DigitalOcean Holdings Inc

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DigitalOcean (DOCN): One-on-One with the CEO





Date Published:


Lede

We spoke with the CEO of DigitalOcean (DOCN) and have included analysis and the full transcription below.

 

Analysis

We just covered our first earnings season with DOCN and we leave that dossier as the establishing piece for new investors to learn about the company.

As for our conversation with CEO Yancey Spruill, we were impressed.

It was near the end of our conversation, but the CEO’s vision of DigitalOcean is clear eyed and ambitious:

We’re going to be a free cashflow machine in addition to growing very fast and we can do both and we are doing both and we’re committed to doing both.

And I think that folks that take a look at our company and over the next five, seven years are going to look at a company that is created… I truly believe it would be one of the iconic companies in tech.

I think we can be as important as [AWS, Azure, Google Cloud]. [It will be] for different reasons, but be able to transform our relative markets.

I believe that very strongly that we’re on a path to do that.

 

As for future growth, beyond the $1 billion in revenue milestone, he said:

[W]hen we talk about a billion by 2024 we state in terms our first billion.

… that’s not it, that’s not the promised land, it’s not over.

This is a multi-billion-dollar opportunity, and we’re just getting started.

 

I then asked about the risk that DOCN’s biggest customers leave the platform for the hyperscalers (cloud titans), to which he had a firm, unwavering retort:

Never in the first 18 months as employees at DigitalOcean, have we ever heard the word internally graduate. It’s just simply untrue.

People don’t leave our platform.

 

We then discussed sales and marketing spend, which is absurdly low, even as revenue growth has accelerated to 35%.

Yancey noted:

You know, [traditional sales generated] about 2% of revenue last year. That’ll double as a proportion of dollars this year. It’s a little over 3% of revenue. 6 million last year, probably over 12 million this year.

 

As you will read, he then discussed the self-serve channel which is growing so quickly, it will be difficult for the firm to raise sales and marketing expense faster than actual revenue growth.

This led us to the realities of a CEO who has a background as CFO, and it’s very refreshing.

[W]e believe this very passionately — profitability and margins are philosophy.

We’re biased heavily. Our comp is biased. Our philosophy is biased to grow the business as fast as we can grow.

But having said that, we also said, “Grow smarter.”

We’re trying to create scale and efficiency, as expressed for the higher EBITDA and free cash flow. That’s important to us.

…[Y]ou’re not going to hear us say, “Well, we’re going to grow at 80% and burn 100% for the next 10 years, just because we can grow 80%.”

…[T]here’s such a narrative at Silicon Valley that the only way to grow really fast is to burn a lot of money. I just fundamentally don’t believe that.

 

The conversation then moved to other revenue opportunities — even higher margin than its infrastructure as a service (IaaS), which would be platform as a service (PaaS).

Yancey explained:

We’ve gone from zero platform as a service (PaaS) revenue to roughly 10%.

And we think we can get that to 20% by focusing on relevant applications, not the breadth of applications.

 

It’s expansion into PaaS that will help DOCN grow its net dollar retention level, which is already at 113%, up from 100% in 2019, 105% in 2020, and 109% in Q1 2021.

Net dollar retention (NDR) refers to the growth in revenue from existing customers, where a 113% NDR indicates that customers of a certain size spent $113 for every $100 they spent in the prior year.

The conversation was much richer than the snippets above and we do hope you enjoy the full transcription below.


One-on-One with the CEO of DigitalOcean (DOCN)

Ophir Gottlieb:
We hold DigitalOcean in very high regard.

And while the sell side is lukewarm, we’ve actually seen this pattern before in emerging platforms.

Several years ago, we saw the sell side kind of drag an Excel formula forward for 10 years for like Shopify and Nvidia, for example.

And each time, the model followed a cadence of deceleration eventually ending at some terminal value.

So, let’s say, tepid upside.

But the sell side missed the power of a burgeoning customer base that was large, growing, monetizing, but most importantly, extremely happy.

