GoDaddy Inc. (GDDY) Earnings Call Transcript

Good afternoon, and thank you for joining us for GoDaddy's First Quarter 2023 Earnings Call. I'm Christie Masoner, Head of Investor Relations, and with me today are Aman Bhutani, Chief Executive Officer; and Mark McCaffrey, Chief Financial Officer. [Operator Instructions] On today's call, we'll be referencing both GAAP and non-GAAP financial results and other operating and business metrics. A discussion of why we use non-GAAP financial measures and reconciliations of our non-GAAP financial measures to their GAAP equivalents may be found in the presentation posted to our Investor Relations site at investors.godaddy.net or in today's earnings release on our Form 8-K furnished with the SEC. Growth rates represent year-over-year comparisons, unless otherwise noted. The matters we'll be discussing today include forward-looking statements, which include those related to future financial results; our strategies or objectives with respect to future operations, including our approach to capital allocation; new product introductions and innovations; and our ability to integrate acquisitions and achieve desired synergies. These forward-looking statements are subject to risks and uncertainties that are discussed in detail in our documents filed with the SEC. Actual results may differ materially from those contained in forward-looking statements. Any forward-looking statements that we make on this call are based on assumptions as of today, May 4, 2023, and except to the extent required by law, we undertake no obligation to update these statements because of new information or future events. With that, I'm pleased to introduce Aman.

Thank you, Christie. Good afternoon, and thank you for joining us today. GoDaddy's mission is to empower entrepreneurs and make opportunity more inclusive for all. We learn from our customers every day, and they are a resilient group, and they value what GoDaddy brings to them. While many worry about a recession, our venture forward service found that our customers are noticeably more optimistic today about the future of their business than they were 6 months ago. One customer we showcased in the past is the Furlough Cheesecake founded by 2 sisters impacted by a government furlough. In a recent interview, 1 of them commented, "With partners like GoDaddy, we can manage our business from anywhere. GoDaddy helped us launch our business quickly from idea to up and running in 1 week because they had the tools in place." GoDaddy's unique combination of seamless intuitive technology and best-in-class human and digital guidance creates the ease of use that our customers want and need, so they can focus on their business. This combination continues to differentiate us in the marketplace, helping us drive profitable growth and superb cash flow. We serve 21 million customers that have a high retention rate of 85%. In Q1, we drove double-digit growth of 12% in our Applications and Commerce segment supported by 10% ARR growth in our Create and Grow products. Additionally, we surpassed $1 billion in annualized GPV for GoDaddy Payments. One area we continue to watch carefully is our aftermarket business. We faced tough compares last quarter and a continued unevenness in flow of large deals that we believe is impacted by broader macro headwinds. Overall, we are pleased with our Q1 results and encouraged by the positive momentum over the quarter, especially in our subscription and Commerce businesses. Our strategic priorities remain consistent, and our teams continue to launch experiments and new experiences at a fast pace. As always, I will review each of our priorities. For our first priority, driving Commerce through presence, we are happy to share that we gained exciting traction in our Commerce offerings. We had our best quarter yet, attracting sellers more than we anticipated and rapidly crossed over the $1 billion of annualized GPV. The largest opportunity for us remains our existing base of 21 million customers and the many sellers that are already a part of it. The efficient motion of selling into our existing customer base was the primary contributor to our GPV growth. And hence, it remains our focus as we work to scale the sales team. Adopting our commerce product paves the way for customers to deepen the relationship with us, which results in higher retention and increased lifetime value. Last month, we also launched Apple's contactless Tap to Pay technology within our GoDaddy app. As you know, Tap to Pay allows our customers to accept all types of contactless, in-person payments with only an iPhone just by tapping their credit card, mobile wallet or watch. We worked directly with Apple to integrate this technology natively, creating a seamless, best-in-class, low-friction sign-up experience for our app customers. We also made several other improvements to make Websites + Marketing a more robust solution for sellers, including improved pay buttons and new reports for merchants to