Nebius Group N.V. (NBIS) Earnings Call Transcript & Summary

So just to be clear, the 3 different types that Alex is alluding to include short term. These are agreements that are typically 3 to 6 months in duration. There are opportunities where we're potentially able to secure premium pricing around specific types of workloads that I'll share a little more detail about in a moment. There's what we call medium-term agreements. This is the 1- to 3-year agreements and actually represent, in our point of view, the lion's share of opportunity in the market and some of the most important and diverse set of customer opportunities. And then thirdly, there's the longer-term agreements, which are 5 years and longer in duration. These tend to be the agreements that the industry, and we've done historically with like the hyperscalers. When we've done them, it's been with an explicit intent that we're looking for the capitalization benefit in terms of being able to fund the expansion of our core business, which takes us back to our primary objective, which is the medium-term agreements. Medium-term agreements and the kinds of customers that we're talking about here run the range from the AI native that we have a right to win with. This is the heritage of the company. We are AI natives ourselves, and we've built an experience and delivered the type of technologies that these customers are most likely to adopt from. These are like Higgsfield in media and entertainment or HeyGen media production as well. These are companies that have built their apps on us and they're scaling with us. There's also the larger scale AI natives that are already producing revenue. They're into scaling out. They're looking for longer-term visibility around the capacity that they need, they're signing longer agreements and are looking for greater cluster sizes. Also in the same range of contracts of 1 to 3 years, we're seeing digital natives like what Arkady mentioned earlier, like Shopify. Companies that are, again, looking for a reasonable duration of commitment to be able to fuel their requirements. We're also seeing enterprises adopt in this range. It's just the beginning of enterprise adoption, but it's a very important dynamic and important part of our market. And we are actually prioritizing a portion of our execution like we talked about earlier around the Palantir agreement to make sure that we're able to start building towards the enterprise because we believe, ultimately, enterprise will represent the majority of the opportunity in the market.

Fantastic. And maybe one for you, Arkady, on pricing. I think it was fascinating to see at the last results, you talked about this capacity auction. So it would be great to get a sense of kind of what you learned from that. What does it mean for how you're going to price and sell capacity for '27? And how should we think about the durability of the pricing in future years as more capacity presumably will come online?

Well, when you have this imbalance between demand and supply, the best price discovery mechanism is something like an auction in one way or another. Again, we try to do it manually first to raise the prices. It didn't help. The demand is still there. What is the best mechanism to discover what the real price balance should be? We ran our first experimental auction for the Blackwell processors a month ago, several weeks ago. We achieved results where we got 15%, 20% higher price than we ever sold before -- after all our price raises. We liked the experience. But more importantly, our clients liked the experience, the guys who won this auction, they tweeted that they're happy that they were able to get guaranteed capacity through this mechanism, because it's the only way when there is deficit of resources and you need it. what is the way to get it guaranteed in price competition and win? And they won the auction, and they were happy about it, and we are happy about it. And probably, it's the right way to find this right balance. We will do more of this. We told that we will put more capacity on the auction. We now will start experimenting with our longer tail clients, self-serve clients. We have hundreds of thousands of clients, which are self-served. Small clients with preemptive mechanisms. And we will go introduce something like the auction there. And probably, this is the right mechanism to actually work with more regular and bigger clients, at least we should use some mechanism like the auction to discover the price. And then based on this full price discovery, we should offer them discounts or upsell from those prices, depending on different circumstances to these clients. But auctioning is the best way to find the right balance in this supply-demand situation, which we are now in.

You touched on competition. So maybe one for Marc, just more from a Nebius perspective. Obviously, at results, you talked about those 4 landmark wins. So it'd be great if you could just remind us a bit about what you won, what enabled you to win those? And then how we should think about the pipeline from here? Is there more to come?

Certainly, certainly. Actually, I realized when I answered the last question, I forgot 1 category. So I'm going to rewind just for a minute. I didn't mention what's going on with the short-term agreements, which I prefaced I was going to come back to later, we are setting aside a small amount of capacity for short-term scale training runs. This is a very unique and finite part of the market, and we're going to continue to make that available. These tend to go out at a multiple of the ARR per megawatt that we see with our core or medium-term agreements. These 4 wins that we talked about last quarter fit in that core segment of our contract base. These were averaging $1 billion apiece. These were significant wins by existing -- pardon me, by new customers to Nebius that were looking for scale capacity. So they obviously had incumbent suppliers, was highly competitive. Those wins were ultimately won in the POC. It was not about price. It was actually about the reliability and performance that we delivered in the experience. As a matter of fact, one of the customers actually even called out the fact that the POC, according to their technical team, was the best technical experience they have ever had with any supplier in the industry. So garnering significant confidence in the technology that we're delivering, but more importantly, also the humans that were part of that delivery. The expertise that we're able to provide them, gave them confidence about the kind of experience that they're ultimately going to have. These wins have led to, obviously, the scale relationships that we have. But more importantly, we're partnering with these customers. They all have additional requirements. We're already talking to them about the next cluster that they have. In some cases, they're looking for additional GB300s. In all cases, they're all talking to us now about their Vera Rubin requirements. So already set up for additional expansion with them. We also have other similar customers in our pipeline that we're pursuing with similar types of opportunities that could ultimately contribute in the same way that these 4 wins did.

Fantastic. Staying with you, Marc, you mentioned there about new types of customers. Clearly, over the last 12 months, 24 months, you've had this period of diversification. So it's really not just about hyperscale at all. Obviously, there's a place for that, but you kind of calibrate all these opportunities. Can you talk a little bit about how the mix has been evolving and how you think that customer mix will evolve as we go forward?