And that’s how we see DigitalOcean. That’s a backdrop.

That feel like a good enough backdrop for us to do some Q&A?

Yancey Spruill (CEO DigitalOcean)
Yes, thank you. That’s helpful.

Thanks for taking the time to get us some backdrop on how you are thinking about things.

 

OG:
You’ve given guidance through 2024 to hit 1 billion in revenue, which is about 33% compounded annual growth, which is above all sell side models.

But, first, I want to talk about 2025 and after. I know there are so many variables that get introduced when we start doing longer-term discussions, but I want to talk about the path to $2 billion and $5 billion in revenue.

It appears to me that by then, there’ll be tens of millions of more SMBs, internet infrastructure will be vastly more important and evolved.

So, whatever velocity DigitalOcean has to $1 billion, it’s not obvious to me that growth will somehow magically slow afterwards.

How do you see this very long-term view of DigitalOcean at 2025 and beyond?

YS:
Yeah, so that’s a great question.

When we talk about a billion by 2024, we state it in terms of our first billion.

I’m a firm believer in running to the finish line, so that’s not it, that’s not the promised land, it’s not over.

To your point, the size of the market will then be well over $100 billion annually. It’s about 50 today, growing about 27%.

And that’s just for the SMB cloud aspect of the market that we play in.

That does not include the broader, for example, the hyperscalers.

So just our market segments should be going to over 100 billion during this timeframe. And we set things in motion to accelerate growth.

We feel good about committing to this growth rate in the near term, and we’re very focused, frankly, on the multi-billion-dollar revenue opportunity is there.


To your point that we don’t see things changing materially in four years, or three years, to the opportunity, and the market data, what we see every day in terms of who we talk to, and who we serve, all of those plans suggest.

This is a multi-billion-dollar opportunity, and we’re just getting started.

 

OG:
DigitalOcean’s net dollar retention number is the canary in the coal mine, either for shorts or for longs.

In 2019, it was 100%, which fit a tepid bearish thesis.

Then you guys came on board, and it rose to 105%, 109%, last quarter to 113%, and it’s grown from this kind of tepid bearish place to on the verge of overwhelmingly bullish.

What is a realistic plateau for DigitalOcean? Are we at peak post-COVID, stay at home, 113% net dollar retention, or is there still more upside to go?

I’m not talking about next quarter per se, I’m saying, as an entity going forward?

YS:
Well, we’ve talked about sustaining at least 110% or better. We’re kind of in the zone of where we need to be at our peak growth.

And haven’t set a range yet for net dollar retention because it’s still early, we’re still learning about the opportunity to drive expansion.

We had seen a ton of success getting churned down from upper teens, down to lower double digits, and expansion from upper teens to, in the high twenties, and we see more opportunity to continue to improve.

And so, I think in the very near term, we’re just focused on heads down, and we said, “It’s going higher.”
And I think you just acknowledge that at this point, being in the mid-teens on net dollar retention for an SMB customer base is pretty good. In fact, better than pretty good; probably top tier.

So, we feel good about the progress we’ve made.

The key to it is using data analytics, using more proactive engagement to get churn down in that first year, and then, help customers…

I was just on the phone early this morning with a customer in Canada, we were just having a normal check-in with our customer success rep, and we were talking about some of our capabilities, and how they’ve evolved.

And they’ve been on the platform for seven years, so you can’t be a proactive enough with the high growth, early-stage customers, to help them get better optimized on the platform.

And they’re frequently moving so fast as they grow from zero, to a million to 5 million, to 10 million of their revenue, that sometimes they don’t lift their head up, and need us looking at the model, which used to be historically very reactive to provide support.

Everyone has always historically received support at DigitalOcean, but it’s been reactive.

We had an orientation that we didn’t want to sell, or upsell, or engage with developers; if they needed help, they’d call. And our view was that that’s the opposite; we need to be proactive to help them be more successful.

