DigitalOcean Holdings, Inc.

Hello, my name is Stephanie, and I will be your conference operator today. At this time, I would like to welcome everyone to the DigitalOcean first quarter 2022 earnings conference call. All items have been placed on mute to avoid any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question at this time, simply press star, then number one on your telephone keypad. If you would like to withdraw your question, again, press star one. Thank you. Rob Bedley, Vice President of Investor Relations. You may begin your conference.

Thank you, and welcome everyone to DigitalOcean's first quarter 2022 earnings 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 second quarter and full year, well as statements about goals and business outlook industry trends market opportunities and expectations for future financial performance and similar items all of these statements are subject to risks uncertainties and assumptions you can review more information about these in the risk factors section of our filings of 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 on our call. Reconciliations between our GAAP and non-GAAP financial results can be found in our earnings press release, which was issued earlier this afternoon, and in the investor presentation on our IR website. With that, let me turn the call over to our CEO, Yancey Spruill. Yancey?

Thanks, Rob. Apologize for the slight delay kicking this off. Good afternoon, everyone, and thanks for joining us. Pleased to share the details of another strong quarter for DigitalOcean. Q1 demonstrates that we are building a highly efficient business that combines strong revenue growth with significant free cash flow generation. Despite an increasingly uncertain macro environment, we are proving the strength of the DigitalOcean business model quarter after quarter and beating our top line guidance once again. We are maintaining our previous revenue outlook for the full year of 2022. While there is some near-term global economic uncertainty, especially in Eastern Europe, we have a number of initiatives that give us confidence that we will manage through near-term macro challenges and have another strong year of growth and free cash flow. Bill will walk you through those details in a few minutes, but first I want to address some of the key developments from the quarter. We're pleased with our Q1 performance as we continue to see exciting developments in product. We released the beta version of serverless function in customers' hands and are on track to make a generally available release to all customers very soon. We saw a dramatic increase in the unique visitors to our website with visits up over 70% year over year in the first quarter. That's before the recent acquisition of CSS Tricks which will significantly boost monthly visitors as we move through this year. As I will share in the customer story shortly, bringing developers and businesses onto DigitalOcean early in their journey is a vital component to our strategy to drive sustainable growth. And website visits are a strong proxy for the health of that part of our customer acquisition strategy. Think of customers that come through this channel as presenting us with modest near-term revenue, but a highly valuable option on their eventual uplift. And in the meantime, we nurture them on their journey. Finally, we continue to make progress building an inbound and outbound sales capability, which contributed three percentage points of revenue in Q1, up more than 200 basis points from Q1 of last year. This area is a compliment to our self-service revenue motion because these customers start substantially larger, roughly $5,000 to $6,000 per month in revenue, relative to our self-serve customers at $15 to $20 per month day one. This sales source ARPU is also up 180% year over year, a strong demonstration of the potential for this route to market. Revenue. In the first quarter was $127.3 million of 36% year over year and a 700 basis point improvement compared to Q1 of last year when we grew 29%. We ended the quarter with $524 million in ARR, which is up 35% year over year, a 500 basis point improvement from Q1 of last year. Net dollar retention. Revenue per customer were both significant contributors to our top-line growth. Once again, NDR improved and was 117% in the quarter, a 1,000 basis point increase from Q1 of last year. Importantly, the churn portion of NDR has been stable at roughly 10% for consecutive quarters now. We continue to invest to improve the entire customer experience in order to help our customers develop, build, grow, and scale on our platform. This investment in the customer experience, along with targeted product and infrastructure investments that ensure a relevant and growing set of capabilities, will continue to be essential to sustaining NDR at current levels or better. ARPU was up 28% in Q1, driven by our customers' own organic growth And we accelerate their spend by providing them other offerings beyond core infrastructure that they consume as they scale, including managed databases and Kubernetes, serverless, and our marketplace. Operating margin and free cash flow improvement were also reflected in our Q1 performance. Our non-GAAP operating margin was 11% in Q1 in line