Conference Transcript - DOCN 2026-06-03

Operator

Welcome to BFA's Global Tech Conference, day two. I know it's a session after lunch, but that's why we got Matt over here, to keep you all on your toes and stay awake. Welcome to DigitalOcean. We have the CFO, Matt Stanford. Matt, thank you for joining us. You know, you guys have done an incredible job here over the past few years and changing the entire sort of model of the company going from a developer cloud to what you are today. So do you want to take a minute to maybe talk about what has changed over the last couple of years and we'll get into Q&A.

W. Matthew Steinfort, CFO

Yeah, thanks, Bamsi. And thanks for having me and thanks for the nice walk-up music with a little Colorado. I appreciate that. Yeah, you and I were talking about before the session how much the company's changed in the last couple of years and how the narrative has changed in terms of the questions that we get. A couple of years ago, we were still third largest cloud by customer count, but we were viewed as kind of the smaller kind of toy cloud that was largely targeting developers and small kind of businesses. And I think that, you know, the narrative, you know, there was, okay, don't your biggest customers tend to just go away from you because they get, they outgrow you and they graduate. And we spent a lot of time, literally the number one question, like the hard question when we would prepare for these sessions was, the number one question was, why do you guys exist? You know, why can't the hyperscalers do what you guys do? And we had to spend a lot of time explaining that we have carved out a niche and we serve an underserved portion of the market in the core cloud by those customers who aren't well served by the hyperscalers because they need more attention, they're digital native, and they need more care and feeding, they need simpler, they need less requirements for long-term contracts and those kind of things. But we couldn't explain away the fact that, yeah, we did have a challenge, a leaky bucket in our top customers. And so you roll that forward to today, and not only have we fixed that particular issue in the core cloud, where now our million-dollar-plus customers are growing, I think it's like 180%, and we hadn't had any churn in the last four quarters in that bucket. So we've fixed that challenge, but we've also launched and taken the same kind of fundamental value proposition into the world of AI, and we've developed a very compelling full-stack AI-native cloud that is resonating incredibly well with our AI customers and the AI customer revenue is growing 220%. And we built a very strong business there with a number of marquee inference-oriented customers. So very, very different kind of business in just 18 to 24 months. And it required a lot of development, required retooling the leadership team at all levels of the company and kind of rediscovering our roots around focusing on the technology customers and the end experience, but not on the individual single developer, but more on the larger digital and AI native companies. So this has been a dramatic shift.

Operator

Yeah, no, it sure has. Maybe, you know, it's getting reflected in the guidance that you have provided, which you have upped a few times now. And I guess, you know, as you look over the last, call it, I don't know, six months or 90 days, like what has really changed in what you're seeing in discussions with customers that's giving you the competence to keep adding this power and expansion plan that you have, that you have communicated to investors and also taken the guidance up now to like 50% for next year? Sure.

W. Matthew Steinfort, CFO

Yeah, it's it's the traction that we're getting with the customers is kind of it's a virtuous cycle. So when we won character a while back, that was the first kind of marquee recognizable name that we had had won. And, you know, we had a lot of smaller customers that were interesting. But winning character gave us credibility in the market to be able to secure, you know, the cursors of the world and start to win some of their business. but like Hippocratic and Ideogram and others. And the more we learn from them, the more we can develop our software in a differentiated way and build on the platform advantage. And the more we do that, we're getting more attractive, you know, customers are coming on. So it's just, it's snowballing. And so that gives us the ability and the confidence to take down incremental capacity. And as we're getting more experience deploying that capacity, We're having more confidence in our ability to execute on the timelines and turn up, you know, some of the new technology, like liquid cooling is very new for the industry. And, you know, the first ones that we turned up are, in fact, the first of the data centers we turned up this year was air cooled. So it was like that. We're just now getting into the liquid cooled. But we're delivering even our second data center that came on in April, which was fully liquid cooled, came on ahead of schedule. and so we're just getting more confidence in our ability to execute so that's kind of one part of the guide but the other part is just the customer traction that we're getting and the the reaction we're getting and the demand signals that we're getting from those customers and the customers in the pipeline is um is uh is very compelling and enabling us to really lean in yeah you've gone from like 40 plus megawatts and added like another 30 plus now like 60 plus more how how should we think about this incremental 60 when does when does it come online yeah it comes online over the course of 27th so um it's not it's not entirely at the beginning and it's not back end loaded so think about it it's going to come on it's four different data centers um so there's diversity there of providers and locations so we feel good about our ability to manage um those and they'll come on over the course of the year we'll provide more clarity when we get to the 27th, the kind of more formal guide. We feel really good about the providers and the partners that we have. They're all very experienced data center operators. These are generally existing facilities where they're building out a data hall for us or their existing campus where there's a building that's like a shell that's ready to go and they just need to kit out for us. We feel good about the operational execution risk associated with that.

