DigitalOcean Holdings, Inc. (DOCN) Q1 2021 Earnings Report, Transcript and Summary

Good day and thank you for standing by. Welcome to the DigitalOcean's First Quarter 2021 Earnings Conference Call. [Operator Instructions]. I would now like to hand the conference over to your speaker for today Rob Bradley, Vice President of Investor Relations. Please go ahead.

Thank you, and good morning, and welcome to DigitalOcean's First Quarter 2021 Earnings Call. Today, DigitalOcean will discuss the quarterly financial results that were distributed earlier this morning. Statements on this call include forward-looking statements, including future financial results, including our goals and expectations regarding future revenue growth; profitability and our ability to generate and sustain positive free cash flow; our ability to achieve profitability on an annual basis and then sustain such profitability; future investments in our business; our anticipated capital expenditures and our estimates regarding our capital requirements; our ability to acquire new customers and successfully engage and expand usage of our existing customers, the cost and success of our marketing efforts and our ability to promote our brand; our reliance on key personnel and our ability to identify, recruit and retain skilled personnel; our ability to effectively manage our growth; our ability to compete effectively with existing competitors and new market entrants and the growth rates of the markets that we compete. These statements are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those projected or implied during this call. In particular, those described in our risk factors included in our Form 10-Q for the quarter ended March 31, 2021, and the risk factors that will be included in our Form 10-K for the year ended December 31, 2021. You should not rely on our forward-looking statements as predictions of future events. All forward-looking statements that we make on this call are based on assumptions and ease as of today, and we undertake no obligation to update them, except as required by law. Our discussion today will include non-GAAP financial measures. These non-GAAP measures should be considered in addition to and not as a substitute for or in isolation from our GAAP results. A reconciliation of GAAP to non-GAAP results may be found in our earnings release which was furnished with our Form 8-K filed today with the SEC and may also be found in the supplemental investor materials posted on our Investor Relations website at investors.digitalocean.com. I would now like to turn the call over to DigitalOcean's Chief Executive Officer, Yancey Spruill. Yancey?