help them prepare their taxes and understand their fees and payouts. Our teams are also excited about how generative AI can add ease of use for customers by auto populating content for them and helping them create natural language, e-mails, chat and text messages they engage with their customers. AI-powered tools are showing up across multiple experiences at GoDaddy. For example, we built instant video features in our Studios app, and use cases like auto generating product descriptions are coming soon. As always, we are focused on both technology tools and guidance for our customers. As our customers start exploring generative AI, we want to help them by launching a growing area of resources, so our small business owners can begin harnessing its power to save time and grow their sales. For example, we now provide an essential Small Business Guide AI Prompt Library. We are also working to bring these capabilities together in a manner that even the smallest businesses can benefit from instantaneously accessing vast amounts of data and transforming it into something meaningful for their business. Websites + Marketing continues to be rated as the highest-performing website builder according to Google Core Web Vitals, and it is taking share in the marketplace. The team continues to focus on making it easy for customers to build high-performance websites quickly. On our second priority, delivering for GoDaddy Pro, our goal is to make them better serve their clients and grow their businesses. GoDaddy Pro's value platform capabilities like performance, availability and security, but also automation, support ease of use and value-added offers. Our new Managed WooCommerce Stores offering replaced our old Managed WordPress commerce offering over the last few weeks. With this new product in place, we are bringing many more capabilities to the table, and we'll be able to test into higher-priced SKUs. On our Hosting business, our focus is around stabilization and simplification. As discussed previously, we are on course to integrate brands more deeply, which includes retiring the Media Temple brand with the final migration of customers to the GoDaddy full stack. In April, we also signed an agreement to exit a couple of our smaller European brands. Our goal remains to provide customers with a higher level of service at a lower cost to serve, while sharpening our focus. On our third priority, innovation in domains, we have continued to broaden our bundling offers for new and existing customers. While our initial focus was around bundling e-mail, we have increased experimentation velocity and are doing much more here. We are improving the onboarding flow for customers with the target of higher attach, and encouraged by the results we have seen. This matters because we know that customers who activate and attach more products have higher retention rates. And we continue to be excited about payable domains and have 2 clear insights since our launch. First, customers who adopt this product are demonstrating their satisfaction by quickly doing a significant number of transactions through the default Pay Link we provide. Our initial efforts to drive more traffic to this product resulted in impressive early GPV. Second, we noticed that existing customers are more ready to use this product compared to potential customers who are new to purchasing a domain. We are currently focused on creating more opportunities for both existing and new domain customers to discover and utilize payable domains. Although there is still work to be done, we strongly believe in the enormous potential of this offering. On the aftermarket, you will remember our List for Sale feature that allows GoDaddy customers to list their domain in the aftermarket. This quarter, we extended this capability to our registrar partners, opening a channel to bring more inventory to the aftermarket. We've also added new features to the customer experience for brokered aftermarket transactions. We built a new lead center, giving real-time status updates to the leads being pursued on behalf of domain sellers, so they can have more visibility into progress on their transactions. Our aftermarket business continues to innovate and create value for our customers and all players in the industry. At GoDaddy, we are eager to help small businesses thrive. This fuels us to create better products that deliver greater value for our customers, which drives our attractive financial model that then translates into sustained customer and shareholder value. This is the simple approach of how we work to grow GoDaddy and differentiate our offerings. We are proud of the consistency of our strong execution and our strategy. We have a great business with a loyal and growing customer base that continues to spend more time with us. Through our strong competitive advantages and attractive financial profile, GoDaddy is well positioned to continue to grow and deliver for all stakeholders in meaningful ways. With that, here's Mark.

