All right, excellent. Thank you all for joining. My name is Josh Baer, Software Analyst at Morgan Stanley. We have CFO of DigitalOcean, Matt Steinfort. I have disclosures to start. For important disclosures, please see the Morgan Stanley Research Disclosure website at www.morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative. Matt, thank you so much for joining us today.
Yeah.
Happy to have you.
Thank you.
Wanted to start with a little bit of an intro. It's been about a year since you've been on board. What are you most excited about looking ahead and specifically wanna pull in? You have a new CEO, so, you know, with sort of the new energy and framework for thinking about this next year.
Yeah, I'd, I'd say I'm excited about the same things I was excited about when I joined a year ago. And, and first, it's like, this is a phenomenal market that we play in, right? It's, IDC's most recent report was like $113 billion growing 25%. That's a phenomenal market to, to be participating in. And we've got a, a really nice niche that we've carved out, you know, being the developer, you know, cloud, right? And, focused on, on those, smaller customers and developers that are trying to build businesses and experiment and learn, below kind of the, the hyperscalers where, you know, they're just those kinda customers aren't gonna get the attention. They're not gonna get the, the love. It's a lot simpler, solution. It's simpler priced. It's, it's easier to use. And, and, we've got a really, you know, loyal and, and, large customer base.
So I'm really excited by that. But I'm even more excited now, having been here a year, about the opportunity that we have to grow. And I think Paddy, as you mentioned, is gonna be a key catalyst to that. The, you know, as you know, we're growing slower than the market today. And, you know, last year was certainly challenging for a lot of software companies. But we have the ability to accelerate. And, what Paddy is bringing is a focus on, you know, the developer again, like, being obsessive about the developer experience and innovating and driving kind of capabilities that, you know, build on that great relationship we have with our customers. So I'd say in my first year, all of that has been reinforced.
Now with Paddy adding to the team, you know, I'm very encouraged by our ability to execute in that market.
Perfect. Wanna ask a follow-up on that focus on the developer. I think that was one of the two elements of Paddy's strategic priorities, the second being go-to-market. But around, focus on the developer and product innovation, to me, DigitalOcean's reputation has always been focused on developers. Really easy to use. Like, so what, what does that actually mean, as far as, like, where the investments are going and what changes we might see from a product that I think developers already love?
Yeah, no, it's, that's a great point, Josh. We are, you know, we have been known for being that kind of favorite of the developers. We have tons of content and tutorials. And we've done a lot to the developer, you know, to give to the developer community. And that's created the loyal customer base that we have, like, no, north of 650,000 customers. The difference, as you said, oh, so what's different? The difference is those customers, as they come onto our platform, they grow into real businesses. So they started as developers, maybe hobbyists. And they started messing around with, with, you know, learning code. And maybe they have a website or an app that's running on us, but they spend, you know, $15, $20 a month, right? That's a lot of our customers.
It's like 450,000 or so of our customers just do that. But, and that's the way the company was started, right? That's what that was their core market. But as the customers grow on our platform and they build big businesses, we have customers that spend $hundreds of thousands a month with us. And we have lots of customers that spend thousands of dollars a month. What they need as they scale is different than what they needed when they were a, you know, a mom-and-pop development shop. They need global load balancing, for example, where we, you know, manage their workloads across our different data centers. They need more data resiliency. They need more flexibility in their backups. And they become slightly more sophisticated. Now, they're not anywhere near as sophisticated as an enterprise customer that's gonna go to the hyperscalers.
But they have basic needs as they scale their business that we believe if we can address, we can get, you know, we can provide them better experience on our platform. We can get a higher ARPU. And that will drive growth. And so it's really just maturing a little bit with our developer base that's the difference. It's the same developers. But as they get bigger, they just have, you know, better, more expansive needs that we can take care of. And that's where we're focused.
That's really helpful. Is any element of that moving up market? Or is it really about serving the SMB and, you know, providing all the tools that they need to have their business as SMBs?
Yeah, it's not really moving up market. It's really staying with the same size customers that we target today and kind of expanding our fulfillment of the things that they could do on our platform to make them, you know, more effective. And so, a lot of times, again, this has been new for me. I've, you know, been here a little bit over a year. When people talk about SMB, I don't really think about us as an SMB-focused customer or a company. We focus on smaller customers, sure. But SMBs like pizza shops and retailers and small law firms, that's not us. All of our customers, or the majority of our customers, are digital, you know, in some nature. They're using technology. They're developing technology. It's part of their business model.