And we’re just in the early days of pulling a lot of those levers, and turning those dials.

We made a lot of progress. A big reason is that we reduced the churn, and removed that as a headwind, but have also been able to, proactively with our business customers, get them more actively involved on the platform.

And we have more capabilities than we had a couple of years ago. You know?

So, if companies go from a two-person developer team to a 10-person, 20-person, 50-person, a 100- person company, their workflow evolved, so their need for a database solution to monitor and market to customers effectively, and analyze.

If they crossed that line, the need for software deployment tools like Kubernetes or app platform as their engineering team goes from two people, to two teams of 10 people, those deployment tools are helpful.

Our marketplace, it gives a host of developer tools, productivity tools, security, et cetera. They need that as their workflow and employee account grows.

We drive expansion through that lens, through product acceleration, our SMB customers have a natural, organic growth, and so I think we’re early in this journey on where we land on NDR, and so, hopefully the coming quarters we’ll have more to say about that.

But all we said recently is, it’s getting better. Obviously demonstrably better. And that’s not an accident.

We’re making that happen through change that we put in, up and down, and across the team. And we think we can continue to do better, and as we get closer to the landing zone, we’ll be more transparent, but I’m not sure we’re there yet.

 

OG:
Yes, I would say by the way, 113% NDR in the SMB world, kind of sticks a flag in the ground, and it erases that bearish argument, in my opinion.

All right, so I talk to a fair number of institutional investors, so my next two questions are going to be about the two overwhelming bearish arguments I hear when I introduce DigitalOcean.

The first bearish argument is that if the hyperscalers or the Cloud Titans, whatever we want to call them, if they’re growing 40% as they did last quarter, and DigitalOcean is only growing 35%, then DigitalOcean is somehow underperforming the market and as such, it is not an interesting investment.

That’s the bearish argument number one. So, how do you address that first argument?

YS:
Well, it’s just a funny, we don’t play in the hyperscaler market; we’re focused on developers, through SMB. That’s a $50 billion market growing 27% annually per IDC.

So, we are growing faster than our market segment. So, I think if you look at the broad IT span, cloud span, a majority of it is spent in, more than 50% of the dollars that are in enterprise, just a different market.

They’re moving trillions of dollars of existing IP into their cloud, and that’s been accelerated with the pandemic.

We’re essentially signing up new small customers at $58 a month ARPU, versus obviously a much different price point in market segment for them.

We don’t compete with them, we compete with Linode, Vultr, OVHcloud in our segment of the market, and we’re growing faster than segment of the market.

What we’ve said is we plan to grow 30% or better, 30% plus growth rate.

We’re going to accelerate, so we’ll continue to try to manage better growth performance. But we’re very comfortable where we are, we’re growing fast in our particular market segment.

 

OG:
Yeah. For what it’s worth, that first argument to me is a total discombobulation; comparing the wrong company to the wrong market.

YS:
Yeah. I think it’s just a misread of the market and the understanding that we don’t compete at hyperscalers.

The other aspect is, we’ve changed the business.

I can see where a year ago or two years ago, as we were ramping up to get public, people are looking at mid-20s [revenue growth] when we were growing slower than our segment. And 100% NDR.

And people might’ve misread what that meant in terms of us being crushed by the hyperscalers, or whatever.

We were in a transition on leadership teams over a year plus, and the business stagnated. What we’re showing is that this is a massive opportunity, and we can execute at best-in-class metrics around ARPU growth, customer growth, and net dollar retention through better, more proactive support and focusing on our value proposition to our customer.

And staying focused on our customer, not thinking about anything beyond developers through SMB.

I think we’re changing that narrative. That was our thesis coming in, that this was based upon transition issues, and just bring the gray hairs in, as I like to say.

You can’t see us, but we have gray hair. And that we could implement a lot of change, focus the organization on high impact activities and priorities that could drive the growth rate faster.

Drive what we call grow smarter, which is build scale and efficiency.