Operator

Yeah, it's not like you're targeting a gig of capacity. These are much more measured sort of incrementals. But even despite that, you know, it looks as though the market's relatively tight in terms of being able to procure, whether it's servers, whether it's, you know, everything in our power or it's getting like, you know, all the liquid cooling in place. So are there any particular constraints that you see or what are maybe the tightest constraints that are going to somewhat determine how that 60 megawatts gets rolled out?

W. Matthew Steinfort, CFO

Yeah. And I mean, it's what is it? It's June now, which is crazy. But it's June and we just announced 60 megawatts. It'll come online in 27. So we're 12 to 18 months in front of in front of that. So there's clearly the data center providers need to deliver on schedule. Like I said, this is not data center capacity being built from dirt. Right. This is this is existing facilities. Power's already there. So there's not as much risk there, but they still need to kit it out. The equipment side is less a scarcity thing than it is a timing and cost, meaning you can get the capacity, particularly at our quantum. So, like, you know, you want the amount of GPUs that we're buying, you can find them. Multiple OEMs have them, like, you know, we work with Dell and Supermicro and HP and Lenovo. We work with a lot of them. The question is, is can they get it to you when you want it? And can they give you some kind of certainty on the price? because the cost, the component costs, you know, clearly are going up. And so that's something that we have to deal with. But it's less of a can you get it, you know, than it is, you know, can you get it when you want it? And we've been pretty good about our relationships, working our relationships with the OEMs. And the evidence of that is we turned on the six megawatts of the 31 we're deploying this year. We said second quarter when we provided guidance, we delivered in March. The second of the three is a 10 megawatts. We said second half and we delivered it in April. So and when we say we delivered it, when we deliver it, it comes with the GPUs are right behind and the CPUs are right behind it.

Operator

Yeah. OK. OK. That's helpful. How much visibility do you need to sort of go ahead and put this incremental capacity and sign these data center leases? Like what sort of visibility do you have from your customers, both in terms of, you know, duration and as well as sort of magnitude?

W. Matthew Steinfort, CFO

Yeah, well, we've been, I think, very clear multiple times externally that the demand that we have right now from our existing customers and could fill up the capacity that we have and that we've got three to four times the capacity or the demand than the capacity that we're bringing online. And that's what gives us the confidence and the signals that we're getting from our customers, the feedback that they're giving us on the impact we're having on their total cost of ownership and some of the new capabilities that we've announced that are very compelling to our customers. Many of them develop jointly with our customers, like the inference router capability. All of that gives us the confidence. Plus, the market opportunity is just, I mean, you're seeing a number of other companies here at your conference that are doing very well, very good companies that are also seeing similar demand. Like the demand in the market is, I won't say limitless, but there's certainly not enough capacity to meet the demand that's out there right now. And I think we're benefiting in that customers are beginning to understand the difference between coming to someone who can provide them a full set of inference capabilities with a full cloud stack next to it versus someone who can provide them with access to bare metal, which is valuable, but requires you to do a lot more and invest a lot more. And our customers tend to not want to spend their effort and their resources worrying about infrastructure level, and they want to focus on building their own software.

Operator

Yeah, that makes a lot of sense. Matt, so you just said demand is like three to four acts. I mean, literally what you're able to potentially scale to. why is 60 megawatts the right number in terms of getting when demand is so strong?

W. Matthew Steinfort, CFO

Yeah, I think that's probably the single question that everybody in the audience has got on their mind as well. 60 is what we had signed as of the last earnings. So there was no magic number there. It was the number that happened to be signed at the time that we did earnings. And what we had said is we're continuing to actively evaluate incremental capacity for 27. We're looking at 28 capacity already, clearly. We're looking at how do we grow even faster. So part of the executive team and the board, one of our primary focuses is exactly that. Like how fast can we go? And there are a lot of dimensions to that. Like how fast can you go without being too highly levered? Like, OK, well, there's a throttle we have to have. And fortunately, we've demonstrated the ability to tap into the equity markets and do things to give ourselves an incredibly strong and flexible balance sheet. It has implications on, okay, well, what about the capacity? Like, you know, do you have how many megawatts do you have that you could sign right now? And then it also has the balancing that you just described of, okay, how much are we willing to do with our business model of not having a five-year, you know, bare metal offtake with an investment-grade kind of counterpart? And so we look at our customers and their credit profiles and their growth trajectories and their funding, and we allocate capacity to try to optimize in that. And so I'd say we're in a more nuanced game because we're investing ahead of the security of the committed revenue, where a lot of our peers, they're approaching it more from a neocloud bare metal side. They tend to have a customer and then secure the like that then gives them the finance and gives them the data center kind of, you know, financing, et cetera.