It's, you know, it's smaller growing digital companies versus, you know, thinking about it's somebody on the corner that's selling milkshakes. I mean, that's not our customer base.
Right. Makes sense. Similar question on the second priority around go-to-market. You know, there, there's always, I guess, to highlight what has changed or, you know, where the investments will be going, from a go-to-market perspective.
Yeah. The vast majority of our go-to-market investments, which, again, if you look at our cost structure, we have a highly efficient, you know, go-to-market engine with our self-serve funnel, is focused on harvesting the customers that come to us every month and join our platform to try to experiment and see if they're gonna like it or not. So we spend a ton of money on customer success, a ton of our investment on customer success and making our customers successful as they grow, making sure that we're understanding their challenges and helping them kind of scale in the business.
We spend a lot of our resource on trying to identify through both AI and through some of our own, kind of initiatives, when a customer hits our platform and signs up, how do we predict that they're going to be one of the customers that grows into a builder or a scaler early in the process so we can give them a very focused onboarding experience? So most of our sales and marketing is aimed at both the attraction of the customers to our platform, and then it's on, once they get there, engaging them, you know, as quickly as we can and as appropriately as we can to help them accelerate on our platform. We do very little that's like what I would consider like dialing for dollars or reaching out to customers that we don't know.
I'd say most of our investment in that regard is through partners, where we try to get partners to come on. And they bring their own audience. And we try to drive new logos through that. Most of our sales and marketing is really just trying to mine the value of the self-serve funnel that we've built.
Got it. But as far as the actual team, like, what's the current size? And, like, is that growing? You know, that's been a relatively new initiative, not from the, you know, the history of the company where it was, you know, 100% self-service.
Right. I'd say it's still, again, we have hundreds of people in customer success. And in some of those, what I would consider inside hunting, so they're hunting but within the, like, hunting in your own pond kind of thing where, you know, we've got all the customers that are coming on. We have a, you know, still a modest team around the partnership channels. But we don't have any at this point, you know, any material dedicated resources on the kind of cold outbound. It's mostly just, you know, focused on the growing and enhancing the self-serve.
Got it. In the intro, you talked about growing below the growth of the overall market. I mean, the overall market and certainly your customer base faced a lot of macro headwinds in 2023. So wanted to ask you for, you know, an update there, if you could characterize the current spending environment, consumption trends. What are you seeing out there?
I'd say, cautiously optimistic is the word I would use both for our customers and what we hear from them, and what we're seeing. So, you know, as you know, the decline in our growth rate bottomed in kind of Q, you know, second quarter or third quarter time frame. And, as we said, we've seen a steady improvement in the core DO usage since then. You didn't see it in our NDR from third quarter to fourth quarter. It was; it still rounded to the same number at 96%. But if you unpack that a little and you look at the core DO business, we've seen kind of steady improvement. And we saw increased usage in January that continued into February.
So I'm again cautiously optimistic that the core DO business is kind of returning to better growth. The Cloudways business has continued to do, you know, quite well. And clearly, Paperspace is pretty much all net new for us. So that's gonna be a positive growth contributor as well.
When you think about guidance for this year, is it that cautiously optimistic? Like, what's embedded in guidance from a macro perspective?
Sure. So, what we've said and what's included in the guidance is we believe very appropriate. It's, let's not assume any market improvement. Let's just assume that we continue to execute. And we continue to see improvements in the expansion rate, mainly because of the new products that we're launching. So we'll launch new products. We launched new products last year. New capabilities will come out this year. That should increase our expansion. And so if NDR only improves on the back of our product launches and things we control, we should be able to get NDR back to, you know, say, 100 by the end of the year and, you know, towards the latter part of the year. And so we'll reduce that headwind.
And then, you know, the other contributors, the growth from new customers, again, primarily through the self-serve funnel, that's, you know, a very strong contributor. And then we'll get a couple of points from Cloudways and then, you know, 3 points from Paperspace. And I think, you know, it's solid. We feel very comfortable about, you know, low double-digit growth for this year.