We can set ourselves up for a billion dollars of revenue and beyond, but also do as well, expand EBITDA through cashflow margin.

And building into team and talent, and let’s grow together our third leg of the stool so that we can all execute on this pretty massive opportunity.

I think we changed the narrative, that we came in as a thesis. We’re executing on that; we don’t see anything slowing that down.

And that’s not to say the first point is not relevant; we don’t compete against hyperscalers in a direct way.

 

OG:
All right. The second bearish argument, I know you’ve heard this one just a fantastical number of times.
… Is that, as customers grow with DigitalOcean, they will graduate to large providers, the hyperscalers.

So, in a sense, DigitalOcean has limited upside in its business because its best customers will eventually leave, leaving the not best customers behind as the business.

And there is empirical evidence that it’s actually the reverse that’s happening, but I’ll let you respond. So what do you have to say about that?

YS:
Bill and I joined two years ago last week, and never in the first 18 months as employees at DigitalOcean, have we ever heard the word internally graduate. It’s just simply untrue.

People don’t leave our platform.

We’ve talked a lot about the churn in the first year, that’s your overwhelming majority of it. 99 plus percent of our dollar churn within the first year.

We’ve been focusing our teams on reducing that, and you’re seeing that play out in the numbers.

But the fact is, that customers that stay on our platform over one year, they may go multi-cloud like the customer I spoke to today, for various business reasons.

This particular one, they need redundancy. They need all sorts of different dynamics in their business that have nothing to do with graduating off of our platform. And so that’s just, it doesn’t happen.

Customers do not leave our platform after a year. As best as we can tell, we need to get more scientific around this.

Somewhere in the three to $5 million revenue of business we’ll start to look at multi-cloud for a host of reasons.

But they don’t pull their infrastructure off of us. We have highly performing infrastructure, global scale.

Serving all these customers, and a diverse mix of customers efficiently, at a really low price point. I mean, we’re a 20 to 60% price discount to the hyperscalers.

So, the notion that people would move their infrastructure off of us to go to them, to pay 50, 60% more for basically equivalent in their use case doesn’t make sense.
And in fact, the opposite does happen, where in our first earnings call, we highlighted a media streaming business who raised their head up, was spending too much; were struggling with support and documentation as they were trying to launch multiple products.

They came to us initially because we were cheaper. But as they benchmarked us in the first 30, 45 days, they realized that we were equally performing for their use case.

And it was about a $10 million business growing very rapidly.

So, they migrated in Q1, as we talked about in Q1 call. And they’re continuing to migrate business over to us.

And so, they’ve gone from, they have a better experience. They have a more direct team that cares about them.

Whereas, I’m sure the large hyperscaler who they were off of, had all their infrastructure up, doesn’t even know this company exists, let alone that they’ve left.

And so, we see that all time. And they’re saving 50%. So that’s one affect.

The second is, graduation is more like the case study we cited in an earnings call two weeks ago where we said a customer starts out on a platform in 2013, really goes sideways, spending less than $1,000 a year for five, six years. Consumes documentation, research tutorials, learns how to do this, learns how to do that. Participates in our community forums, consumes our support.

And finally gets lift off on the idea they’ve been thinking about for years. The business is launched in 2018 or so, it starts to ramp nicely.

The pandemic hits and it’s an e-learning thing, so everybody is learning from home. Their business goes through the roof, and we were there to support their geometric growth in volume.

And so, they graduated from developers with an idea to a small medium-sized business running on the platform.

That graduation happens all the time as well. But people do not leave us. It’s not like we’re in the AA.

Right? And somebody says, “Oh, I got promoted to AAA, it’s time to get ready to get up to the big leagues.

And so, “I now need to move on to one of the big three.” And it’s not what happens.

What they say is they may want some apps, like a Lambda functions on an AWS. And so, they run our infrastructure with us and they may go to successively SaaS apps.

But that’s one of the benefits and beauties of our value proposition around simplicity, we’re about removing barriers and obstacles to entrepreneurs thriving.