Operator

Yeah. Yeah. No, that's that's a good point. You mentioned on the cost side, right, like that it's not about just maybe just availability. It's the cost of sort of bringing up this capacity. And in the past, you've spoken about 20 to 25 million dollars per megawatt from a cost standpoint. The market's been very inflationary in terms of all these components, including now CPUs and memory, obviously, has been ongoing for a while. So as you think about putting that all together, what do you think about the incremental cost? Is that still the right range and it's the high end of that range? Or are we sort of talking about a big step up in sort of the cost to bring this up?

W. Matthew Steinfort, CFO

Yeah, it's the 20 to 25 million per megawatt in CapEx that we talked about was for the 31 megawatts that we were turning on this year.

Operator

Yes.

W. Matthew Steinfort, CFO

And again, you can you can see that. And if you look at our first quarter results, we added about one hundred and forty four million of equipment finance obligations. And that was associated with the first six megawatts. So it puts you right in that range that that we talked about. As you pointed out, the costs are higher now and they're higher on two two dimensions. One dimension is just component costs. So the cost of storage or memory is the primary driver, but even storage like NVMe drives, or I'm probably missing a letter in there, are a lot more expensive than they were. And so you're starting to see component costs across GPU and CPU go up. But I'd say the bigger thing is actually the type of gear, the versions of some of NVIDIA's latest technology that we're putting in, the B300s, you get more tokens per megawatt. It costs you more, but you get more tokens per megawatt. So the revenue potential is higher, which is good because that drives our 13 million in ARR per megawatt that'll drive that up. But there is extra cost in there too. And so I'd say the good news with that is, well, it's everybody's got that cost and the cost in the industry. So at this point, we've been able to pass that on as just part of the pricing. That's why I think you're seeing the, you know, some of the prices of older generation also increasing just because it's, you know, you've got scarcity and you've got rising cost structures. That's very difficult for an industry investing at this much to absorb that. It's got to be kind of passed on to the end customers.

Operator

What have we seen lately from your perspective on pricing in that regard?

W. Matthew Steinfort, CFO

Yeah, I think you're seeing, and this has been definitely a surprise for me, which is when we underwrote our investment in the 31 megawatts, and even when we underwrote the investment in the 60 megawatts, we're projecting costs come down. I mean, not costs, prices come down, right? The older generation, you got new generations of technology, prices will come down. And so you got to be comfortable that you're underwriting a good business case, even if that happens. Well, that hasn't been happening, right? The prices for H100s in H200s are increasing. And you've had a lot of people that, Jensen and other folks, again, some of the folks at this conference talking about explicit increases in the pricing. We've seen that. And we're actually in a really interesting position in that because we don't have long-term contracts, we can rotate through a contract from 12 months ago comes up for renewal. We're not renewing that, even close to what the price was before, we'll either increase the price, we'll move them off. If they were a bare metal customer, we got a little bit of that left. We'll move them off. We won't even offer that to them. We'll move them to a higher grade level service. Or we can literally repurpose it and say, we're not going to sell it as GPU per hour. We're going to sell it as tokens. And we can increase the monetization even then. So in general, the pricing for older generation technology is not only stabilized, it's increasing, which is a, you know, it's a really good thing from a near-term perspective.

Operator

So, conversely, you actually want a higher churn in some ways off your price.

W. Matthew Steinfort, CFO

Yeah, we were talking about this in one of the sessions earlier today. Traditional SaaS metrics are really not super relevant right now. Like people ask me about NDR and when are you going to include AI and NDR? And I mean, I don't know if we ever will. One, you got to be like 12, 13 months in before that actually makes sense. But if I rotate out a customer at a certain price, because maybe they were a marketplace, and at the time, we didn't have a go-to-market, and so we were selling through a marketplace, and I said, okay, we're not going to sell to you anymore. We're going to sell to Cursor. And then if you looked at NDR, you'd say, oh, you had churn. I'm like, did I? Did I? Like, I'm using the exact same equipment. I mean, no gap in revenue with a better customer at a higher price. So it's just, like you said, it's a different world, and different metrics matter.