Thanks, Rob. Good morning, everyone. Thank you for joining us for DigitalOcean's first earnings call as a public company. We have entered the next phase in DigitalOcean's evolution, in which we are accelerating into the $100 billion plus annual opportunity to serve software developers, entrepreneurs and SMBs. We are excited to review our strong Q1 results with you in the context of our strategy to faster, grow smarter and grow together. Before taking your questions, I will turn it over to Bill to provide details on the financial results for Q1 and provide our financial outlook for the year. Last month, our IPO is an incredible milestone as we achieved a long-standing goal to become a publicly traded company. It is a true testimony to the hard work, dedication and focus of many, many people and their passion for our customer opportunity. Taking an idea, nurturing and developing it, experiencing numerous peaks and values is a wild journey [indiscernible] faith, patience and perseverance. DigitalOcean lived this journey over the past decade, and we would not have been able to reach this milestone without the vision of our founders, the tireless efforts of our employees and the support of our customers and our investors. One thing couldn't be clear to us today. There is an incredible opportunity in front of us, and with the more than $700 million raised in the IPO, we are excited to put it to work to build towards our full potential to realize this opportunity. Thought it would be helpful to share the key elements of our business strategy some investors might be newer to our story. DigitalOcean was founded with initiative to simplify cloud computing, so developers and businesses can spend more time creating software that changes the world. To understand the importance of that mission, when individual developers and entrepreneurs are just starting out, they want and need to focus on building their applications and growing their business. They don't have the time, expertise or capital to address the complexities of managing IT infrastructure. They want technology to work for them simply, intuitively. And when it isn't, and they get stuck, they want documentation and support to help them get unstuck. The workflow of our customers is fundamentally different than that of larger businesses. And our commitment to simplicity, community support and open-source software are key ingredients to enable their success. DigitalOcean is purpose-built as a compelling alternative for developers, start-ups and SMBs to enable their journey of turning ideas into reality. Focusing on the specific needs of our customers, in just 10 years, we have earned the right to serve 600,000 customers in nearly every country across the globe, and have grown the business to nearly $400 million in ARR, and we are just getting started. Now I'd like to speak to our Q1 results. We are off to a strong start in 2021. Going to speak to our execution on the broader context of our 3 key imperatives to grow faster, grow smarter and grow together. We put these imperatives in place because they speak to the core value creation elements that are in this phase of the company's life. We want to grow faster because we have a massive opportunity in front of us. And given our value proposition, we believe we should grow faster than the growth rate of our addressable market. We grow smarter by improving our processes, infrastructure and systems to enable us to build efficiently to not only support our robust revenue growth plans, but also deliver adjusted EBITDA and CapEx leverage, so that we are able to generate significant free cash flow. Finally, we will grow together at DigitalOcean as we invest in our people and our talent processes to ensure that we all scale in our jobs as our business grows to our first $1 billion of revenue as we approach the middle of this decade. So how did we do? In Q1, we generated $94 million of revenue, a 29% increase over the previous year, and annualized revenue run rate, or ARR, was $388 million, a 30% increase over Q1 of last year. We are pleased with our progress but remain focused on continuing these accelerating trends as we progress through 2021. The key levers driving accelerated growth can best be viewed through the core measures of customer growth, net dollar retention and revenue per customer. And I will share some thoughts on our progress to date against each. First, customer growth. Increasing the rate at which new customers join and stay on our platform are important indicators of our long-term growth potential. There are over 100 million SMBs globally, with 14 million new businesses added each year. We are relevant to all those seeking a digital presence and growth in our customer base is a strong proxy for sustained growth acceleration. Our unique self-service go-to-market model is ideally suited to attract and onboard massive numbers of customers at low cost. And we are making significant progress in making that engine ever more efficient to fuel our growth. Additionally, we are adding a sales capability to focus on larger SMB customers whose needs are a little too complex for onboarding via self-serve. In Q1, we made good progress as customer growth accelerated to 7% year-over-year. Second, net dollar retention, or NDR, is an important driver of the quality and sustainability of our growth. And we are focused on improving it from recent years in the 100% area. In Q1, NDR was 107%, a 600 basis point improvement over Q1 last year. This metric is a strong indicator of the quality of our service to our customers and their willingness to stay and expand with us. We remain focused on specific initiatives to improve fulfillment of customer needs on our platform and believe they will deliver improving NDR as we progress through 2021. Third, revenue per customer or ARPU, is an indicator of our ability to drive growth within our customer base. And is reliant both in our ability to continue to add new products and capabilities to our platform, as well as our success in adding larger SMBs through our nascent sales effort. Our product initiatives enable us to more deeply embed in the evolving workflow of existing and new customers. In Q1, ARPU improved by 20% to $53.68, as new products and better expansion and new customers growth continue to drive better economics per custom. We are laser-focused on continuing to make progress on these 3 measures. And as we do so, we will be able to achieve and then sustain a higher growth rate than we are reporting today. To help illustrate the power of these trends, I'd like to highlight a customer that migrated to DigitalOcean in Q1. The customer is a social networking and live streaming platform that caters to more than 200 million global users. With the customer base of that magnitude, a major portion of their cloud spend is on bandwidth. As they scaled with one of the larger cloud players, their cost became unpredictable, they found customer support lacking and contract terms owners. These pain points led them to DigitalOcean. We invested the time to understand the requirements and won their trust through a personalized onboarding approach involving their internal team and ours. As a result, they migrated in Q1 and are currently running over 200 droplets across multiple data centers that host their production workloads. Better yet, in the coming months, they plan to migrate their core infrastructure over to DigitalOcean as well. The initial migration was completed in about 90 days and demonstrates how the combination of our robust capabilities with compelling price can result in DigitalOcean supporting larger SMBs. In Q1, we generated $30.7 million of adjusted EBITDA which represented 33% margin. This was a 740 basis point improvement as compared to Q1 last year. We're focused on sustaining consistent operating leverage as we accelerate revenue growth by prioritizing our activities to those that generate the highest benefit to customers and deprioritize activities that are below threshold. In Q1, we drove CapEx down to 25% of revenue versus 44% in Q1 2020, an improvement of 1,900 basis points. We are better matching our customers' utilization of our platform with the growth in capital we deploy to serve them. Our team is working on a number of initiatives that puts us on a path for a sustained reduction in CapEx intensity in 2021 and beyond. Importantly, on the way down to our longer-term target margins, we will be managing our CapEx spend within narrow ranges to avoid lumpiness. Very encouraged about the path ahead to materially reduce this important measure of the fundamental economics of our business. We believe that growing faster with higher margins and free cash flow generation are not mutually exclusive. In fact, as we are demonstrating, they are complementary. Our recent IPO is a testament to our company coming together to execute better. Since I joined in the summer of 2019, we have implemented a lot of change up and down and across the business, in terms of people, processes and prioritization, with the goal to grow faster and improve efficiency to grow smarter. Not to mention in the last year, we all did this remotely due to the pandemic. I couldn't be prouder of our entire team for driving improved execution in the midst of this change. This is a great testament to how we grow together. Finally, I want to touch on something that is foundational to the spirit of DigitalOcean and demonstrates our commitment to our values. The first of which is our community is bigger than just us. Last spring, we launched Hub for Good to donate our infrastructure to individuals and organizations that were helping their communities during the COVID-19 pandemic. Since then, we have expanded the breadth of the program to include over 1,100 projects across a variety of use cases. There are so many heartwarming examples of DigitalOcean being used for good. It has been inspiring and a great encouragement to both our customers and employees during this challenging time. In connection with our initial public offering, we joined the Pledge 1% movement and we'll be allocating 1% of our valuation at the IPO over the next decade to expand our Hub for Good program. Just before our recent IPO, one of the founders of Hub for Good suddenly passed away. She was a beloved member of our DigitalOcean family. And to honor her legacy to our company and our commitment to community, we have renamed Hub for Good to Hollie's Hub for Good. We're proud to continue Hollie's legacy as we leverage our capabilities as a Force for Good because our community is bigger than just us. In sum, it was a strong quarter that has set us up for an even stronger 2021. We are excited for this next phase as we continue to focus on our mission to simplify cloud computing, so developers and businesses can spend more time creating software that changes the world. I'd now like to turn the call over to our Chief Financial Officer, Bill Sorenson, who will provide detail on our financial results in Q1 and our outlook for the balance of this year.