And we know that if we provide a great service and help them get liftoff and then scale their business.

Kind of like if you’re trying to lock someone in to our tech stack so that they couldn’t use someone else’s tool. In today’s world and the cloud just, that’s old world.

We’re about unleashing businesses, and we’ll get our fair share. And I think obviously our results, the trajectory we have the business on speaks to that.

 

OG:
I’ll tell you that I have a bias. I think that the graduation risk is just not a risk.

Internet infrastructure is one of my favorite subjects.

If there’s going to be some movement from between DigitalOcean and a hyperscaler, it’s going to be from hyperscalers to DigitalOcean, not the other way around.

DigitalOcean’s revenue acceleration has really been profound since you and Bill joined, went from 25% revenue grower, NDR of 100%. Now 35% grower, NDR of 113%.

Guidance to a billion by 2024, which would be give or take that same rate of growth for several years.

But one can’t help but look at the minimal spend on sales and marketing and think, gosh, if they pressed on the gas even a little bit maybe this is a 40% or a 50% grower.

And you discussed, I think it was with KeyBanc, exactly how it works.

Can you talk about what is and what is not realistic when it comes to accelerating revenue growth, just through a sales and marketing spend expansion?

YS:
Well, we are adding sales and marketing spend. Two years ago, we really just got rolling with the first set of hires on those direct sales capability. We kind of paused that and reset it.

And so, we’re ramping that. You know, [traditional sales generated] about 2% of revenue last year. That’ll double as a proportion of dollars this year. It’s a little over 3% of revenue. 6 million last year, probably over 12 million this year. 2% of revenue last year. That’ll double as a proportion of dollars this year. It’s a little over 3% of revenue. 6 million last year, probably over 12 million this year.

So, and we are investing, regional outbound sales teams. We’re adding a partner capability.

The first couple of years of sales has been much more focused on mining self-serve revenue opportunities for people that can’t onboard the platform, like the media streaming business we just talked about.

They have customers. They need help.

But they may come to us through the website, and I’ll get to that model in a second.

And so, that’s been the focus and then also sort of mining our cohorts to upsell them in a more aggressive way. That’s been the focus.

And now we’re going to broaden that capability out to be more traditional, outbound selling partner channel.

We think the opportunity is pretty substantial for sales to become a large part of our net new revenue from the two, 3% over the last a year and then this year.

Now, having said that, the lion’s share of our net new leads and customer signups come through the website.

And the we generate those website sign-ups, and those are tens of thousands a month of new signups.

The source for that is that 35,000 plus set up document tutorials that we have online that drive millions, five plus, five and a half million people to our website every month.

Tens of thousands put a credit card down.

And it’s like the customer we just talked about.

They start out testing, reading tutorials, learning how to code, learning other things about open source. Then ultimately launch a business, and then become one of our significant ramping customers.

And that’s the customer growth dynamic that isn’t this quarter or next quarter’s growth indicator.

It’s sort of the six to eight quarter health of the business.

Then we’re adding a steady supply of new developer teams who ultimately are going to launch a business. And that’s how that drives the economics of the model.

The key with that model, though on the marketing side, is it’s a lot of SEO content.

So, we write the tutorials and they get read multiple times. And so, there’s an enormously high leverage in our marketing spend to drive that many customers to the website.

My last company, SendGrid, when we started, we had to fix the self-serve model for scale. And the team that we have now did that.

We were spending 14, 15% of revenue on sales and marketing. That was a self-serve.

Well, ultimately, by the time we sold the Twilio got it to the upper teens, but the difference there, and we built a sales team just like we’re running at play here.

We paid to get people to come to the website and we had far fewer website visitors and far fewer new customers.

We have a massive amount of visitors here.

And SEM [Search Engine Marketing] is a very small percentage of the spend. We get these customers through a very efficient sell.