Perfect. Let's hit on some of those growth areas, maybe starting with Paperspace and more GenAI more broadly, AI and machine learning offering. How are they differentiated versus some of the alternatives out there? And a question on kind of what attracts a customer to your platform. If it's more around the simplicity, like, are those AI products, does that fit the theme?
Yeah, I think you nailed it. That's the differentiator for us in this space is, you know, we're very bullish on the AI/ML market. We think it's really early, really early stage in terms of how people are gonna, you know, monetize that and how that'll manifest itself in different business models. But developers want to be able to use that kind of capability to build their own businesses, either to make themselves more efficient or to you know, embed that as part of their value proposition.
And just like the company did, DigitalOcean did when it was founded, the strategy and the differentiation is, okay, how can we take that technology, which the hyperscaler is gonna be all over, the people are gonna spend tons of money on, how do we make it simple and easy to use so that they can embed it in their development processes? And they can leverage it. And so to do that, it has to, again, the economics have to be different. It has to be simple to understand. It has to be simple to use. And if we can do that, we think we have a very differentiated offer. It's a software layer differentiation, though.
It's not that we're not. I mean, if you look at the bar charts that you'll see out there on who's buying the most GPUs, and it's, you know, starts with the hyperscalers. And it's got Tesla. And it's got Facebook or Meta and everybody else. Like, we wouldn't even be on the same stage if you drew that chart up here. We're just not buying at that scale. That's not where we're gonna compete. Where we're gonna compete is making it simple and easy for the large and growing developer community. The thing that's really exciting about AI/ML is that it should drag more developers. I believe the developer market, the people doing development, will go up because it'll simplify the development experience. You know, you'll have more people that can be developers.
So, I just see it as a phenomenal tailwind over the long term for the market. And, again, we're gonna stick to our strategy around we're all about making developers successful so they can build businesses in a way that's with very low barriers to entry.
Got it. You mentioned economics. From a pricing perspective, with Paperspace or AI in mind, is there also you know, is lower pricing, consistent with those products as it is, you know, with the rest of your portfolio?
Yeah, it has to be it has to be a similar, you know, again, easy to use, you know, less expensive than the hyperscalers for what you're getting. The price-to-value needs to be different. The market we were talking about this earlier today, the market for AI capabilities right now and for like, if you just go to look at for a GPU, and you wanna lease a GPU, it's actually a pretty price-competitive market, meaning that the suppliers are willing to go to, I'd say, pretty aggressive prices, despite the fact that we're in probably one of the more supply-constrained environments, you know, that we've seen. It's a little bit like being in COVID when you couldn't get chips. But instead of the end price to the consumer being higher, it's actually, you know, there's a whole lot of competition.
Again, that's why we believe that, you know, where we'll play in that market is where customers value the software and the wrapper that we put around those capabilities to make it easier to ingest into their development processes.
Okay. Got it. Another growth area you talked about was rolling out more products, more product adoption, essentially ARPU growth. What are some of the key products that are driving that growth? And then how should we track the success of adoption of more products? Like, the overall, the ARPU metric captures more consumption broadly.
Right. Sure. Yeah, I agree with you. The ARPU metric is a little; it's just odd. It depends how you divide it because you've got all these customers that spend $15. And if you get a lot more of those, your ARPU goes down. But are you worse off? No, you're not. You actually have a bigger pool of people that will eventually grow into the higher spenders. So the way I would think about it is, coming back to NDR growth, we believe that we can get NDR back, you know, to 100 and above. And we're saying we're not banking on the market to do that. We're banking on our new product capabilities and releases. And so, you know, so goes NDR. So goes our, or reverse. So goes our product release. So goes NDR.
So if you're seeing NDR improving, it's likely that it's coming from the, you know, the increased adoption of these new products. You asked at first about what kinds of products and we talked about this a little bit earlier. Think of it as it's scale-oriented products, so not scale like, you know, enterprise scale, but like, okay, if you're growing on our platform, you may need a little bit more diversity in terms of where your workloads are being run. And you want that to happen automatically, okay, global load balancing. That's capability that, that's in process. You may need tighter controls over who has access to what privileges on your developer team. Okay, those are capabilities that we can add that enable people to just kind of mature a little bit on our platform.
Those should enable us not only to grow with our existing customers but also should make us more effective at poaching customers from larger, you know, providers where they've already got scaled teams. And you say you wanna move them from a more scaled platform like a hyperscaler to ours, there's some table stakes you have to have. Otherwise, they're just not gonna move. Even if it's a better experience, it's more economic, you just have to have some of these table stakes. That's where the majority of our product development resources are going this year.