over the prior year. Our operating margins are typically lowest in Q1, given certain typical front-loaded costs such as benefits and related taxes, and we will deliver ramping margins progressively through this year as revenue grows sequentially throughout the balance of 2022. We are committed to generating positive and ramping free cash flow, and Q1, despite seasonal challenges, was no different. We believe that a defining differentiator of the DigitalOcean investment thesis is our ability to grow fast while generating free cash flow. In the past, we've referred to the company becoming a free cash flow machine and are confident that we are on track to delivering on our 20% or more target of revenue in the next couple of years as we approach and exceed our first billion dollars of revenue. In Q1, we generated free cash flows, 4% of revenue or $5 million. This was a strong performance as our team is managing our capital spending very well, both in terms of generating operational efficiencies and better management. Similar to our operating margin profile, we expect free cash flow to ramp through the year and margins to increase significantly by year end. Finally, customer additions were also a key contributor to our Q1 growth. We added 14,000 total customers and more than 3,000 of those were our customers that are spending more than $50 per month. This higher spending cohort, now numbering 102,000 in total, grew 20% year-over-year, and their revenue represented 84% of total company revenue. Even better, their revenue grew 43% year-over-year, much faster than overall company growth. We believe there are many more customers that fit this high customer spend profile that we can attract and cultivate this year and in the years ahead. We break down customer size because it's a more relevant indicator in terms of what is fueling our revenue base, since we simply don't have an average customer. Most of our customers start at $15 to $20 a month, and over time and at their own pace, they grow to greater than $50 per month, which is a point where we typically see This unique focus on supporting our customers through a journey is a defining differentiator for DigitalOcean in the marketplace. As you can see, the business is on firm footing and we are well positioned to continue to grow into this immense market opportunity. I'd like to turn your attention to some specific steps we are taking in product development and marketing to continue to execute against our ambitious growth objectives. One of the many growth levers that we have is expanding our product set to better serve our customers' changing needs as they experience their own organic growth. A key ask from our customers is a serverless offering, and that is why we acquired Nimbella last year. In Q1, we introduced the beta version of our serverless offering, and it will become generally available in a few weeks. Serverless is a rapidly growing adjacent market opportunity that extends and complements our infrastructure and platform offerings. and is foundational to our functions as a service strategy. Our serverless product is cloud native and allows builders to create and manage applications without having to allocate time and resources to server selection, geography, and performance. Instead, builders and developers can elect for DigitalOcean provision servers to meet their needs based on consumption and other factors, while they can focus on coding and development. This has been one of our top product launches for 2022, and Serverless should help propel customer acquisition, ARPU growth, and NDR, while also laying the groundwork for future product expansion plans. Efficient customer acquisition has always been one of the hallmarks of our business, as best evidenced by low sales and marketing costs. Few companies in software are growing their top line 36% with sales and marketing expenses as low as ours. In Q1, non-GAAP sales and marketing spend was only 12% of revenue. And yet our largest customers grew 20% and their revenue grew 43%. Expanding our community content is an important element of our customer acquisition strategy. We use this content to drive millions of people to our website each month. In Q1, we made an acquisition that significantly increased our content library. We also launched a refresh of our brand to be more balanced in our positioning to who we serve across developers through SMBs. In March, we acquired CSS Tricks, a learning site with 6,500 articles, videos, guides, and other content focused on front end development. This nicely complements our existing library of content, furthering our reach with both front end and full stack developers. We now have over 7,000 tutorials to complement the 32,000 other documents on our site, which all contribute to the rapidly growing website visits and will allow us to sustain an efficient customer acquisition motion as we continue to scale the business. When we went public a little more than a year ago, we were averaging roughly 5 million unique visitors to our website each month. Thanks to leveraging Thanks to leverage we are realizing from significant changes in our self-serve marketing motions and the addition of CSS tricks in Q1, we delivered an average of over 9 million unique visitors in the