquisition, up 24% year over year to 99,000. its revenue grows significantly faster, up 44% in the quarter. They churn less and have a better NDR at 117. And while total customer acquisition will continue to be an important metric for us as we attract the small developers of today who become the SMB of tomorrow, it is these larger customers that point towards the future growth potential of the business, buying multiple products and consuming more of our infrastructures. As we focus on our growth objectives going forward, we are prioritizing, targeting, developing, and supporting this customer group as they have the potential to drive further acceleration in our growth. We are pleased to have brought new sales leadership on board in recent months to help pursue these efforts in finding these customers, as well as continued investment in our customer support to keep them once they join the platform. Turning the page to 2022, I'd like to provide our first quarter and full year outlook. We are pleased to be raising our growth target for 22 since we provided our initial outlook on our recent November earnings call. We are increasing our outlook for revenue growth from 31.5% to 32.5% at the midpoint of our full year guide. As always, we aim to exceed our outlook with our actual results. Now, for the first quarter, we expect revenue to be in the range of $126 to $126.5 million. As mentioned, we are focusing investors on operating income for a profitability metric as we move forward. And for the first quarter, we expect non-GAAP operating margin to be in the range of 12% to 13%. For the full year, we expect revenue to be in the range of $564 to $568 million. We expect non-GAAP operating margins to be in the range of 13% to 15%. Lastly, in 2022, we expect free cash flow as a percentage of revenue to be in the range of 8% to 10% as we further increase our profit margin and manage our capex. We're very excited about the continued progress we will make in 2022 and believe we are building a solid foundation to achieving our long-term goal of 40% revenue growth and 20% plus free cash flow. Combining those two gives us our rule of 60. That concludes my remarks, and now let's turn to Q&A.
spk00: Thank you. As a reminder, to ask a question, please press star 1 on your telephone keypad To withdraw your question, press the penalty. Please stand by while we compile the Q&A roster. Your first question comes from Tim Horan from Oppenheimer. Your line is open.
spk05: Thanks, guys. Can you update us in your thinking on value-added services? Maybe what's the total percentage of revenues now and where can that go to, and how does that kind of 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.
spk06: This is a huge area for us. We talked about the growth of, for example, our database as a service into the mid-20s, an ARR ending last year. That's just in two years. And so... found is adding a database. As companies go from scaling their businesses, they need a database tool. As they go from 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 grow. So this is a core aspect of our strategy. We exceeded a year, approaching 20% of total revenue across these services. We'll continue to add targeted capabilities. We'll have serverless. We'll expand our serverless, as we mentioned, with the Namela tools coming online here, available to customers now, but generally available and producing revenue beginning in Q2. 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, but we do need some incremental capabilities. For example, an AI ML 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 at M&A so we can do more in the same period of time by moving parallel with both organic and inorganic. So we'll prioritize it in that fashion. We would expect over time, as we get to that first billion in a couple of years, for these services to supplement the IaaS part of the portfolio in the mid-20s to upper 20s would be a good target. And that's probably where we would land a 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 complimentary fashion. And you've seen our growth acceleration hasn't just been as a result of adding these other software platform services. our IAS growth rate has also accelerated in concert.
spk05: Male Speaker 1 And just a comparison, I think you were, it was closer to 10 percent of revenue a year ago, and I think we were thinking maybe we can get to 20 percent of revenue. So, it seems to have ramped up much faster than expected, or than I expected anyway, just to be clear.
spk11: Male Speaker 2 Tim, just to be clear, there's two pieces relative to the revenues that Yancey is speaking to, which is the 20 percent. They're comprised of two 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 top terminology, that's running around 11% or so, and the other optimized, which is more related to our core infrastructure products, is around 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 percent, that group as a whole is basically growing up towards 80 to 100 percent. And that's a key piece that will be complemented with the additional focus that Nancy mentioned in terms of new product offerings.
spk05: Got it. Thanks for the clarification.
spk00: Your next question comes from DJ Hines from Canaccord. Your line is open.
spk08: Hey, thanks, Yancy and Bill. Good work on the quarter here. So it seems like this cohort of, you know, 99,000 kind of high-spend customers is really what's powering a lot of the company's, you know, ARPU expansion and NRR improvement. Obviously, it's fueling growth. You talked a little bit about direct sales investments and product expansion. Can you just kind of double-click on what you're planning to do to kind of nurture and expand this group of customers?
spk06: Well, there's multiple of them. It's 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, 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 a customer acquisition side of it. We're expanding sort of the product set really is relevant, you know, adding these new capabilities, you know, 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 a 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 with 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 that'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.