Even as we’re ramping up scale, that just drives growth acceleration, the dollars that we spend, it’s going to be very hard to grow faster than the rate of revenue growth, just because the practicalities of improving the self-serve model, which had been essentially we’re generating multiples of net new revenue per month in self-serve than we were two years ago.

That’s sort of like Lucy with the football.

We want to spend more on sales and marketing as a proportion, but we’re getting so efficient at the activities we already have at accelerating revenue that we just can’t spend that fast.

But I’ll tell you Bill and I, and our team would love to … If you saw sales and marketing get in the low to mid-teens, then everyone’s going to be asking us about why we’re growing slower than the hyper scalers, even though that’s not a relevant point. Because we will be.

We wake up every day, “How can we spend more money and accelerate growth rate?” And what’s the tradeoff there without sort of materially diminishing our unit economics.

So, it’s what we think about.

And if we can at least grow it at the rate of revenue growth in the near term, we’re going to going to sustain this elevated growth rate of 30% or better. And that’s what we’re focused on.

 

OG:
Okay. That’s a good problem to have that you’re growing so fast that you can’t spend enough to keep up with growth.

YS:
Yeah. One thing I would just say add, and we believe this very passionately, profitability and margins are philosophy.

We view it as those are outcomes we’re trying to drive.

When we came to the company, we said, “We want to grow faster than our market, for sure.” And we’ll continue. We’re biased heavily. Our comp is biased. Our philosophy is biased to grow the business as fast as we can grow.

We’ll see where we land on a growth rate. 30% or better, we’re comfortable with. We’ll see if we can do even better than that.

But having said that, we also said, “Grow smarter.” Because we said, “It’s not good enough just to grow at some ridiculous high growth rate.”

Because you can’t manage your business with unlimited priorities everywhere. And so, we constrain priorities to what are the best and most impactful growth levers that we have on the go to market and product side?

And we prioritize for that.

And the same on the infrastructure.

We’re trying to create scale and efficiency, as expressed for the higher EBITDA and free cash flow. That’s important to us.

And we do use a rule 40, rule of 50 framework. But for us, you’re not going to hear us say, “Well, we’re going to grow at 80% and burn 100% for the next 10 years, just because we can grow 80%.”

We don’t need to do that. We can do both.

And I think people have seen, we had to convince believers in the company. Because when we came in and said, “Well, we’re going to prioritize and focus the spending, but we’re going to still grow fast,” and people didn’t believe it.

We said, “Because there’s such a narrative at Silicon Valley that the only way to grow really fast is to burn a lot of money. I just fundamentally don’t believe that.

 

OG:
I have two more questions. Maybe I can sneak just one in given your time.

In the realm of platform as a service, adding MongoDB seems like a really great move.

There are a handful of other services that are also monstrous in their reach. Like in and of themselves, maybe, they bring sales avenues just by virtue of their ubiquity.

Should we be looking at other big-name additions, like, I’ll just name some, DataDog, Okta, CrowdStrike, things like that? Or even further downstream, Fastly and Cloudflare.

YS:
Well, we work very closely with Cloudflare on a number of areas today.

So, our app platform capability leverages their edge capability. So, we use them as security tools, et cetera.

I mentioned earlier we’re introducing a partner channel capability.

We have a marketplace with several dozen applications. We’d like to expand that out to some other best of breed tools.

So, I definitely think you’ll see that. And then we also think we want to add some managed services, platform service and capabilities, that we want to drive directly with our customers.

We don’t need a lot.

Again, to reinforce the point from earlier, we don’t need a platform with the breadth and depth of the hyperscalers. Because our customers are early in their journey, and their workflow is a lot simpler.

And we don’t want to overwhelm them with a complexity of a product set.

We want to maintain simplicity while also adding services that are clearly what they need on their early-stage journey. Like a database, right?

You go from zero customers to some number of customers, and you can’t use your whiteboard and an Excel spreadsheet any more. You need more sophisticated database tools.

And you could see we’ve been very successful in just two and a half years.