Thanks, Yancey, and thanks to all of you for joining us this morning for DigitalOcean's first earnings conference call. This is an exciting day for the company as we share with you the progress that we're making against all of the key operational metrics we discussed with many of you during our recent IPO process. And that clearly demonstrates the company's improving performance. In every important category, DigitalOcean showed progress in Q1. We saw continued acceleration of revenue growth. Improving profitability is measured by our adjusted EBITDA margin, and increasing free cash flow potential by reducing CapEx as a percentage of revenues to just 25%. I'll keep my remarks brief today but want to elaborate on the key metrics that I mentioned above, what's driving those improvements and the actions we're taking to continue to drive further improvement. After that, we'll open the call to take your questions. As Yancey mentioned, revenue growth accelerated to 29% year-over-year, up from 26% just last quarter. An important driver of the acceleration was a substantial improvement in net dollar retention, or NDR, to 107%, up 200 basis points from Q4 and 600 basis points year-over-year. As we've detailed, as our customers grow, their usage of our offerings grow alongside them. That's usage of our original offering of compute storage and bandwidth, and increasingly, the adoption of new products launched over the past several years, such as Kubernetes and managed databases, as well as our recently introduced high-performance droplet types. Expanding our product set along with the continued focus on 24/7 support and customer service are key components of how we can drive better customer retention and further revenue growth acceleration. We continue to invest in each of these areas in people, systems and processes to make DO the go-to service for today's developers and small businesses. We believe that all of these efforts will help us retain our customers long into the future. Along with revenue growth acceleration, DigitalOcean continues to drive greater profitability as reflected in our adjusted EBITDA margin, which increased to 33% in Q1. That's more than a 700 basis point improvement year-over-year. Contributing to the year-over-year change were higher gross margins, continued efficiency in our marketing spend and executional focus on all operating expenses across our organization. We also saw a 200 basis point reduction in bad debt expenses year-over-year. An additional contributing factor was the heiring what's behind our internal plan. That said, as we ramp new hires during the year to help with our growth objectives, we expect some moderation in adjusted EBITDA margin from our current levels, but the company's profitability will still be materially higher than the prior year. Improving EBITDA has also led to a healthy increase in cash flow from operations, which reached $20 million or 21% of revenue in the first quarter. This was a meaningful step-up from the first quarter of last year and is an encouraging signal of the potential for our business. The final pillar operating focus is increasing the efficiency of our capital expenditure investments, through improvement in our procurement muscle and our technical capabilities in managing the utilization of our capacity. For the quarter, we had a meaningful reduction in CapEx as a percentage of revenues to just 25% of revenue, down from 44% of revenue in the first quarter of 2020. As we continue to pursue revenue acceleration, we intend to manage our expenses as efficiently as possible with the goal of driving our CapEx investment even lower. This combination should be beneficial for cash flow generation. And as such, we expect to be cash flow positive as we go forward. As we've discussed, Q1 results clearly reflect the improvements we are making in the operating performance of DigitalOcean, as we pursue this $100 billion-plus market opportunity, and we're really excited about the journey ahead. One exciting milestone to quickly note is that during the quarter, we did indeed achieve a long-term objective of becoming a public company. This achievement provides the company with access to a new group of long-term shareholders, as well as capital to help us pursue our goals. Our sale of 16.5 million shares has resulted in proceeds to DigitalOcean of over $700 million. Using those proceeds, we reduced all outstanding borrowings to 0, but still retain borrowing capacity, if needed, under the terms of our revolver. However, given the improvement in our cash generating capability, we anticipate that we will fund our CapEx requirements from internal funds. Finally, let me share with you our Q2 and full year outlook. For the second quarter, we expect revenue to be in the range of $97 million to $99 million. We expect adjusted EBITDA margin to be in the range of 30% to 31%. Fully diluted weighted average shares outstanding will be in the range of 117 million to 119 million, which reflects the impact of new shares issued during the month of March. For the full year, we expect revenue to be in the range of $405 million to $409 million, which represents 28% growth at the midpoint. We expect adjusted EBITDA margin to be in the range of 30% to 31%. For the year, we project our CapEx as a percentage of revenues to be between 25% and 26%. And finally, the fully diluted weighted average shares outstanding will be in the range of 115 million to 117 million. Weighted average shares outstanding are lower for the year, given the impact of the timing of the IPO at the end of Q1. Thank you all for your continued support and for joining us today. And now let's turn our attention to the questions that we've received from our analysts.

