DigitalOcean(DOCN) - 2024 Q3 - Earnings Call Transcript

Financial Data and Key Metrics - Revenue in Q3 2024 was $198.5 million, up 12% YoY [46] - Annual Run Rate (ARR) in Q3 was$ 798.3 million, also up 12% YoY, with $17 million added in the quarter [46] - Adjusted EBITDA was$ 87 million, a 14% YoY increase, with a margin of 44%, up 200 basis points QoQ [50] - Diluted net income per share was $0.33, a 65% YoY increase, and non-GAAP diluted net income per share was$ 0.52, up 18% YoY [50] - Adjusted free cash flow was $26 million, or 13% of revenue, lower than the prior quarter due to timing of capital expense payments [51] - Net dollar retention rate (NDR) was steady at 97% [47] Business Line Performance - Core cloud computing platform saw 42 new product features released in Q3, almost double the previous quarter [12] - AI/ML platform ARR grew close to 200% YoY, contributing significantly to overall growth [10][46] - Managed hosting platform faced headwinds due to lapping price increases from April 2023 and a temporal surge in Asia in late 2023 [47] - Builders and scalers, representing 88% of total revenue, grew 15% YoY, ahead of the overall 12% revenue growth [11][52] Market Performance - The company saw steady growth in core cloud and AI, despite challenging comparisons from previous price increases and acquisitions [9] - The number of builders and scalers (customers spending more than$ 50 per month) increased by 2,260 QoQ, reaching approximately 163,000, up 6% YoY [52][53] - Total ARPU increased 11% YoY to $102.51, reflecting a shift towards higher-spending customers [54] Company Strategy and Industry Competition - The company is focusing on product innovation, particularly for builders and scalers, who drive 88% of total revenue [11] - Strategic partnerships with Hugging Face and Netlify were announced, aiming to simplify AI/ML model deployment and enhance developer tools [36][39] - The company is investing in AI infrastructure, including GPU droplets and Kubernetes GPU nodes, to democratize AI for all customers [24][25] - The company is also innovating in the platform and application layers, enabling customers to build AI applications without deep expertise [27][30] Management Commentary on Operating Environment and Future Outlook - Management highlighted the success of product innovation and customer engagement, particularly with builders and scalers [42] - The company is optimistic about its software-centric AI vision, with rapid product shipping across infrastructure, platform, and application layers [42] - Management expects baseline growth in the low to mid-teens entering 2025, driven by steady improvements in core business and AI contributions [57][74] - The company plans to host an Investor Day in late March or early Q2 2025 to share long-term strategy and financial outlook [43] Other Important Information - The company ended Q3 with$ 440 million in cash and cash equivalents and repurchased $11 million in shares, bringing total repurchases to$ 29.9 million YTD [54][55] - The company is targeting a net leverage ratio of 2.4x to 3x and maintaining flexibility to address its 2026 convertible debt [55] Q&A Session Summary Question: Product Innovation and NDR Disconnect [61] - Management acknowledged the disconnect between product innovation and NDR but emphasized that customer adoption takes time, with green shoots already visible [64][65] Question: EBITDA Margin Sustainability [66] - The strong EBITDA margin in Q3 was attributed to disciplined cost management and optimization, with expectations of ramping expenses in Q4 [67][68] Question: AI Customer Expansion [96] - AI customers are expanding their spend over time, particularly as they move from experimentation to production workloads [97][98] Question: GPU Supply Constraints [101] - The company has managed GPU supply effectively, with no current constraints, and has ordered enough capacity to meet demand [102][103] Question: Shift in Competitive Focus [106] - The company is following its customers' needs, particularly hyperscalers and scalers, to expand its share of wallet in a multi-cloud world [108][109] Question: Baseline Growth Outlook for 2025 [114] - The company expects baseline growth in the low to mid-teens entering 2025, driven by steady improvements in core business and AI contributions, without assuming NDR reaching 100% by Q1 [116]