We’ve gone from zero platform as a service revenue to roughly 10%. And we think we can get that to 20% by focusing on relevant applications, not the breadth of applications.

That’s what we’re looking to do and very focused on.

 

OG:
Fair enough. So, you’re up on your time. I have another question, but I don’t want to be so presumptuous as to ask it.

So, I’ll leave it to you. Do you have a few more minutes, or are you up against it?

YS:
I think we do. Please ask.

 

OG:
Okay. Thank you.

I want to close it off with this. Let’s talk about the competitive landscape.

You’ve done an excellent job. We’re not talking about the hyper scalers anymore. I think that conversation is just tired.

Let’s talk about DigitalOcean’s moat and its position relative to competitors. Again, we’re not talking about the Cloud Titans or hyperscalers.

So, just leave investors with a final word about — this is why DigitalOcean’s moat is so deep.

YS:
I was in the satellite business where we spent $500 million per satellite. That’s a moat. Like who in their right mind would do that?

I think here, our moat is around the experience we create around simplicity, ease of use, what we call it community, which is our documentation support.

Our support model, our customer support model, where every customer gets to talk to or engage with a personalized support experience.

The fact that we’re open source, meaning we promote the use of open-source tools, not only on our platform, but for our customers and all of that is about making it simple, easy to use our platform so that our customers can focus on building their applications and their relationship with their customers. And we remove the friction.

So, we think that’s a moat because that’s a workflow. That’s a commitment to understanding the customer and focusing on the experience that the customer needs to be successful, as opposed to, we throw a lot of technology and services and contract terms and lock them in, et cetera.

I think that’s one thing that’s very special and that’s why if you talk to our customers, they actually use the word “love” to describe their relationship with us because it’s so hard for these early stage businesses around the world, to get leverage on technology, because it’s not built for them.

It’s built for enterprise where the money is, and they’re a sideshow for the revenue stream for almost any company.

And, so we are this emerging platform who said, “No, this is about you. And it’s always going to be about you.” We’re never going to wake up and say, “We got to go to enterprise.” We don’t need to.

This is a massive market.

We can go build a multi-billion-dollar revenue company doing it, but we think that’s really important.

The other is, we have this global network of capability on the infrastructure side, the data centers.

The servers, the knowledge that we have about how to manage such a complex network with 600,000 and growing customer base.

And that’s a real capability. And I know we’ve taken a lot of nicks for CapEx being too high, but that was then.

We’ve cut the CapEx in half as a proportion of revenue and it’s going to make further progress.

And even with it in the mid-twenties, we’re generating positive … strong, free cashflow.

And so, I think not that’s a moat, but have CapEx intensity is a feature of the platform because you got to be good at managing capital and efficiently serving so many customers all over the globe.

I think our four differentiators are our simplicity, community, support and open source and I think our ability to manage this global fleet of infrastructure to support customers in a highly complex environment and getting good at doing that, which we obviously have demonstrated we can make a ton of progress and we’ll make more.

I think those are huge differentiators.

And by the way, those differentiators allow us to get a price premium to our real competitors Linode, Vultr, OVH.

We charge a higher price and customers gladly pay for it because they value simplicity, community, open source and support.

And I think that’s really important in a world of tech where people think these things are commodities. We’re not selling a commodity.

The hardware is a commodity, but we don’t sell hardware.

We sell a platform for people to test ideas and build a business. And because we treat it that way, it’s highly differentiated in the marketplace.

 

OG:
Yeah. I’ve spoken or had researchers speak to customers of DigitalOcean’s and never in my life have I heard customers so happy with their infrastructure.

The amount of exuberance doesn’t even make sense.

It’s an infrastructure company.

They truly adore DigitalOcean.

I also think that the community that DigitalOcean has is basically irreplicable and I think that’s a rather substantial moat too.

I appreciate your time so very much. I hope we can do it again next quarter.

Is there anything else, Yancey, that you would like to tell investors maybe that I should have asked, but I didn’t ask or something that I missed?