Got it. One other area that sticks out in regard to scale-oriented products would be security. Could you talk a little bit about some of your security offerings, what the opportunity is for, you know, enhancing what you're offering to your customers there?
Yeah. So security is a big, you know, a big aspect of our, our platform, not just in what we provide to the customers but what we do to protect our customers and, you know, the, the use of our platform from kind of, you know, bad actors. So we've got a, a very robust, and, kind of advanced security capability where we're, you know, making sure that we're monitoring and protecting the use of our platform for anything that's kind of outbound like, you know, DDoS or malware or, or spamming, all that kind of stuff. But we also embed a lot of those same capabilities into our products to protect our customers and their customers. So, you know, that's clearly, we've got, you know, DDoS capabilities and, and other capabilities that, that we provide.
But it's a big aspect of running a global, you know, platform that just has to be part of the infrastructure.
Got it. A few other growth areas. Cloudways seems like the performance, not only as far as what's expected this year, breaking out that contribution to growth, but also 2023 performed very well.
Yeah.
Maybe better than expectations, I would say. What's driving this overall? Maybe if you could talk a little bit about the, like, cross-sell.
Sure.
You know, what's been driving that performance?
Yeah. No, you're absolutely right, Josh. The growth in the Cloudways business was 43% year-over-year in 2023. Call it 10 points of that was a price increase that Cloudways did in the kind of the April time frame that they hadn't done, I think, in five years, hadn't increased their price. But even without that, you're talking 30, you know, mid-30s growth still. We were able to, I'd say, boost the Cloudways business after the acquisition by pretty materially increasing the traffic volume that goes to them by basically siphoning off customers that hit our website that self-select based on some questions into a more managed experience. You know, prior to us owning Cloudways, we would've just lost those customers.
They would've either gone away 'cause they concluded themselves that our solution was more do-it-yourself than what they were looking for, or they would've tried us and then realized that, yeah, they were looking for a bit more managed experience. So we've been able to direct that traffic to Cloudways. And we've been very happy with the increase in their traffic as a result. And they just again, they're incredibly steady, right? It's just they grow very predictably month-over-month. Their core metrics are pretty consistent. And we feel very good about that business. You know, you'll get some wonkiness in their NDR year-over-year the same reason we did 'cause they'll lap their price increase in April. But other than that, it's a pretty predictable business.
Great. Matt, one more area of growth, wanna talk about customer growth. In Q4, I think all the customer counts, like, across scalers, builders, learners, all increased sequentially. Can you talk about some of the initiatives that might be reducing churn there? And then also just more broadly wondering, like, where these new customers are coming. Are they still landing primarily with Droplets? Are there other products that are common entry points for new customers?
Sure. So just on the churn front, churn has been very stable. Like, churn has been, you know, pretty stable at historical levels most of last year and through this year. So it's not that we were losing customers at a clip. It was that we weren't adding customers at the clip that we wanted. But the other thing to remember is, based on our model, we bring customers in. They typically spend, you know, $10, $15 a month, or they try us, and they're spending $50 a month. And then they grow. So when you look at builders and scalers, the majority of those are graduating on our platform. They're not coming from, you know, outside. So they're moving from the learners bucket to the builders and to the scalers bucket.
So it's the ramp of our spend. And that was when I first got here. I'm like, "This is an amazing model. You bring in all these customers, and then some portion of them just start to take off." And so that's the way to think about that. What we're doing to drive the top of the funnel, which is the learners, is, you know, we're investing in kind of our search engine optimization capabilities and our other, you know, the traditional things that you do with the self-serve funnel.
But we're also, and this is, again, one of Paddy's big kind of commitments, is we're doubling down on our commitment to the developer community to provide interesting content and relevant content and kind of refreshing this great 40,000 set of DO documents and tutorials and training videos that we have. So we're really, you know, doubling our efforts around engaging with the community. And, you know, the advent of AI/ML into that conversation gives us a great new channel to do that where we can do that same take that same model for AI/ML and provide that kind of content for the developer community. And we believe that will drive more people to our website. It will drive more people to try the platform.