Thanks, Bill, and thanks all of you for joining us today. As Bill mentioned, we collected questions ahead of time, and we'll answer those first, and then time permitting, we'll have a few minutes to let other panelists ask questions. So the first question came from Chris Morban at Goldman Sachs, and he asked how are things going with the cross sell motion? Are you continuing to see improving attach rates for your database and manage offerings, particularly among higher spending customers?

Thanks, Chris, and good morning, everyone. We continue to see adoption of our PaaS products, if you will, our Kubernetes, our Database as a Service, our marketplace, our recently launched app platform, those approximate 10% of revenue. They're growing materially higher, 4 to 5x higher than the total company's growth rate. And that 10% of revenue is up from about 0, 2 years ago. So we continue to see our cohorts adopting more revenue. We exceed and focus on ARPU, as we talked earlier, and having ARPU grow 20% as well as our net dollar retention, seeing that 600, 700 basis point expansion. Those are the best proxies, in our view, of the long-term potential of multi-product adoption that we're seeing across our cohort. And we're very pleased with the progress. We've had a number of initiatives that we go back into our cohort using digital tools, using data science, using different engagement models with our teams to engage with our customers. And we're really encouraged by the progress we've seen early in this journey, and we think that's driving growth acceleration that we're talking about here today.

Great. Thanks, Yancey. And Pat Walravens at JMP Securities asked about CapEx, along with many others. Can you walk us through the main drivers of your CapEx spend? And how should we think about -- how you would lower it as a percentage of revenue over time?

Bill?

So CapEx for us is a major focus area. It's a tremendous platform that we have built over the past 10 years, allowing us to deliver [indiscernible] to 185 countries around the world. We've made material changes in terms of how we acquire CapEx. Previously as a young company, there was very much a just-in-time focus given capital constraints. Today, we've taken a longer-term view, looking at capital investment, CapEx investment over the next 6 to 8 quarters, which has allowed us an opportunity to work with our major suppliers in order to drive the cost of those to a much lower. And we continue to work in that area, continuing to push on price as best we can. But also, as part of this, is better understanding of our customers and how we can maximize the utilization of our server fleet. And that's been a major area of focus for our technology team and will continue to be so. We're very confident that this year, we will be able to maintain our CapEx investment in the mid 20%, 25% to 26% of revenues we have a long-term view, again, which allows us to plan well in advance of our expectations. So we will not see any lumpiness there. And given the numbers that we are forecasting and accelerating growth, we think that 25% to 26% allows us plenty of runway to basically provide for that growth, but we will still look to drive that down towards our long-term goal or medium to long-term goal of 20%, sub-20% over time.

Great. Thanks, Bill. Virtually, all analysts asked this, but Michael Turits at KeyBanc, got it in first and said you've shown an improving net expansion rate. Could you talk about what's been driving that improvement? What's still to come? And what could that mean for your potential to accelerate revenue growth?

Well, we're really excited about the progress we've made driving net dollar retention up from roughly flat 100% a year or plus ago to what we reported today of 107% and expect to be continuing to see that metric accelerate. And importantly, what's driving that is expansion. We have made progress on churn, but I would say the ratio between what's driving the aggregate number higher, it's about 3:1 expansion over churn. And we have a number of initiatives across our teams both in that first year, the onboarding phase. The first year is where we see the vast majority of customer churn in our business. Both small and large customers, if they're on our platform for a year or more, essentially, the churn is de minimis. So we've been focusing on that first year of the life of the customer. Using data science, using digital tools to engage customers to help make sure that their onboarding experience that they get optimized on the platform early. They have a good experience, like a lot of software products. You typically see people stick with it. If they don't, they shuck it and move on. And so a lot of our initiatives are around that first year. And then also going back into the cohort after a year, we see a lot of customers who are growing and scaling their workflow is becoming more complex as their business takes off. And their use case starts to evolve. Their business there, the number of employees they have, the number of customers they have, the number of products they have. And we've been using propensity analysis, digital tools to identify customers who might be candidates for upgrades or different product use cases, and we've been driving engagement with them. And we just scratched the surface of this, but we've seen pretty significant success rates with those customers. And so that's what's driving the expansion. As we've just proactively, we've always had a commitment to support. That's always been a value differentiator for DigitalOcean. What we have changed over the last year plus, is turn that around where we're not just waiting for a call in to support our success teams, we're actually engaging proactively. We're early in this journey. But as you've seen, we've had pretty significant improvement in this metric. And we're not done. We've not landed at 107. We think that we have a lot more runway and are optimistic and looking forward to reporting and discussing that with you over time during the course of this year.