YS:
I think that you have your finger on the pulse of it. It’s a big market. We’re not going to land at a billion.

That’s our first billion.

We think we have opportunity to build a multi-billion-dollar business in terms of revenue. And because there’s so many entrepreneurs in every corner of this planet that need a solution that’s purpose built for them to go test an idea and build a business, that’s us.

I think what’s really important also as a takeaway is this isn’t just, “Let’s grow really, really fast.”

We’re going to generate, as we already did in Q2. We’re going to be a free cashflow machine in addition to growing very fast and we can do both and we are doing both and we’re committed to doing both.

And I think that folks that take a look at our company and over the next five, seven years are going to look at a company that is created … I truly believe it would be one of the iconic companies in tech.

There was a meme going around on Twitter a couple of weeks ago that had Bill Murray and a bunch of models.

And there’s lots of different themes of it, but one of them somebody posted on Twitter said, “DigitalOcean, Azure,” there’s four people and they put ideas about what the other people were thinking and they put DigitalOcean, Azure, GCP and AWS in that meme, and I believe that, not because we’re going to be as big in terms of revenue, not because we want to go after enterprise.

We do not.

We won’t be as big in revenue and we won’t go to enterprise, but those companies have transformed corporate IT from a productivity standpoint over the last decade.

They’ve allowed companies to transform … well, be responsive to their markets while getting out of the way, something that they were never really good at.

And I think that we have the same opportunity to enable entrepreneurs, developers around the world to basically decimate the barrier to them getting their ideas on the internet, chasing the dream.

I think we can be as important as those companies for different reasons, but be able to transform our relative markets. I believe that very strongly that we’re on a path to do that.

 

OG:
I see it the same way.

For whatever it’s worth, I’ve named DigitalOcean one of the best three ideas in the market for the next five to 10 years. So, you know my bias, Yancey.

I appreciate your time and I hope we can do it again.

Please enjoy the rest of your week.

And I just have to tell you, investors do appreciate how hard you are working at these investment conferences. You are getting the word out there and it is so very appreciated.

YS:
Well, thank you. Appreciate your time and your sentiment and we look forward to continuing the conversation.

 

OG:
All right. Have a great week.

YS:
All right, bye, guys.

 

Risk

DigitalOcean has many risks.

1. The SMB world is infamous for customer churn as companies go belly up, or simply move their smaller operations to other vendors. A smaller operation is nimbler and that nimbleness helps DOCN in acquiring new customers, but hurts it when trying to maintain them.

We note that DOCN’s 113% NDR is the answer to this risk and the metric by which we can measure it.

2. It simply must be the case that the cloud titans (AMZN, MSFT, GOOGL) will offer some sort of “cloud lite” product with a cool name, like ‘Brisk’ (or whatever), and the allure of a titan behind the scenes powering the lite cloud could be attractive.

As for DOCN’s risk disclosure on the subject in its S-1, we get:

Many of our competitors and potential competitors, particularly our larger competitors, have substantial competitive advantages as compared to us, including greater name recognition and longer operating histories, larger sales and marketing and customer support budgets and resources, the ability to bundle products together, larger and more mature intellectual property portfolios, greater resources to make acquisitions and greater resources for technical assistance and customer support.

 

3. Other competitors will arise. As the company states in the S-1:

The markets in which we participate are competitive, and if we do not compete effectively, our business, financial condition and results of operations could be harmed.

 

4. The CEO has alleviated the urgency of this risk, but we’ll leave it here for completeness.

A lingering risk in our mind is one which sees DOCN’s best (largest) customers outgrowing its use and moving to the cloud titans. We don’t know if this will happen, but it is an interesting thought exercise. To date, there is no evidence of this risk materializing.

5. There are many other risks, including those that are nearly impossible to point out until they arise and all of a sudden, we say, ‘oh, yeah, that could happen…’

 

Conclusion

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The author is long DigitalOcean at the time of publication.


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