To get people to move up the curve from learners to builders to scalers, that's a big investment that, you know, as we deploy our customer success resources and our customer support, is like making sure that we're intimately engaged with the larger customers and identifying what's keeping you from growing faster. And that then feeds back to why the product roadmap is what I described it to be, the feedback we're getting is, "Hey, we could grow with you, but we need a couple things." And those couple things are what's driving our product roadmap.
Perfect. In the past, there's been some context for how to think about customer growth. Anything that you could add as far as, like, thinking about customer growth, whether it's overall or for any of those specific cohorts?
Yeah. I think that, and this is why we, you know, when I first arrived, we used to publish total customer counts. And we had a group that we called testers, which are people within their first 30 days, or three months on the platform. Some of them stick. Some of them don't. The number of that number is de minimis. It has almost no revenue impact on the business. And it, it's volatile. And so then you say, "Well, what about learners?" I'm like, "Okay. Well, there's 450,000 of them. If there was another and they represent" and I would do the math in my head. I think it's, like, 10% or 12% of total revenue, like, not much. So you got another, you know, 1,000 of them or you got 10,000 of them.
It doesn't move the needle on the revenue. So it's not, it's a super leading indicator, which is, "Well, I'd like that number of learners to be stable. I'd like it to be growing. If it grows a little bit or it grows a lot, it's what's more important is how many are graduating out of that into the builders and the scalers?" 'Cause that's what 86% of the revenue comes from those customers. And so to me, it's those two counts are a more clear indication of near-term revenue progress than the learner count. Learner count is, you want that to be healthy and growing. But, you know, it's not a quarterly metric. It's more of a, "What are the trends? And how are you, you know, building it slowly and steadily over time?
Perfect. Let's talk about operational efficiency. Your company was very quick to rapidly expand margins when some of the macro was turning. And now looking ahead into this year, guidance is calling for, I think, three points of margin contraction. A lot of that is from the Paperspace acquisition and CapEx investments. But could you talk a little bit about that dynamic, like, where we saw so much operating leverage and then where these investments are going that are kind of weighing on margins this year?
Yeah. So as you said, when we saw the market growth was gonna be challenged last year, we accelerated our longer-term margin targets. And we were able to achieve that through a combination of kind of non-headcount efficiencies and spend, and then, you know, through some headcount reductions that we did in February. And we also shifted our cost model. So we have more than half the employees in the company now are international. We have a lot of resources in Pakistan and Mexico and India and other places. So we've changed the long-term cost structure. We believe that there's still more efficiency that we can drive. And particularly as we focus, you know, we wanna increase the amount of focus we put on our R&D.
We wanna increase the throughput and the pace at which we're deploying new capabilities. We think we can do that by just shifting resources, internally. But by virtue of getting to the higher margins, we were able to invest in Paperspace and grow that and only, you know, give up a couple points of free cash flow, while we're investing fairly heavily in both CapEx and OpEx around our AI/ML capabilities. So I think there's more room for us to drive leverage in the core business. But we're sitting in a pretty good spot where we've got the ability to invest in the AI/ML capabilities and see how that goes this year. And we can adjust, you know, our spend accordingly.
Got it. Wanted to ask about AI but from the context of how you're using it internally, maybe from a efficiency standpoint. If you have anything that you could add or around how your R&D teams are leveraging generative AI or how your marketing teams are.
Yeah. So, we've been using AI for a while. The one of the bigger areas is in the fraud and abuse. Like, identifying, you know, based on patterns and, and use cases, etc., whether somebody's likely to pay or likely to abuse the on the platform. So we've been doing that for a long time. The customer success and customer support organizations have been using AI/ML capabilities to, to, you know, divert a, you know, a reasonable chunk of calls and, and emails to be able to be served through, through that. I'd say on the marketing front, we're, we're still early stage. That's an area where we're, we're exploring. And on the developer side, the, the developers certainly, we have, you know, the Copilot kind of capabilities internally.
And that's also an area we're trying to figure out is, could we be doing more than what we're doing today? So I'd say, we're like many companies, you know, experimenting. And we've had some good successes. But there's a lot of potential, we think, to leverage it that's not been tapped.
Great. And as we think beyond 2024, you know, where, where can margins go? Where, you know, where will there be big, sources of leverage? Like, how should we think about margins beyond this investment year?