spk08: Yeah, super helpful. Maybe the follow-up. I'd love to hear if you have any thoughts on kind of Akamai's entry in the space. Obviously, you know, they bought Linode. I know that that business is less than a quarter of the size of DigitalOcean. But any thoughts on kind of implications for the space or DigitalOcean specifically?
spk06: Well, I think, you know, the validation of people putting capital in the sectors is always a validation of our thesis and the opportunity there. 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 data points with OVHcloud. Linode and the team's growth rate. We talked 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 and 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.
spk08: Yep, yep, yep. Super helpful. Thank you, guys.
spk03: Thanks, DJ.
spk00: Your next question comes from Wamsi Mohan from Bank of America.
spk04: Hi, yes, thank you. Yancy, 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
spk06: how you intend to go develop this this pipeline and it wasn't clear to me why you thought that the field and marketing intensity won't increase or maybe I misunderstood that and have a follow-up well you know at current percentage of revenue we could keep it flat or and it may go up a little bit that depends on you know our ability to drive growth and if We can see substantial acceleration, you know, 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, you know, current levels as a percentage of revenue. But not much because our customer acquisition model is so efficient on self-serve. But if we grow spend at 37%, it doesn't change as a percentage of total revenue. If we grow it a little bit more than 37%, it might change a little bit. So that was what the reference 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 Europe, Asia, South America. And, you know, 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, you know, sort of message to customers to come onto this platform. So that's really the strategy. It's targeted and focused on our segment of the market. It'll be regional in nature. It'll 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, you know, sales has 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'll be a tailwind on the growth rate as we move forward.
spk04: Okay, thanks, Yancey. And then if I could 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 as 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 high single-digit growth rate, given that that still acts as part of the pipeline of customers that you incubate and eventually scale?
spk06: Yeah, well, our growth rate for customers last quarter is in line with what expectations we set at the last call. with some of the headwinds we talked about in Q3. And we expect it to sort of start to lap that and outgrow it as we get through this year, certainly in the 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 sustain 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 their platform are in that $10, $15, $20 a month area where they sit and we nurture and 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 still expect to get back to upper single digits, hopefully double digits over time. And that's going to be a big tailwind supporting a long-term growth objectives that we have. But our customer growth last quarter was in line with what we expected. 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 drive the economics of the business, we expect to see growth rates in the ranges we've been experiencing recently.
spk04: That's awesome. Appreciate it. Thanks, Paul.
spk00: Your next question comes from Michael Turretts from KeyBank.
spk11: Hey, guys. Good morning. Great metrics. One question, one thing that was interesting was 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 seemed to be happening more positively towards the very end of the quarter that might be indicating even stronger growth in the next year?
spk06: You know, I don't... ARR was roughly the same as revenue growth in the quarter, so... Yeah, we see acceleration in our coup 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. 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, you know, and then adding those smaller customers, the more that we get on that platform, you know, they graduate. And so those are all working right now, and we're excited to get into this year and continue to drive a business growing well into the 30s.
spk11: Thanks, Nancy. And then, Bill, just on CapEx, did you give a CapEx target for 22 as a percentage of revenue? And also, if you are able to help us with that, maybe making sure we're defining it the right way. Yeah, 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, you know, sort of equate to the terminology that a lot of folks look at in terms of comparing performance to other companies in the technology space. So we're moving more to sort of the non-GAAP operating income, like less CapEx, to get us to a free cash flow margin. If, however, you wanted 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. 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%. You know, lower costs relative to the servers we're acquiring is lowering our DNA, 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 periods, which I know you've heard us say before, we've reduced to down to around eight to nine months, down from around 15 previously. So your simple, your straightforward question, probably 21, 22%, but then a number of other factors that are working to improve overall free cash flow margin up towards 10%, as Nancy mentioned earlier. Thanks, Bill. That's helpful. And just to clarify, you said your gap growth 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.
spk00: Your next question comes from Mark Murphy from JP Morgan. Your line is open.
spk07: 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 them?
spk06: Well, I think a core premise of the cloud isn't about inflation, it's about productivity, inflation. 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, you know, at a modest premium to the Linode Vultures, you know, VHs at the small end of our segment of the market. So, you know, our differentiation around simplicity and community, our support model, our commitment to open source are actually real differentiators. And, you know, 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 is 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 can 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 you 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 capsule 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.
spk01: Okay. Understood. And, Yancey, as a quick follow-up, you had commented that the MongoDB offering is
spk07: will start to materially lift your growth rate this year. Can you just give us a quick version of why is that particular database product scaling, you know, quite so rapidly? And I'm not sure what your threshold for materiality is, but are you saying that that could, you know, that could give you a tailwind of a point or two maybe of growth in the next year or two?
