DigitalOcean Holdings, Inc.

there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press the star one again. For operator assistance, press star zero. And finally, I would like to advise all participants that this call is being recorded. Thank you. I'd now like to welcome Rob Bradley, Vice President, Investor Relations. To begin the conference, Rob, over to you.

Thanks, Pauli, and thank you and welcome everybody to DigitalOcean's first quarter 2023 earnings call. Joining me today is Yancey Spruill, our Chief Executive Officer, and Matt Steinfort, 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, as 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 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 on our call today. Reconciliations between our GAAP and non-GAAP financial results can be found in our earnings press release, which was issued earlier this morning, and in the investor presentation on our IR website. With that, let me turn the call over to our CEO, Yancey Spruill.

Thanks, Rob. Good morning, and thank you for joining us today. I'm pleased to share the results of another strong quarter for DigitalOcean. We made solid progress on our key priorities of adding valuable services for customers on our platform and reshaping our cost structure to accelerate our long-term free cash flow margin objectives. And despite the challenging macro environment, we met or exceeded all of our financial targets. Our first quarter financial results were strong across the board. We delivered year-over-year revenue growth of 30%, As projected, our quarter-over-quarter revenue growth was more muted given the near-term macroeconomic headwinds we are experiencing. These headwinds have resulted in modest net expansion from our customer cohorts as their businesses have seen their own growth deceleration, and they have continued to focus on managing their spend in the midst of the ongoing economic uncertainty. While it is unclear how long these macroeconomic headwinds will persist, We remain committed to achieving our financial targets this year. Matt will provide more detail on our Q1 results and Q2 and full year outlook later on the call. Stepping back for a second from the current market conditions, I've reflected that we just recently crossed the two-year anniversary of our IPO. Over the course of these two years, we have become a much stronger and durable company. We added significantly to our platform's capabilities and have enabled our customers to grow their businesses. We dramatically improved our financial profile, more than doubling revenue from 2020, the full year prior to our IPO to this year, and improved adjusted free cash flow from negative 18% 2020 to 21% plus this year. We've added a number of valuable offerings for our customers like serverless functions, premium droplets, tiered support, significant additions to our tutorial content, additional database engines to name a few, and expanded our total addressable market through our Cloudways acquisition last year that brings us managed hosting capability. Collectively, the improvements we've made to our offerings and our go-to-market have improved ARPU by more than 70%. We've also returned significant value to our shareholders since Q2 2021, repurchasing 26 million shares for a total of $1.3 billion. While we are proud of these accomplishments, we will continue to remain focused on delivering new offerings, significant operational improvements in the business, allocating capital to accelerate growth both organically and through M&A, and delivering capital back to shareholders through a regular buyback program. We remain bullish on our incredible market opportunity, and we know we are still early with plenty of room for significant growth in the years ahead. Shifting back to our near-term plan, I'd like to reiterate our key priorities for 2023, which we believe will enable us to deliver our 2020 targets and will position us for accelerated growth when the macro environment improves. As shared at our last earnings call, we have prioritized three growth initiatives that underpin our 2023 revenue targets. These initiatives are focused on sales and go-to-market, product monetization, and delivering the synergies from our Cloudways acquisition. Each of the initiatives will build on the $660 million annual recurring revenue foundation we had entering 2023. First, we will continue to strengthen our go-to-market capabilities. Over the course of the company's more than 11 year history, Our highly efficient self-service go-to-market motion has been the primary source of new customers. People leverage our platform and become paying customers because of the simplicity and ease of use of our cloud tools, the documentation and support we provide all customers, the openness of our platform, and the attractive price to value that we offer for our services. Collectively, we are focused on building on our customers' ecosystem of learners, builders, and scalers. We're investing to attract more learners, providing an environment to nurture and launch an idea into a business. We're extending our product capabilities to enable the long-term successful growth of the builders and scalers on our platform. I'd like to think of our self-service model as one of the world's most efficient lead generation engines, where customers pay small amounts to learn and test on our platform. And they represent a ripe opportunity to foster their development, such that over time, they become rapidly growing businesses on our platform. Importantly, the cost to acquire these customers is very low. Our ability to attract learners who have high intention to become builders and scalers has been an important evolution of our self-service go-to-market strategy. We're evolving our tools and upfront content to attract higher spending customers, and we are also changing our onboarding process to better serve these high-intent customers early in their DigitalOcean journey. to reduce the time they spend as a learner and become higher spending customers sooner. Additionally, we have invested significantly in enhancing our ability to engage with a higher percentage of the 146,000 builders and scalers on our platform. We are seeing good traction from leveraging data analytics to have our sales teams better target candidates for upgrades or additional product adoption. including moving their multi-cloud workloads to DigitalOcean from other providers. This expanded customer engagement effort is bearing fruit as our legacy cohorts of builders and scalers continue to increase spending at robust rates, and we continue to add to these cohorts at strong rates of growth. Our second key initiative is to continue to deploy new capabilities or new bundles that both increase the value we provide to customers and drive up our pool and our share of wallet. These product monetization efforts are focused primarily on our fast-growing builder and scaler customer segments as we listen closely to their feedback and extend our capabilities in response to help them continue to scale their own businesses. As an example of a recent monetization initiative, we launched a premium dedicated droplet in Q1. which targets bandwidth intensive applications such as video streaming and ad tech businesses. We've seen strong adoption of this product extension as it improves the ability of our customers to scale efficiently. In other words, it enables cloud optimization for our customers. The premium dedicated Droplet is an example of our packaging our existing capabilities to better serve the needs of a specific customer application. providing additional value for which our customers are willing to pay. We were