Yeah. As I said, I think there's still the opportunity to just drive in efficiency in the core business. You know, there's data center footprint and kind of networking things that we can do that you do as a scaled company that will drive some gross margin improvement. So I feel good about that. You know, I think there's still room on the OpEx front to drive efficiency, some through AI/ML as you're describing, some through just a very aggressive and high prioritization of what's getting the best return and being efficient with our spend. So I feel positive about that. The variable that's, I'd say, least known at this point is, "Okay. Well, we're spending—we said $50 million in capital on AI/ML capacity in 2024.
What's the right amount to spend in 2025? I don't know yet. It depends on how we see the traction of the capabilities we're developing now. What I can tell you is it would be an awesome problem to have to say, "Hey, this is growing so well, and we got such good economics that we wanna spend some more to attract that growth." And we'll do that, you know, prudently and appropriately. As you've seen, we're not going out and, you know, build it, and they will come and spending $hundreds of millions on the AI space. We made what we think is a prudent investment, consistent with our strategy. And you should expect that kind of decision-making from us as we go through this year as well.
Great. Wanna shift to M&A just to hit at the overall strategy and philosophy there. You've definitely been acquisitive. And so when we think about build versus buy, is it fair to say that there's maybe a preference for buy to get to go-to-market faster? Like, what's the philosophy? And you know, does that change under Paddy's leadership?
I don't think the philosophy changes. I think there's not a preference to buy in an absolute sense. There's a preference to accelerate the velocity in which we're advancing our platform and putting new capabilities out. If that means if we can build it, that's, you know, there's a lot of advantages to building things and owning it and, you know, that from an economic and from a risk standpoint. You can partner. So you can partner and work with another technology provider to fill in a gap that you have. And there's a certain, you know, different risk and economic profile there.
Or if there's an opportunity to pull in M&A to, like we did with Paperspace, where we didn't see a, you know, a path where we could build it in a timeframe that would be relevant, we'll take advantage of that. And the nice thing about DigitalOcean is we've gotten lots of flexibility. We had $412 million of cash at the end of last year. We said we're still very committed to driving free cash flow per share. So we'll have an ongoing share repurchase program. But it's modest relative to what it has been historically, $140 million over two years. That gives us a lot of flexibility to both invest in organic growth should we want to, which we do.
Also, if there was an opportunity to accelerate our pro-product roadmap, and we have some dry powder that can do that as well, all while we're still trending towards our long-term leverage targets. I feel comfortable about that as well.
Got it. You mentioned buyback. You also have $1.5 billion of zero-coupon notes out there, I think due at the end of 2026. So still some time there before their current. But any, you know, how should we think about your alternatives for addressing that debt maturity when, you know, down the road?
Yeah. That's part of the reason why we, you know, as we communicated the, the buybacks being at the level that they are is to give us flexibility around that and, and also, be delevering to a point that we, we'll we feel like we'll be in the 2.5-3 times in a reasonable amount of time. You know, if you just take the guidance that we provided, we'll be in the low threes, on a net leverage basis by the end of this year, just with the guidance that we provided. And so when, you know, we're certainly paying attention to that. I'm highly confident we'll have a lot of different options of how we would refinance that.
And again, when you're sitting on $400-and-something million of cash and you're earning 5% on it, and someone says, "Well, you know, you could get a 7% yield if you bought back some of the convert," I'm like, "Okay. It's two points. And I lose all kinds of option value. I can't, you know, I can do that. And then I don't have the cash. I can't invest it if our AI/ML capabilities take off or if there's an acquisition that we wanna do." And so we're just being prudent and making sure that we have flexibility and but that we're headed towards the right capital structure. So I feel very positive about and again, zero coupon with, you know, maturity and just under three years. It's a pretty good instrument.
Got it. I'm gonna ask one more and then see if anyone has any questions out there. Kinda wanna lay out the, the bull case and just see your, your reaction, or part of the bull case. I mean, we like, for some of the recent history, we've always been making adjustments around M&A and, and impact from pricing. And when reported growth rates were, you know, strong, like, we, we were seeing decelerating trends. At this point, you know, you do the same work and you see the complete opposite. Like, that growth actually bottomed in Q2 by our calculations around 3%, accelerated in Q3 to around 5%. And, and Q4 was like 9% growth. So pretty solid acceleration, under, you know, backing everything out, making some assumptions. And then guidance for next year, on the surface is, I think, 10%-10.5%.