Great. And competition has been a big focal point for investors and Timothy Horan at Oppenheimer asked. Microsoft seems to have similar products and services as you do for SMB that are free. Can you discuss how you compete with this?

Yes. Thanks, Tim, for the question. It's -- I think it's worth noting, first off, it's a massive market. Our data size is at $50 billion today going to over $100 billion, so it's growing 27% annually, but it's just a massive market. We don't believe it's a winner-take-all market. We think other cloud markets, where the big cloud plays, there's an opportunity to serve SMB, and we think were no different. I think the 600,000 customers, $400 million sort of run rate speaks to the fact that we can carve out a very interesting niche here. And how we do that? How we differentiate is focusing on simplicity. When you think about our customers and you talk to our customers, the CEO founder, their DevOps, their marketing, they're doing the coating. And so their experience on our platform is that they are working multiple jobs. They really need our service to work. They need simplicity. And when it doesn't work, they need help. Our documentation, the quality of our documentation, our support experience being personalized regardless of the size of the customer, whether you're an early journey customer or one of our largest customers, everybody gets support. That matters to them because they just don't have the time. And I think in the script, we talked about this example of the customer onboarding that happens many, many times a quarter. A month where customers come to us as their businesses grow and scale on some of the larger platforms, they still are insignificant in terms of revenue size and can't get that personalized support. And so what we found is free, is it helpful if you're stuck and you can't get a support experience or there's no documentation or if the contractual terms as you start to ramp and scale are difficult. And so we think our differentiation is really, really important. And as a matter of fact, our tutorials and our documentation is free to customers for people who aren't even customers. So we have a lot of offerings that attract people and it creates evangelist for our product. And I think that's why we've established such a strong position in the marketplace on brand.

It's probably a good segue. Wamsi Mohan at Bank of America asked, can you talk about the opportunity across Pass versus IS? Our most larger spend clients looking for additional Pass services and any examples would be great.

Yes. So thanks, Wamsi, for the question. Again, as a level set, we're roughly 90% of our revenue comes from the core compute network and storage solutions that are typically called Infrastructure as a Service. 10% are Kubernetes, our Database as a Service, our marketplace and our app platform. And that piece of the revenue pie is growing significantly higher than our overall growth rate. And that reflects the fact that we have a growing customer base who is building their business. They're getting lift off from the initial testing and idea to building a business. And as they grow and scale, they need more services. Their workflow evolves. They go from 2-person team to a 20-person company. From 2 people writing software development to individual teams of 8 to 10 of writing software. And as a result of that increasing complexity, they go from no customers to hundreds or thousands of customers, and they need more services to manage that. So that's where a database as a service helps people with their own customer analytics and managing their customers. Our Kubernetes, our app platform helps with the workflow on software deployment as customers grow and scale from individuals to larger organizations. And we see that adoption and the volumetrics increase with that. That's what's driving ARPU. And that's what's driving net dollar retention. And that's a core fundamental aspect of our strategy to have both. But you also see in Q1, we're also making the core infrastructure better in innovating there with our premium droplet, which has had significant adoption in just the first 2 months of its existence. We launched a premium storage option in Q4 that has seen a lot of adoption. So we're making the whole platform better in terms of the infrastructure, in terms of flexibility and optionality of the services. Security is critically important to us, reliability and scalability. And then also innovating with new platform applications services that are also driving as growth because of the evolving workflow of our customers. So it's a 2-pronged strategy, and it's really focused on the workflow and the -- how our customers evolve. That's how we choose which products to launch, and we've been pretty successful over the last couple of years in doing so.

Great. And Brad at Stifel asked, as you continue to bring a greater level of discipline to the sales and marketing efforts, can you highlight the success you have had driving greater customer engagement, and overall operational efficiency?

Well, our -- we relaunched our sales effort a couple of years ago. It's generated about 2% of revenue last year. We think it will do 3% to 4% this year. We're investing this year. One of our key initiatives is to expand regionally in certain markets where we see there are additional growth opportunities ahead of sort of our faster growth opportunities and large opportunities than the overall effort. So we're very focused on managing a sales effort to grow it. We're starting at a 10% of revenue for total spend on sales and marketing. So we have a lot of room to invest in sales and marketing to drive a higher growth rate. We're very focused on that. Other operational improvements we've been making. I talked earlier about how we engage digitally with our using data science and other triggers to help us drive engagement to optimize that first year journey of our customer on the platform, keeping them on through those first 90, 120 days, churn starts to reduce dramatically, and it becomes de minimis in the first year. Sales operational efforts are bearing a lot of fruit, as you've seen with the expansion dynamics that we're seeing and lower churn. We've revamped our support and customer success efforts to normalize for the next level of scale. And those increasing service levels have led to better customer engagement. Again, people consume support in a self-serve model in the first 90, 120 days. And to the extent we can keep them with a great experience, that drives expansion opportunities. And we're excited about the operational levers that we're pulling. And we're very early. And I think that's what's exciting about this is, there's a lot of runway here across our sales, our customer success, our support teams as well as our self-serve. We've been optimizing the whole self-serve process not only increasing top of funnel visits to our website from 4 million to 5 million over the last year, but also driving new customer additions every month. We're doing that through operational excellence. And using much more metrics, cross-functional collaboration, et cetera. So we're really early in the improved operational improvements. And what's heartening is how much impact they're having despite how early we are in the process.