quarter, which represents over 70% year-over-year growth. We will continue to look for high-quality content sites that can expand the top of the funnel to increase the base of potential customers and enhance the DO brand around the world. With respect to enhancing our strong brand, which supports increasing organic traffic, we launched a new campaign in Q1 targeting the customers that can build their businesses on DO, leverage the product portfolio we offer, and increase their spend as they scale. We want to be the cloud platform of choice for innovative digital SMBs anywhere in the world, and our branding will help promote DO to that growing audience. Next, I'd like to highlight one of our 102,000 high spend customers who drive 84% of our revenue, which provides yet another demonstration of the organic tailwinds driving our business. Customer's mission is focused on delivering an engaging experience for people to meet online. They do this via a video chat platform that makes virtual introductions, interactions more human. The company started only two years ago, and has experienced exponential growth and now has more than 10 million people using their platform. The online platform caters to individuals, teams, and companies. More than 10,000 teams have adopted their platform for virtual office space, and they have hosted over 20,000 professional events, including job fairs, academic events, conferences, and media releases. The company was started by a group of friends after they graduated from college. They were aware of DigitalOcean due to our vast library of technical tutorials and selected DO for our simplicity and pricing. As a startup, they needed an easy way to build and test ideas quickly and with minimal overhead. Our low cost outbound data transfer is incredibly valuable for network intensive loads, which rely heavily on streaming video to large numbers of users. They started on DigitalOcean in May 2020 as part of a startup our startup accelerator, we call Hatch. They received infrastructure credits and dedicated technical support to build their business. Once they completed the Hatch program, they decided to continue to build their business on DigitalOcean. When they started on DigitalOcean, their monthly recurring revenue was just under $300. As of March of this year, their monthly spend has jumped to more than $190,000, or over $2 million of ARR. As we have seen time and time again, this dramatic growth in spend has been paired with the adoption of additional products in our portfolio. They started with droplets and have now added our managed Kubernetes, our managed databases, app platform, our spaces and volume bought storage, our load balancers, and our container registry projects across five of our global data centers to deliver great experiences to their customers. This customer offers another example of the journey that businesses take on DigitalOcean, demonstrates how and why we cultivate a large universe of developers and early-stage businesses, even if at lower dollar values initially, and reap the benefits as many of them get liftoff and experience rapid growth while using an increasing mix of our products and services. But certainly not least, I want to share an exciting recent development that highlights our mission to grow together with our customers and the broader developer community. When we went public last year, we pledged to contribute 1% of our evaluation at the time of the IPO, or $50 million, to charitable initiatives over the ensuing decade. Last month, we announced the cornerstone of that initiative, DO Impact. a global social impact program aimed at empowering technology innovators through the donation of DigitalOcean infrastructure, philanthropic grants, and employee volunteering. We are supporting organizations that we believe are having interesting and important impacts, such as facilitating technology literacy to communities who haven't historically been part of the broader tech ecosystem, efforts that help tech-enabled nonprofits better use technology to support their missions, and many other specific use cases. Supporting innovation like this is core to our mission to simplify cloud computing so builders can create software that changes the world. I'm very proud of this effort because it expands access to cloud computing technology. It creates more opportunities for people around the world and will be a feeder for DigitalOcean's business over the long term. We look forward to expanding our DO Impact program in the coming years. We truly believe that our community is bigger than just us. DO Impact runs how we live our values and will be an important element of our company as we continue to grow and achieve our first billion dollars of revenue in 2024. In summary, we're off to a good start despite the global challenges we all find in 2022. I'm proud of our team for their accomplishments and would like to thank each of them for their efforts on behalf of our customers. We are well positioned for continued and durable growth along with ramping free cash flow generation across the balance of this year. I'd now like to turn the call over to Bill Sorensen, our Chief Financial Officer, who will provide details on our financial results in Q1 and our updated outlook for this year.