spk06: Definitely going to be a tailwind on the growth rate. and um you know that material is is real many millions of dollars uh you know into this year so that's what i meant but it's going to be a material driver the database capability uh is growing several times uh what our overall growth rate is it's a foundational you know when somebody goes from having their first customer 10th customer, 50 customers, you know, you can manage that on a napkin Excel spreadsheet. But at some point, you 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 a product set, but Mongo is one of the more popular, certainly for digital businesses, and we're seeing that uplift and traction and validation of why we decided to launch that and partner with Mongo last year.
spk07: Excellent. Thank you.
spk06: Thanks, Mark.
spk00: Your next question comes from Raimo Lencho from Barclays. The line is open.
spk10: Thank you. Can I actually stay on that subject? If I think about Mongo, it's obviously a very popular database offering, etc., but it's only one database, but there's lots 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 R pool versus shying away from becoming as complex as AWS? That's my first question. And the second question is more around the sales effort. I'm just trying to understand it better. If I look at other guys, like, for example, Mongo, they use the self-service to kind of get a customer base, and then they use the sales effort to kind of target those guys in that kind of big... customer base that you have to see like oh those are real customers that I would benefit from sales effort you are you know up to call sell them better with you it sounds more like this is more like getting new customers can you kind of elaborate on that a little bit because it was probably confusing to me thank you and Congress great numbers thanks I'll have to re-ask the second question but on the first question
spk06: You know, 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 there's not 50, right? You know, when you look at enterprises, they're so complex in terms of the industry, scope and scale, geographies, business models, that the bigger platforms will have more alternatives because their customers are more complex. the Venn diagram overlap of our businesses' customers tends 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 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 learn. 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. And that's why I say we'll add more database engines over time, but it's a small handful, not a lot. And, you know, what will be critical is maintaining simplicity in the experience for the customer. You know, having documentation, tutorials, the support experience that's integral and also reinforces simplicity. And, of course, will be, you know, 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 today. 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 true to 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 was.
spk10: You talked about more direct sales or more investments in direct sales. I'm just wondering, are they going back into your installed base and trying to upsell and work those customers better or is this an additional new customer effort?
spk06: Yeah, okay. So in the 3% of sales over this first couple years that we've 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 optimized in a platform. For example, you see a customer who may start at $10 to $15 a month, um you know 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 these early stage businesses when they get lift off they're moving they're growing so fast that they could use the help. And we found really good, innovative ways to engage with them. And that's been a big driver of that 3%. The direct outbound that we're adding to that 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, you know, building their business on our platform. Yeah, okay, that's clear. Thank you very much. Thank you.
spk00: Your next question comes from James Green from William Blair. Your line is open.
spk09: Thanks for taking the question. Just on the overall sort of growth strategy, you know, I think previously it sort of managed growth to a free cash flow and earnings break-even level. And given sort of the increases you're seeing in 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.
spk06: 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 is still referenced. And, you know, you could see a couple hundred basis points in, you know, operating pre-cash to 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.
spk03: Great. Thanks.
spk00: Your next question comes from Pat Walravens from J&P. Your line is open.
spk09: I mean, congratulations on running a tight business and getting the memo on what the new environment needs to see. It's a hard question, but I think we got to ask it anyway. So, you know, obviously, tragically, this morning, Russia's invaded 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 and if there are any key points you can make for investors.
spk06: Well, you know, in terms of revenue, we do have a small amount of revenue in the Ukraine and in Russia. Um, but there's some very small percentage of revenue. Uh, so not really material in the, in the broader context of, uh, what we're generating today. And, um, you know, obviously our business helps has helped people through the pandemic. Uh, and I expect that, um, you know, cloud offering will help people, uh, in the unfortunate circumstances we have, uh, 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 we'll enable people to collaborate and work together on whatever would be helpful. 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. This is built up to what happened, kicked off today.
spk09: Okay, thank you.
spk00: And that concludes the question and answer session. I would now like to turn the call over back to Yantis Bill for closing remarks.
spk06: Thank you and thank you all for joining us. I know this is a very tough day for humanity, so 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 at a fundamentally different place. And we are set up to continue to be a rapidly growing business into a massive market opportunity to serve the entrepreneurs and developers in the cloud. And what you're also seeing a window is this is going to be a 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.
spk00: This is Thursday's conference call. Thank you all for joining. You may now disconnect.
Disclaimer