And then Josh Baer at Morgan Stanley asked, how should we think about plans for geographic expansion? And how would this impact CapEx?

Thanks, Josh. Well, the good news is we're already in 185 countries because of the power of this highly efficient self-serve model that can attract tens of thousands of paying customers each month from those 4 million to 5 million website visits that we've been having. And we drive those visits from increasing our community content. People come searching online and they're stuck on an idea. They read our tutorials online through a Google search or other search mechanisms. That's what drives people to the site. So we're in all of these markets. We are looking to expand our sales capabilities in certain markets whether it's out in Asia, South America, Middle East, Africa and Europe as well as the United States. And so we're adding targeted people. And how our salespeople get a lot of leads when people come to the website, they're not optimized for self-serve. And so having individuals and teams who can work with larger customers, for example, like the one that I mentioned earlier today in the script. We're investing in targeted ways to drive growth because when we bring on a new sales customer, they come at substantially higher monthly revenue versus a self-serve customer. And so we're principally because of the level of scale going to be principally a self-serve motion. But sales can supplement, and we're seeing it go from 0% to 3%, 4% this year of revenue, 0 a couple of years ago. So it will certainly contribute to our accelerating growth trends.

Great. And then the last question we collected before we go to the operator or take additional ones was from Raimo Lenschow at Barclays. And could you give us an update on new product uptake?

Well, the new products have been really strong. Again, essentially a pure Infrastructure as a Service company two years ago. We're now 90%, 10% PaaS offerings across cumene DBaaS, our marketplace, our app platform, et cetera. We're seeing significant adoption. Those are growing 4 to 5x faster than the overall company. That was the case in Q1. But we also innovated around premium droplets. We went from a $5 droplet to a $6 droplet with a premium intel or AMD chip. We saw significant uptick in that, $1 million-plus ARR in 6 or 8 weeks. And so we saw a similar dynamic by providing a premium storage option back in Q4. So we're going to make the whole platform better. Again, our customers are looking for anything that's simple, easy, intuitive to help them drive productivity as they build their applications and build their businesses, and we'll continue to innovate as a driver of accelerating growth, in addition to the optimizations we've been talking about on this call around our go-to-market and our marketing efforts to support onboarding more customers as the same there, as we talked about.

Operator, we're ready to take questions from the queue.

[Operator Instructions]. You have a question from the line of Mark Murphy with JPMorgan.

Yancey, you're closing in on the 30% growth level a lot sooner than we thought was going to be possible. In fact, we thought it would take 2 to 3 years. But you're essentially there in Q1. And so I heard all your commentary about the new initiatives. But when we see this kind of triple-digit net new growth in the ARR, what inning do you think we're in with respect to this operational transformation? In other words, the direct sales, the intelligent marketing campaigns and all the cross-sell and upsell, what inning? And how much runway do you think is left there?

Yes. I think -- Mark, thank you. I think we are just sitting down after the National Anthem, and we have our per year and our first hotdog. And I haven't even gotten any mustard on my hands yet. So I think it's very early. And I think it's important to mention here, as I mentioned in the script, we joined less than 2 years ago. And a lot of the operational changes that we've made. It's not unusual that after 18 months, you start to see bear fruit. And the typical conversation in the Board room with the investors is, let's see this run out for a year or 2 before we go public. It's very unusual. This is a very distinct opportunity. In month 19, we were a public company. And so I think that this is going to be a very interesting opportunity for public investors to see the operational improvements month-to-month, quarter-to-quarter, it's very early. And that's what's so exciting about where we are in the journey. And there's such a massive opportunity. It's just such an incredible thing that we're seeing, both on the go-to-market and the sales, our self-serve, for our teams to really help our customers get more productive, then they just spend more money because we're able to enable their success. And it's very exciting to see that. And then we're focusing our innovation around products in a way that keeps that experience for our customers, but it also allows them to do more with us. So very early and really excited about that.

Okay. Great. And if I may, just as a quick follow-up, maybe for Bill. You have this tremendous improvement in the CapEx ratio. I think we're just wondering how much of that is structural and sustainable due to the volume discounts and the prebuying and everything you've implemented versus maybe being -- just having been maybe a little more preloaded into last year? Or said differently, like what gives you the confidence that, that's sustainable?