Certainly. Today, as I mentioned earlier, we have the right to win with AI natives. This is a very important part of our business. What we are experiencing is that we're starting to move up to the larger and larger scale AI natives like the 4 deals that I mentioned a moment ago. That experience that we're gaining with those types of customers is actually building a profile and reputation with digital natives. So like the Shopify deal that I mentioned earlier, we're getting more and more access to critically leading digital native customers where they're embedding AI capabilities in their offering, utilizing AI in order to be able to deliver a better version of their service. It's a very exciting portion of our business because those digital natives are not only scale, but they're also oftentimes supplying the enterprise, which also now is leading to our opportunity to supply the enterprise. There's been a significant uptick in our pipeline with customers that are platform providers to the enterprise. Some of the most important platform players are looking at us as the first non-hyperscaler supplier, and they're looking for 2 reasons. They're looking for the obvious ability to gain access to capacity when they need it. They're also looking for a partner that can innovate with them to be able to support their requirements across their full needs, not just training, but also being able to support them with inferencing and post-training and recognizing what we're building allows them to have the kind of capabilities that, as a matter of fact, we described a little while ago for Palantir. So this is opening up a market opportunity for us and then projecting out to the enterprise where we're seeing significant traction in key verticals. We have a very focused set of vertical initiatives around physical AI, around healthcare, life sciences, around media and entertainment, around retail and financial services. And we're just starting to get traction there, and we're excited about the progress that we're making.

Aside from the different use cases and the different types of customers. One thing I think Nebius has talked about, Marc, is how, over time, we're going to have more and more of these value-added services. And I think you've talked about how that can help with margins. So can you sort of help us think about how large that can be over time and sort of the evolution in that sense.

So it's a really important part of our business, Alex. I mean what Arkady mentioned a moment ago in terms of the full stack, a lot of folks look at the industry and they sort of stop at the hardware. They think of the market that we're in is all about just compute. But the reality is when you talk to customers, and especially as you talk to customers that are more and more, let's call it, large scale their desire is actually for a much more full stack experience and even more abstracted services. So today, when we go sell a customer that might start with us on compute, looking for model training capabilities, we are oftentimes also able to position our inferencing. The combination gives them significant efficiencies and advantages because they are using the same platform where we built the solutions together and they can use the compute in the future between the different capabilities. Likewise, we've added to our platform, the beginnings of agentic capabilities through our acquisition of Tavily, which is an agentic search solution. The conversations that we're having with AI builders, agentic search is a cornerstone technology necessary for them to build the agentic capabilities they have. We're going to be adding to our agent capabilities. Right now, we're delivering blueprint, but we'll be building out more and more solutions to support agentic requirements. As we project out into the future, the vision that Arkady has us becoming a hyperscaler. We have the unique front row seat of being able to watch what's happening with the customers that are building our platform in terms of things that they're doing that could potentially be turned into products and the things that aren't being built that they're turning to us to help them to build in order to bring them to market more efficiently. So it's a unique situation where we're confident that we're going to be able to project into adjacencies that have more value creation and obviously opportunity for us to do value capture and margin -- and add margin to our results.

Talking of value capture perhaps another question for Arkady. It was really fascinating to see the announcement about your new asset-light model, where I understand you can actually partner with other infrastructure players. Can you talk us through how that works? And how does that sort of expand the opportunity and what you see as the benefits when we think about growth and profitability?

With this demand, the main impediment in supply is how much physically we can build, how fast and then how much we can finance all this build. Because one thing is to build the data center. Another is to fill it with racks full of GPUs and tens and hundreds of billions of dollars in our scale. So we develop our own network capacity of data centers, which we build. And this is our natural pace of growth. And recently, we thought that probably we could grow even faster if we partnered with people, there's a lot of -- a whole new class of people who came from electricity companies, from data center companies who are trying to go up the stack, understanding that there is margins up the stack. And they actually need help. They -- what they have, they have physical capacity, plots, electricity, and many of them have access to cheap financing. And we realize that if we partner with them, we provide them with our knowledge. They don't know how -- what to do with it. We can give them -- bring them the knowledge how to build the data center. We can build them -- we can give them our racks. We can give our software stack. And most of all, we can give them all of our go-to-market organization, we have so many customers for that. So it could be potentially a very good partnership with companies who have access to capital and who have their own physical plots. We announced this line of business, this partnership program a couple of months ago, I think. We've got a long list of companies wishing to deploy to try to do something here. It's -- all of this -- each line in that huge spreadsheet is a separate big project. We are talking about capacity coming online in 2027 and later. We're working with several projects like this. And this will be sure -- this will be a non-linear way for us to grow. One thing is we are building ourselves. And in addition to that, we'll probably partner with companies who have access to capital and physical resources to build it. Which is we will be helping them to build and use our client base.

Great. And maybe I think we've got time for one last question. I think you talked about the physical limitations. And obviously, power is really interesting as well as land. Just curious how you think about where you effectively deploy your incremental capacity. And within that, how you think about behind-the-meter opportunities versus perhaps other types of power.

We work with all kinds of plots and power we can get. Anything which moves we will utilize. It's never enough. Again, demand is so huge. We built -- sometimes we built on the plots with electricity, which is ready. Sometimes we need to get connected to the grid. And sometimes, we can just use our own generation. We buy generators. We buy -- recently we started partnering with a company called Bloom, which is hydrogen and co-generation, much more healthy. And so we have -- just like companies going up the stack from the ground, we have to go down the stack from software to racks to data centers and now sometimes to building our own generation, including our recent thing with Bloom, but not only. So whatever we can build as fast as we can build, everything will be sold. So this is the limit for our growth. So that's why the more we build the more we partner with somebody to build the better for us.

Brilliant. Well, on that note, Arkady, Marc, thank you so much for a fascinating discussion. And thank you for joining us.

Thank you, Alex.

Thank you.