Operator

Yeah, yeah. monetization opportunity that maybe doesn't get reflected in some of the metrics. As you think about these new capacity ramps, how should you be thinking about the margin trajectory as well as you're bringing on this capacity? Clearly you add some pressure at gross levels, but can you just talk about how we should be thinking around some of the puts and takes on margins?

W. Matthew Steinfort, CFO

That's a great point. When you add data capacity, it does it drives margins down, like point blank. You can't get it around that. Why? Well, because as soon as you turn the data center lease on, you take lease expense. And because we pay for our equipment over time instead of largely, as soon as you take the delivery of that, the equipment finance depreciation related expense hits right away. So your gross margin takes a pop like right out of the gate, and then you grow into it as you fill up the capacity and you generate revenue. So it has near-term temporal margin kind of impacts. You also have, as AI is growing, like it was, what was it? It was a mid-teens percentage of our overall ARR in the last quarter. As that becomes a bigger mix, well, the margins on the core cloud business, if you didn't have AI, they'd be in the 65-ish range, right? And you're weaving in margins that are not that high. They're not like 25% margins like you would get if you're just doing bare metal, but they're not 65. So you've got two things going on. You've got the merging of the mixed shift of more AI that's got lower inherent margins, but then you've got some temporal stuff every time you turn on data centers. But to me, the more important thing is to look at the aggregate margins when you include operating expense and you include everything else because the actual resulting margins are pretty strong.

Operator

Yeah. Maybe to touch on what you announced at Deploy. You spoke about this agentic stack that customers can now use. What's the adoption? I know it's very early days, but what are you looking at? What should investors be focused on in terms of across the several layers of the stack that you described, obviously at the infrastructure layer, like you have significant penetration, but as you go up the stack, how should we be thinking of the progression of some of those in terms of adoption rates? What are you anecdotally seeing, maybe if it's too early to sort of make a final judgment on where things are?

W. Matthew Steinfort, CFO

Yeah, I think that like the simplest way to assess whether the strategy is working is to look at ARR per megawatt, right? because it's like are we getting more value higher layer services for the investments that we're making in capacity so that's a simple metric we also break down the the within the ai customer revenue how much of it is coming from each layer of the stack right so how much is is being sold at bare metal it's 19 now it's going to go down fast and it like it's not only going down on a percentage but on an absolute basis we don't need to sell bare metal anymore the inference layer will be where you'll see the most expansion, like the fast, because that's growing like crazy. And that's the products that you talked about that we launched at Deploy, the inference router. And we're now selling for token, like we're selling serverless, where it's like people come in and like, hey, I want Kimi tokens. And here's my latency and my throughput. Here's the price. And they don't even know what the infrastructure is. So that's like starting to really take off. And then a lot of the agent layer capabilities that we're selling, That's been really, really interesting. We're the, I think, the top deployment of OpenClaw. We have like 70,000 active OpenClaw instances where things are happening so fast. There's a new one, Hermes something, that we're one of the top in that. And so we're starting to see a lot of that. Those things are going to be hard for the market to see outside other than the anecdotes. But if you look at ARR per megawatt and you see that continue to progress, And then as we will continue to disclose the mix of bare metal versus inference versus core cloud pull through, and you'll see more core cloud pull through, I think as well. I think those are the, the, the, the, hey, is there really a differentiation here? And is this five layer software stack? Is this real? Or is it, is it marketing speak? And they're just talking about software. Everybody talks about software. If you're talking about software and you're getting $9 to $10 million in ARR per megawatt, you might have some really interesting software. It might be a differentiator. You're winning more bare metal than your fair share, but you're not getting higher layer services on top of it. And that's where I think the proof is in the, okay, well, how are you monetizing that investment?

Operator

As you think about that, getting customers into incremental layers, where does that go from a $13 million per megawatt kind of range that you articulated currently to where could that go when you think about using more and more pieces of the agentic stack?

W. Matthew Steinfort, CFO

It's probably too early to say how far it could go. But what I could say is it's already going higher than 13. We underwrote the 60 megawatts at a higher ARR per megawatt than that. Part of it was because of the incremental token capacity, as we talked about, that we get from the higher CapEx that we're investing. But also, we just launched a lot of those inference capabilities. We're getting now, like I'll give you an example. When we won Character a while ago, we were unproven. We had to prove to them technologically that we could provide the service, that we had to demonstrate that it would save them 30% to 40% or improve their throughput by 30% to 40%. And so we got their inference workloads, but we didn't get any core cloud. And now when you're talking to Cursor, they come with core cloud. They're like, hey, we need this and we need NFS and we need other stuff. And so our confidence in the core cloud pull through is increasing. So we're definitely confident in our ability to drive that above 13 on an incremental basis. And we're seeing that in the customer wins that we're getting.