Great question. I think a couple of things relative to how we are approaching our customers, how we are fulfilling those customers, who they are, how they use the platform? Historically, the platform was out there for everyone to use it. Now we're spending time understanding what those use cases are. And we clearly can see that in the combination of the new products that we've offered, how customers are using those products. Pricing opportunities within those products also provide an opportunity for us to drive additional margin and drive additional revenue against those servers. So what we're looking at is indeed continuing to work, as you would expect, we would with our major suppliers, that includes the component manufacturers as well. Continuing to find ways we can drive costs, they're lower. But I'd say the part we're really excited about is, how do we get more out of this platform? How do we service our customers in a way that we can provide them what they need, at the same time, maximizing the revenue opportunity? Our servers, they're paid back within a year, and yet they live 5 or 6 years. And we will continue to find ways that we can drive more revenue through those servers. They run 24/7 across the entire globe. So it allows us an opportunity to keep driving more revenue into that platform. So combination of procurement will have to do, but also to the utilization of the platform, we think provides us real exciting upside.

Okay. So that revenue per server continues to grow and the cost per server continues to decline for a while as far as you can see. Is that fair?

That's fair. Yes.

You have a question from the line of D.J. Hynes with Canaccord.

Yancey and Bill, congrats on the great start. So one of the questions I've been getting a lot is around customers graduating off of DO to other public cloud platforms as those larger user scales. Do you see that as a risk? How do you keep that from happening? I guess, if or when it does? Like is it wholesale replacement of do or just incremental workloads that go to another cloud? Just any thoughts along those lines would be helpful.

Yes. So D.J., thanks. So graduation is a lingo we even use looking on the IPO conversations, customers don't graduate from DigitalOcean. As I mentioned earlier, if we keep a customer over a year, whether it's a small customer or a large customer, the churn is de minimis after a year, literally less than 0.5% or certainly less than 1%. So they don't leave us because the infrastructure, as we talked about earlier, is secure, it's reliable. It scales. It's cheap. We're substantially cheaper than the larger cloud providers. What you do see in almost every business that's in the cloud is people go multi-cloud. And we encourage multi-cloud because it's part of simplicity in our view. This isn't about the tech lock-in. And so 1 of the reasons we support open-source software is, our companies are looking for speed and velocity and low cost. And to the extent for us to try to lock them in with our tech stack, it be counterintuitive and probably bad for the exit of our business. And so you see customers as they grow -- we have an increasing product portfolio, but sometimes it makes sense for risk management, supplier management, vendor management, et cetera, for customers to have multi-cloud. And you'll see that, but we don't see people graduate off our platform. And as we mentioned earlier in the script with that customer example from Q1, we frequently see medium-sized, growing SMB, so still are relatively small in a big pond of enterprise customers at some of the larger clouds come to us because we're cheaper. We can fulfill their use case. In fact, in that case, that we mentioned earlier, when they benchmarked against the player that they were against was orders of magnitude larger company than we are. They actually said for that our use case, and given the price point, we were a better value, without sacrificing performance. So we don't see graduation. We certainly see people go multi-cloud as they grow and scale, embrace that. We think that's a tailwind to our business. Historically, in technology, it's about us versus them. And I think that's been a barrier, and people have looked at the risk profile of churn differently. And in our business, serving customers well and if they want to go multi-cloud for certain apps, et cetera, we embrace it.

You have a question from the line of Chris Merwin with Goldman Sachs.

I wanted to ask about the customer adds. I mean, that's been very strong for the last couple of quarters here. What drove that step function change? And how should we think about a more steady state of customer adds going forward?

Yes. Chris, so the acceleration in customer adds, this is a critical measure, that's why we talked about it in the script. In addition to NDR, net dollar retention and ARPU, the triangulation with customer adds. And that's a really important metric for us because the more people we get on the platform. And as we've seen these early results of keeping them on the platform, it sets us up for every -- some percentage of those customers start businesses and they grow and scale. And so it's really important for us to bring people on the platform. So we've revamped our self-serve motion. And not only are we focused on driving more community content, tutorials and other aspects to drive more website visitors, and we've seen 1 million website-visit-plus jump over the last year. So that's part of it as top of funnel. But then also we've operationalized each phase of the journey from the initial website visit down to paid conversion and added a workflow step to focus on those first 90, 120 days post sign up. So we don't ring the bell just because somebody puts the credit card down. We actually have integrated workflow across our team focusing on that onboarding experience because a majority of our churn happens in that first 90, 120 days. So we can drive a better experience for our customers that's going to lead more and more of them to stay. So I don't know about steady state. We certainly want to have -- we grew 7% year-over-year in our customer base. We want to see that be double digits, and that's in sight. And hopefully, we'll be talking about us being at that double digit. But I think the formula for us, Mark asked earlier about the 30-plus percent growth rate and we're there essentially as of March. If we can get a double-digit growth rate on customers year-over-year, continue to see this accelerating net dollar retention beyond where we are today. And again, we're early in that acceleration. And this ARPU in the mid- to high teens 20% area, that is a formula for a 30-plus handle growth rate. And again, we're very close, if not there already, and we're working those levers very actively.