But again, like, doing some math, it's actually 9%. So like, assuming no acceleration even though we've been seeing this clear trend, seems pretty conservative. I mean, would you agree? Or is there anything, like, fundamentally that gives you, you know, more caution about 2024?
I think it's, I, I use the word appropriate. I don't think I would use the word conservative 'cause you sit where we sit today. One, there's a lot of market, you know, you don't know what's gonna go on with the, the broader market. There's, there's certainly supply chain and execution risk associated with the Paperspace business. I don't think there's demand risk. It's more, can we get the gear in, in, in the timeframes we think we're gonna get it and, and in the quantities we think we're gonna get it? And can we turn it up in, in, in time? So there's and it's because it's you're going from kind of effectively zero to something meaningful, it's there's risk associated with that. So there's that.
The other big kind of risk in the plan is still, while we're seeing the things that you described and we are seeing improvements in the Cloudways business, in the fourth quarter, we're sitting at 96% NDR, which is a 4% growth headwind. And if you said, "Well, you saw all those things that you described, and NDR rounded to 96 in the third quarter and it rounded to 96 in the fourth quarter," this tells you it takes it a while for it to kinda get back to a level that's not a headwind. And so then the question is, how quickly can you do it?
And you, it's if it's all based on product releases and you're not assuming that just, like, the market gets better, you know, it's appropriate to assume that it's gonna take you to most of, you know, 2024 to get there. So it's a headwind. So, you know, am I very optimistic about 2025 and how well we're gonna be positioned and that growth rates will be very different than what we're talking about now? I am. But for 2024, I think it's appropriate.
Got it. Well said. Any questions in the audience? Okay. On competition, we haven't really talked about that today at all. Wanna get the update there, maybe starting with the hyperscalers. Anything to note as far as their attention to your segment of the market? Or is it kinda the same, same story?
I think it's the same story. I mean, you'd say, "Okay. Well, how often do you see them?" And like, well, we see them, you know, at the rate as you would expect if you do the Pareto of our customer base, the largest customers are likely, you know, they're candidates they could go to the hyperscalers. Conversely, hopefully, similar-sized customers, we could win over to our size as well. That's where they become relevant. And then it's all about, well, what kind of relationship do we have? And are they liking our service? Are there any gaps that we have? And we win some, and we lose some, you know, in those spaces.
But generally, them trying to come after our small space. I mean, think of all the money they're spending on AI/ML right now, like, and think of, like, all the enterprise workloads that are still on-premise that could move to the cloud. Like, is the next best thing them to go after, like, little developers that will come on for $15 and maybe in four years might be $1,000 a month? Like, I don't know. I'm not, you know, I don't know that I would sign up to take that job at those companies. So, I don't. We don't. We haven't seen much of a change there.
Got it. And yeah, I mean, you mentioned win some and lose some. But when I talk to customers, I often find that they're utilizing a multi-cloud strategy. Like, is that still the case where you can have a really nice business with a customer who might use a hyperscaler for, you know, certain specific things?
Yeah, that's a great point, Josh. When I say win some and lose some, I mean workloads. I don't mean customers.
Got it.
If you look at our and we, I think we shared this when we first disclosed the learners and builders and scalers model, churn goes way down as you get, you know, as you get into the bigger bucket. What you risk when you get into the really big customers is you're chasing workloads. Like, you know, do you get all their new workloads? Do they keep all the workloads on you? You know, you're playing for wallet share. You know, that's the primary game when it's, you know, when I'm talking about competition with hyperscalers.
Perfect. And then just to round it out, hitting on the alternative cloud providers or maybe the more directly competitive, anything any changes to note in that, you know, competitive landscape? And also just curious if Akamai's acquisition of Linode, do you think, has made the environment easier for you?
That was the one thing I was gonna bring up. I think the rest of the market is pretty consistent. You know, there's lots of folks trying to chase this space. It's still pretty fragmented. You know, a couple providers in Europe, a couple here. But the one big change has been Akamai's acquisition of Linode. They focus more on the enterprise. And they say that. That's not me concluding that. We've observed it as well. But that's a pretty stated direction from them.
Okay. Great. We hit the quadruple zeros.
Nice.
We're out of time. Thank you so much, Matt. Really appreciate it.
Thanks, Josh.
Thanks.
Hey, thanks.