Release Date: May 10, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Revenue growth accelerated quarter-over-quarter, demonstrating the strength of DigitalOcean Holdings Inc (DOCN, Financial)'s business model.
- Net dollar retention improved to 97%, indicating increasing customer loyalty and product usage.
- Introduced new products like daily Droplet backups and memory and storage optimized droplets, enhancing customer experience and platform capabilities.
- AI and machine learning platforms are seeing strong uptake, with AI ARR growing to $19 million, a 128% annualized increase from December 2023.
- Managed hosting product, Cloudways, contributed significantly to revenue, growing 34% year-over-year.
Negative Points
- Despite improvements, net dollar retention is still below 100%, indicating room for growth in customer expansion and retention.
- AI and machine learning solutions are still in early stages, with demand outstripping supply, indicating potential scalability challenges.
- Gross margin expected to moderate in coming quarters due to planned AI investments.
- Total customer count declined by 7,400 quarter-over-quarter, driven by a reduction in lower spending customers.
- Free cash flow margins may reduce in the future to support accelerated AI growth, impacting overall profitability.
Q & A Highlights
Q: Can you discuss the state of AI adoption on your platform and how you see it evolving?
A: Paddy Srinivasan, CEO - We are in the early stages of AI adoption, focusing on the diverse needs of our customers who require various AI models, not just LLMs. Our AI value proposition includes infrastructure-as-a-service for model building and inferencing, and a robust platform-as-a-service that supports the entire AI and machine learning lifecycle. We're seeing strong traction in both areas, with significant growth in GPU capacity usage.
Q: How is the net dollar retention (NDR) trending, and what impact do you expect from previous weaker periods?
A: Matt Steinfort, CFO - NDR has shown a slow but steady increase since last July. The main challenge has been net expansion, which is now stabilizing. We are focused on product development and enhancing customer success to continue improving NDR, independent of market conditions.
Q: Are you seeing an increase in the attachment rate of core DigitalOcean offerings as customers create applications around AI workloads?
A: Paddy Srinivasan, CEO - Yes, we are observing early signs of increased attachment rates. Traditional DigitalOcean customers are starting to use our AI services, and new AI-focused customers realize they need more than just raw GPU power, including various cloud primitives that DigitalOcean offers.
Q: What are your plans to integrate Paperspace more closely with DigitalOcean, and what are the potential cross-pollination opportunities?
A: Paddy Srinivasan, CEO - We aim to integrate Paperspace's capabilities with DigitalOcean's core platform to address customer needs organically. This includes enhancing user experience and infrastructure to support AI model deployment and inferencing, which we expect to progress over the next few quarters.
Q: Can you provide insights into the GPU CapEx spend and its expected payback, considering the current demand and supply dynamics?
A: Matt Steinfort, CFO - Our GPU CapEx is aligned with our plans, and we're deploying capital as intended. The payback period for our GPU investments is less than three years, with a focus on both platform-as-a-service and infrastructure-as-a-service offerings. We continue to evaluate customer needs and market conditions to adjust our CapEx strategy accordingly.
Q: How are you addressing discovered gaps in your product portfolio based on customer feedback?
A: Paddy Srinivasan, CEO - We are enhancing our platform-as-a-service offerings to include more advanced management, security, and networking features. These improvements are driven by customer feedback and are intended to support their growth and scalability on our platform.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
