DigitalOcean Holdings, Inc.

Hello, good afternoon. My name is Jeremy, and I'll be your conference operator today. At this time, I would like to welcome everyone to the DigitalOcean Q3 2023 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, 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 star one. I would now like to turn the call over to Rob Bradley, Vice President of Investor Relations.

thank you jeremy and welcome everyone to digital ocean's third quarter 2023 earnings call joining me today is yancy sproul our chief executive officer and matt steinfurt our chief financial officer before we get started 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 fourth 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. And 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, which can be found on our investor website. With that, let me turn the call over to our CEO, Yancey Sproul. Yancey?

Thanks, Rob. Good afternoon, and thank you all for joining us today. I'm pleased to share our solid Q3 results, representing another quarter with an attractive balance of growth and profitability. This afternoon, I'll share an update on the search for our next CEO, some broader macro observations that have been informed by customer and partner interactions, and briefly recap some of the exciting product announcements that we've made recently. I will also highlight a recent customer win that gives us enthusiasm for our product trajectory before turning the call over to Matt to go over the financial results and updated financial outlook. On the CEO transition front, the search process is well underway, and the board is making good progress in our recruitment of a new CEO. There has been very strong interest from numerous leading technology executives, and we are confident that we will hire an outstanding executive with extensive cloud infrastructure expertise. The board of directors is deeply engaged with several candidates, and we will continue to move these candidates through the interview process as the search progresses. It is still too early to communicate a specific timeline for the hiring of a new CEO, but the board is working with focus and deliberate speed to fill this critical role. Third quarter results were encouraging as the business delivered solid performance from both the top and bottom line perspective. Revenue grew 16% year-over-year to $177 million in our first quarter, having lapped the Q3 2022 pricing actions. And as we indicated, we had started to see at the tail end of Q2, we continue to see positive signs through Q3 and in early Q4 that there are abating trends from the growth headwinds from our cohort that we have seen over the past 12 to 18 months. Our margin profile for the core DigitalOcean business was very strong for the quarter and enabled us to absorb the incremental costs from our paper space acquisition while remaining within our targeted range of adjusted EBITDA and free cash flow margins. The combination of a stabilizing revenue growth rate and the efficiency we have created in our core business is allowing us to deliver robust free cash flow margins. As we look to accelerate our top-line growth rate, We continue to build distinct revenue growth drivers through product and infrastructure investments. A big portion of our focus over the past several months has been on our ongoing efforts to deliver on our product roadmap and continue to add critical capabilities that enable our customers to build and scale their own businesses. Through numerous interactions with customers, prospects, and partners, we continue to fine tune and evolve how we can best serve customers as they navigate the complexities of the cloud markets. The consistent sentiment from our customers is that simplicity is foundational to our value proposition, and relying on DigitalOcean to remove the complexities of the cloud is a productivity multiplier for them. We are focused on enhancing our platform's performance, reliability, security, and scalability, which enables us to retain and grow the spend of our customers and positions us to win new customers. Over the past several months, we have delivered an increase in velocity of product releases and announcements as we focus on meeting our customers' evolving needs. In September, we launched Manage Kafka, a new fully managed database service. Manage Kafka is a critical tool for businesses whose model involves significant data streaming. However, for small and medium business customers, it often comes with increased complexity. With our new fully managed Kafka as a service offering, companies can focus on their development environment and not be slowed down by complex processes. Customers have provided strong positive feedback about Managed Kafka, citing that it is allowing them to focus their time and resources on their customer-facing activities, referring to their increased productivity as a game changer. In September, we also introduced premium general-purpose droplets, extending the premium features of enhanced CPU memory and storage to offer improved performance to a broader way of cloud-native applications. Our first-generation premium dedicated droplets saw broad adoption and drove strong ARPU growth when launched in the beginning of 2021, as customers expanded their computing capabilities and migrated certain workloads to this premium compute offering. Now we've taken it one step further and expanded the opportunity for more customers to use these enhanced features with this new premium general purpose offering. And just a few weeks ago, we introduced scalable storage for Postgres and MySQL managed databases to help customers better utilize their cloud spend by scaling to meet their storage requirements without needing to similarly scale their compute and memory configurations. This introduction is a deliberate effort to better enable customer productivity on our platform. By introducing scalable storage, we are better serving our customers as they can monitor and optimize their utilization to get the best return on their investment. On the paper space front, we continue to be very excited by the addition of their AI ML capabilities and the expanded market opportunity that this business creates for DigitalOcean. While we are still only a few months into the integration process, The demand for Paperspace's services has been very strong, and we continue to learn more about the market and how customers are leveraging our capabilities to develop and grow their businesses. To give you a sense for one such use case, I'll provide an overview of one of the exciting customers we recently added to the Paperspace platform. The company is NOMIC, which was founded in 2022 to improve the explainability and accessibility of artificial intelligence. To date, NOMIC has released two products, an open source AI model, GPT for all, which is the third fastest growing repository in GitHub history, and Atlas, a tool that allows users to visualize unstructured data sets used to build large language models. NOMIC selected DigitalOcean to access high performance compute along with their intuitive along with our intuitive software, customer support, and reliability. Their co-founder was quoted as saying, our team loves Paperspace. It's far more intuitive than other compute providers. It allows us to spend less time managing infrastructure and more time building great products for our customers. Their testimony to DigitalOcean's combination of simplicity, reliability, and support along with the current demand environment that we see, excite us for the opportunity ahead. The RFPs that we are seeing span across multiple verticals for multiple applications and demonstrate the opportunity for new customers to join our platform to not only build their AI applications, but also to scale their products while utilizing the breadth of our IaaS and PaaS capabilities. In summary, we're making good progress with our efforts to bring on a new CEO And during this transition, our business is seeing stabilizing revenue trends while continuing to deliver significant free cash flow. We are seeing very encouraging signals that our top line growth rate is stabilizing relative to the last six quarters of deceleration. We continue to work to reaccelerate our growth rate through targeted product and go-to-market initiatives. The improved operating leverage we have created in the business over the past year is enabling us to make strategic investments while still delivering compelling free cash flow margins. We remain excited about our near and long-term potential in the large and $100 billion addressable market for SMB cloud infrastructure in which we compete. As we approach the end of the year, I'd like to thank each and every member of the DigitalOcean team for their commitment to our customers and for delivering these solid results. With that, I'd like to turn it over to Matt to provide details on our financial results and our outlook for the balance of the year.