You have a question from the line of Tim Horan with Oppenheimer.

Yancey, just doing the math on that, it sounds like closer to 40%, but I'm not trying to put any pressure on you. Could you talk about your product strategy a little bit more? How important partners are? And what inning are you in, in developing new products, do you think?

Well, product innovation is really critical for us. And think about that broadly defined. If you bought a droplet, the infrastructure is just so much better than it was when we first launched the company, it's more secure, it's more reliable, less downtime, more robust, many different data centers, et cetera. So we're investing in that experience because that's foundational to our customers. And then the software services in the marketplace, I think, are critical. The tension that we're going to find is, we want to make sure that we maintain simplicity. So I don't think you're going to see us innovating with thousands of apps, like some of the other folks in cloud. Because our use case of these early-stage businesses are pretty simple. And so we'll want to then diagram to overlap highly with what their workflow is. And I think the database as a service, the growth and the adoption of that is a great testament. So we'll be very targeted on the products that we innovate. We have a focus areas that we're looking at right now. And then the marketplace is an incredible opportunity for us to have best-of-breed apps across the ecosystem, integrate with our platform and give our customers choice. So I think that's going to be the formula. Marketplace is clearly a big partnership angle, and so we're early there. We partner with some vendors to help us with our DBaaS tools. And then we'll own some of those and organically develop. So it'll be a combination of both. We're early in the journey, again. We're -- we talked about our first $1 billion by the -- before the middle of this decade. But this is a massive TAM addressable market, going to over $100 billion. And so for us to have the size and scale we have today, we think there's a ton of runway. New product innovation, making our core capabilities better and more reliable, secure, et cetera, are going to be the formula. And then getting really good and better where we are in customer acquisition, both on self-serve and sales. And that's going to be the foundational elements to driving sustained high growth. And as we're talking about today, higher-margin growth and higher free cash flow as we dramatically reduce capital intensity here in the near term.

You have a question from the line of Wamsi Mohan with Bank of America.

Nice results here. Yancey, $0.5 billion in cash. How are you thinking about deploying this? I know at the outset you said this can help you accelerate the business. How exactly are you thinking about deploying? Is there going to be M&A? Is there data center footprint increases, adding capacity? What do you think is currently maybe a little constraining growth maybe a little bit? I mean, obviously, you're showing tremendous growth. But is there things that you view, in particular, that deploying this capital can drive even further acceleration?

Wamsi, thank you for the questions. So I think it's 2 pronged. M&A is certainly going to be part of the program, and we've already done some M&A. So it comes in 2 varieties: One is to supplement to give us more velocity on product innovation. So the app platform product that we launched about 6 months ago came from an acquisition 2 years ago of a smaller start-up named NanoBox, and we took that IP and integrated it with our platform. And we've seen significant adoption in those series of that platform. I think that's a recipe for what we're focused on now. I think we'd like to be a little bit larger company, so maybe buy the $20 million, $30 million of revenue. So already has a product market fit but could benefit from the distribution of our large network and customer base. So we'll want to continue to do more of that. And we've invested in the team internally to put the capabilities in to drive faster and on CorpDev. We also have acquired some tutorials to supplement our organic ability to write tutorials and publish. And a big reason that we had that $1 million-plus jump in website visits over the last years by accelerating community content. So that's another area. So they're not big deals, but they're certainly hopefully bigger than what we have done recently on the product side. That's going to be a big focus of ours. More product and innovation velocity using CorpDev to supplement what we can do organically. And then on data center, we've got a -- we're free cash flow positive, if you will, and certainly we'll be driving the business that way this year and well beyond. So we'll fund it from the economics of our business. However, the cash will enable us to be more aggressive potentially lining up and adding new data centers. We'll have more to say about this at a subsequent date. But we are doing a lot of analytics around the existing footprint as well as where we will add data center infrastructure. And having a strong balance sheet is going to enable us to be able to work well and quickly when we make those decisions that we'll communicate about where we want to add and how we want to have.

That is all the time we have questions for today. I would now turn it over to Yancey for concluding remarks. EQAA

Thank you, and thanks, everybody, for joining us. We're really excited to have our IPO earlier this year. We're excited about updating you on our progress. And we appreciate your support as we take on this next phase at DigitalOcean as a publicly traded company. We're delighted to share the progress we've made. And we look forward to these conversations over the coming quarters and years, as we work really, really hard. We have a massive opportunity in front of us. This is an incredible business. And our business is all about enabling software developers and entrepreneurs' successful ideas, build their businesses and realize their dreams, and we look forward to updating you over time about how we're doing against the opportunity. Thanks, have a great day.

This concludes today's conference call. Thank you for participating. You may now disconnect.