already an attractive destination for bandwidth-intensive use cases given our capabilities and value pricing. However, bandwidth-intensive customers had to customize our base service through additional software to configure it to their specific use case, which added time, complexity, and cost to their use of our platform. Based on their feedback, we launched this new tailored solution, which speeds up their deployment and reduces their cost to maintain and grow their business, which offers them a more efficient path for growth. This new product SKU is an example of us creating higher opportunities for customers through packaging our services versus an outright increase in price. We believe we have an opportunity to enhance the customer experience on our platform with other examples like this on an ongoing basis. Another example of extending our platform to meet the needs of our larger customers was the expansion of our backup storage capabilities. In this case, we augmented our platform inorganically, acquiring a complementary early-stage product company, Snapshooter and Q1, to add backup and snapshot storage features. This acquisition is a part of a broader initiative to augment our overall storage capabilities. We're expected to continue enhancing the functionality across our storage portfolio. over the next several quarters into 2024. Looking ahead at the product roadmap over the rest of 2023, we will continue to invest to enhance our storage offerings to meet the needs of our builder and scaler customers. By addressing a broader set of storage use cases at larger scale, we will make it attractive for existing customers to put more of their cloud workloads on DigitalOcean and make it attractive for builders and scalers on other cloud platforms to bring their workloads to DigitalOcean. We are also evaluating other strategic platform extensions, such as the introduction of GPU and AI ML offerings, which would be a strong complement to our existing capabilities and expand our total addressable market. Although we are refactoring our cost structure in 2023 to deliver significantly better margins and free cash flow, we don't want this year to be solely about efficiency. We are positioning ourselves for faster growth in the future and the opportunity to enhance our offerings with GPU and AI ML services is a focus. The ongoing organic and inorganic investment in our platform through product expansion and monetization efforts is key to driving long-term growth. We're leveraging the numerous customer conversations we're having during this challenging market environment both to educate customers on how they can leverage our existing products and services differently to help them optimize their spend and to understand how to prioritize our product development roadmap. Our focus on the large SMB customer segment that traditionally has been underserved by more enterprise-focused technology companies is a direct contributor to the stable churn we've seen over the last year, even as our growth has decelerated. Our commitment to simplicity, higher touch support, extensive relevant content, and direct engagement with our customers is a key differentiator for DigitalOcean and has created a very loyal customer base. Remaining close to our customers while their own businesses see a slowdown in growth is going to position us well to capture more than our fair share of the revenue opportunity as growth rates normalize and re-accelerate over time. The third growth initiative is the continued investments in our recently acquired Cloudways managed hosting capabilities. The Cloudways business continues to perform well, managing its growth despite the weaker macro, and is an accelerant to our overall growth expectations for the balance of this year. We are pleased with the progress we've made on integration in our first six months post-acquisition. We have seen a 46% increase in new Cloudways customers in Q1 2023 over last year's Q1. And some of that increased results from the way we have leveraged our well-established self-serve funnel to drive customer leads to Cloudways. We are encouraged by the early results of the recent addition of the product capabilities and pricing changes we announced to Cloudways, a strong ratification of their value proposition and brand. We continue to be very optimistic about the long-term potential for Cloudways as a driver of value for our customers and investors. Before I conclude, I want to take a moment to address changes that we've made to our leadership team. Just as we've been focused on aligning our operating model cost structure and investment priorities on achieving our long-term growth and free cash flow ambitions, we've also been working to build a leadership team that can scale and help us deliver on these objectives. To that end, we've made a number of changes and additions this year to augment our team. First, we've created an important new role, Senior Vice President of Communications, to bring additional focus and expertise to our efforts to connect with our customers and support them along their journey. Nancy Coleman, a seasoned executive with experience in technology businesses at similar stages of size and scale, has taken this role to drive communications to our stakeholders as we increase awareness of the company's capabilities and elevate our storytelling across our customers, employees, and investors. The addition of this role is another important step in the effort to upgrade our go-to-market capabilities that started with the integration of our sales, customer success, and marketing efforts under a Chief Revenue Officer at the beginning of 2023. We have also taken steps to better align our product development investments with our key growth priorities. With the Q1 departure of our Chief Product Officer, we took the opportunity to consolidate product development under our COO combining our infrastructure and new product development teams to drive better coordination and synergies, and to move product strategy under our Chief Strategy Officer to ensure that our product-level strategy efforts are tightly aligned with our overall corporate strategy and long-range plan. This creates a simpler and more efficient organizational structure and will drive improved development execution and tighter alignment across our broad set of strategic priorities. To further augment our go-to-market capabilities, we also announced the addition of Chris Merritt to our board of directors. Chris is an accomplished sales executive and has a broad history across multiple business models in technology, including both self-serve and direct sales motions. He most recently spent 10 years as the chief revenue officer at CloudFlare and helped them scale their business from $1 million to $1 billion in ARR during his tenure. We look forward to adding Chris's perspective to our board and executive leadership team. Collectively, these recent changes support our strategy to become the preeminent cloud infrastructure provider to small and medium-sized businesses. In summary, we're very pleased with both our progress early in 2023 delivering against our revenue growth and free cash flow targets, and our ability to maintain the 2023 target set on our last earnings call. Despite the ongoing macroeconomic challenges, we continue to invest across an array of product infrastructure and go-to-market areas, while refracting our cost structure to position the company for durable, profitable growth in the growing $98 billion annual market for developer and SMB cloud infrastructure. I will now turn the call over to Matt to provide details on our financial results and our outlook for the balance of the year.