Operator

Well, maybe the stock's had a phenomenal move, right? And I think it's reflecting sort of the enthusiasm around, A, the product offering, B, your execution, and C, frankly, like, you know, your guidance has gone up a lot. like you've shown revenue acceleration, which is very, very meaningful going from mid-teens to now a pathway to 50% plus. What do you think that are maybe some of the key risks that investors should watch out for, especially on the execution side, and anything else that you would point out?

W. Matthew Steinfort, CFO

Yeah, I think that if you think of the competitive dynamic, you've got kind of three different four different players you've got the hyperscalers that are very very focused on their own supplying their own capacity for their own internal use and on some of the hyper you know the frontier models you've got the the neoclouds that started with scale and capacity and they're trying to layer on software because they see the same thing we do which is inferencing is going to be a much bigger opportunity than training and there's a lot of better characteristics of it because it's a production workload that runs. It's not episodic and it's harder to move and it requires all these other things. So they're trying to add software capabilities. You've got inference wrappers that are taking advantage of, hey, well, it's really expensive. And so if I can optimize this, I can sell to people because I can save them money, but they don't own any infrastructure. They don't own GPUs, they don't own CPUs, they don't have any core cloud capabilities. So you think about all of those four players and then you take us where we started with software and we've got a very differentiated cloud where other than hyperscale, there's the only one who has a CPU full cloud plus all the AI capabilities, but we don't have as much scale. And so it's a race, right? It's like everybody knows what they're missing. And the question is, is how quickly and how hard is it to fill that? So for us, it's like, okay, how do we add scale in a way that's still profitable and not over levering ourselves, et cetera. For the other folks, They've got to worry about, OK, how do you actually build software if you've never run a cloud and and your primary customers, 95 percent of them, you actually don't even see their software. They just run it on your infrastructure. So that's a different challenge. And if you're a rapper, you're like, I don't have any scale at all. I've got features and functions. And so what do I do? And so I think, you know, if you fast forward this in two or three years, the question will be, well, who won in that regard? And we like our chances of adding scale and growing from a capacity standpoint, because we believe that running a production cloud, both AI and core compute, is pretty difficult. And there's only a handful, three, maybe four other players, all called hyperscalers, that do that.

Operator

Yeah, I'd bet on your chances, too, because it just seems as though filling the gaps of the other places is a lot harder. And you already had customer evidence that has shown that if they were customers of some of these competitors, it was probably more economical and easier to move on to your platform and use the stack as a whole. So definitely excited about the opportunity here. Maybe to wrap over here, since we've only got a couple of minutes over here, Matt, what should investors be most excited about as we look to the future over here? I mean, it feels like you've got this tremendous open-ended opportunity, so would love to hear your parting thoughts on, you know, what investors should be most excited about.

W. Matthew Steinfort, CFO

Well, I think that the thing that I'm most excited about and I would hope that the investors would be excited about is this is still such an early part of the growth trajectory of this market, right? There's clear evidence that there's going to be a massive amount of compute required, right? And I don't think anybody anybody questions that. I think there's some questions around, OK, well, once there's a little bit more of an equilibrium and you don't have the scarcity, will there be commoditization and will there be people who got too far over their skis and are going to struggle? And when I look at what we're doing, it's like, well, what would you want to have when that happens? You would want to have highly differentiated services with more than just kind of a rental kind of a business. You would want to have customers that are embedded in your full stack of, you know, not just compute, but storage and database where there's gravity, right, where it's really difficult to move that kind of those kind of workloads. And we're just kind of, I think, you know, we're, well, like you said, we've had a good run and the people are not paying attention to us. We're just getting started. There's like so much that we can do. And I think that, you know, we add some scale. We get some heft. will be able to do some really exciting things.

Operator

Yeah, no, that's fantastic. In 23 years of doing this, I would say this is probably the BFA Tech Conference where the infrastructure bullishness that we've heard from across the board has been so consistent. And everyone thinks it's early days just because the demand is strong, but the pipelines are exploding higher. So tremendous opportunity ahead of you, great execution, and thanks for being here.

W. Matthew Steinfort, CFO

Great, thanks, Wav.

Operator

Thank you, man. Thanks, everyone.