Thanks, Aman. Before getting into the detailed results, I wanted to summarize a few key points. First, we are making progress towards returning to double-digit growth, while executing our 3-year plan to expand our operating margins and deliver on our free cash flow per share targets. Second, we are delivering on our Applications and Commerce segment growth through increases in new customers and the conversion of our existing customers to our payments platform in the U.S. Lastly, we are on target to complete our restructuring action in the second quarter, driving better operating leverage in our core platform segment and improving our overall operating margin in the second half of the year. With that, Applications and Commerce revenue grew to $338 million, up 12%, exceeding our guide of 8% to 10%. Additionally, the normalized EBITDA margin for Applications and Commerce was 39%. Taken together, this highlights the impressive performance we are driving in this business, which delivered ARR for Create and Grow of $450 million, up 10% and over $1 billion of GPV. This segment is our largest opportunity to drive growth through the attachment of our Create and Grow products, Commerce platform and productivity solutions for both new and existing customers. ARR for Applications and Commerce grew 9% to more than $1.3 billion. Annualized GMV across the GoDaddy ecosystem grew 18% to approximately $28 billion. Our core platform segment, which includes domains, hosting and security, continues to serve as an important on-ramp to our overall business. Core platform revenue was $698 million, with an ARR of $2.2 billion and a strong normalized EBITDA margin of 27%. Core platform revenue was supported by a 5% growth in domains from a combination of new customer adds, attach and price increases on renewals. This was offset by tough compares for our aftermarket business as well as the continued uneven flow of large transactions. Additionally, there are modest impacts to our hosting revenue and customer count from migration of noncore hosting platforms being sunset. Total revenue grew to $1.04 billion, up 3% on a reported basis and 5% on a constant currency basis, reflecting a sequential lift from the Q4 growth rate. Within total revenue, international revenue grew 3% on a reported basis and 7% on a constant currency basis. Q1 bookings grew faster than revenue at a rate of 4% on a reported basis and 5% on a constant currency basis, totaling $1.2 billion. Bookings growth on our subscription products outpaced the related revenue growth by approximately 100 basis points. Our durable model continues to generate cash flow through our strong customer relationships and cohort performance, highlighted by our customer retention rate of 85%. We build on this strength through intentionally focusing our marketing on attracting high-intent customers that stay with GoDaddy and spend more. This quarter, we added 100,000 net new high-quality customers, despite headwinds from our migration efforts noted above. Our ARPU grew 4% to $197 from $190 last year. Normalized EBITDA grew 11% to $250 million, with a margin of 24%, representing approximately 160 basis points expansion. We expect to continue to drive operating leverage through strong execution and our restructuring efforts. Unlevered free cash flow for the quarter totaled $304 million, growing 6% driven by strong profitability, while free cash flow remained flat at $259 million, despite an increase in our cash interest expense due to the refinancing of our term debt in Q4 2022. Free cash flow per share rose to $6.19 on a trailing 12-month basis versus the prior year's cash flow per share of $5.25, an 18% increase driven by execution, operating leverage and share repurchases. Additionally, in Q1, we completed $114 million of share buybacks, repurchasing 1.6 million shares. This brings the cumulative share repurchase under our $3 billion authorization to $1.4 billion and 18.4 million shares, reducing shares outstanding since inception by 11%. We remain on target for our commitment to reduce our fully diluted shares outstanding by 15% to 20% over the 3-year period. On the balance sheet, we finished Q1 with $892 million in cash and total liquidity of $1.9 billion. Net debt stands at $3 billion, with 2.7x net leverage, within our targeted range of 2 to 4x. Lastly, as noted above, we signed an agreement to divest certain noncore hosting assets, which is expected to close by Q3. Our restructuring charge of $50 million in the quarter included $21 million of a noncash impairment charge for these assets. Moving on to our outlook. We are targeting Q2 total revenue in the range of $1.045 billion to $1.065 billion, representing growth of 4% at the midpoint. With the current momentum, we expect to exit the year at approximately 7% top line growth with a normalized EBITDA of 28%. We expect Applications and Commerce segment growth to be between 8% and 10% for both Q2 and the full year. For core platform, we expect revenue growth 1% to 3% in Q2 and accelerate in the back half of the year to deliver between 2% and 4% for the full year. Q2 normalized EBITDA margin is expected to improve to approximately 25%, with continued acceleration over the back half of the year to deliver full year normalized EBITDA margin of approximately 26%, showing improved operating leverage from the actions previously discussed. I would like to spend a moment bridging our expected 2023 revenue growth to what we believe our strategy and model can produce going forward. Our current guide for the full year is 5% revenue growth at the midpoint. As a reminder, this year's revenue growth rate includes approximately 2 points of FX pressure from last year's bookings and is also impacted by difficult compares in our aftermarket business and the divestiture of certain noncore revenue-generating assets. Looking ahead to next year and beyond, absent those negative impacts and with the momentum we are driving through the strategic initiatives Aman spoke about earlier, including ARPU expansion. Even with the continuation of the current macro environment, there is a path to returning to double-digit top line growth, while remaining committed to delivering our margin expansion and free cash flow targets. We remain disciplined in how and where we spend, with a focus on controlling our costs, optimizing our marketing spend, monitoring headcount and investing in innovation, so that we can strike the right balance between capturing attractive opportunities with delivering value to our shareholders, always with an eye towards balanced long-term growth and profitability. In closing, we have strong confidence in our ability to execute and accelerate our growth. We believe our competitive position and strategic advantages, our diverse product offerings, our strong balance sheet and the consistent and predictable cash flow we generate will position GoDaddy as a leader amongst its peers. Our 21 million customers create the foundation for our resiliency. We remain focused on execution against our strategic priorities, responsibly managing our business and building deeper customer relationships, as we partner alongside entrepreneurs on their journey. With that, we will have Christie Masoner from our Investor Relations team open up the call for questions.

Thanks, Mark. [Operator Instructions] Our first question comes from the line of Matt Pfau from William Blair.

First, wanted to understand the potential acceleration next year a little bit better. So if we look at the business, absent those 3 headwinds that you cited, do we need an acceleration in that business in order to get to double digits? Or is just a normalization of those 3 headwinds sort of enough to get us there?

Thanks, Matt. I'll handle the first part of that, and it sounds like you have a second question, too. So on the bridge, we do see, I would say, easier comps on things like aftermarket coming into the second half of the year, which will start to serve as a tailwind. So normalizing the core platform segment growth, obviously, is in the cards, as this turns around into easier compares in that end of it. Domains is growing at a good pace. And obviously, we're taking some actions on hosting, which will act as a headwind in the back half of the year, but turn into a tailwind as well next year. So a lot of positive momentum. Obviously, Applications and Commerce continues to be the higher growing segment for us. We're seeing a lot of traction on Commerce, and we've talked about the 4 pillars there and them being in the market, and we're really happy with the performance of those. So the ability to bridge to what we see as a path to that double-digit growth we've talked about, we think, starts to take that momentum in 2024.

Yes. And maybe I'll just add, Mark, Matt, that we see, of course, the headwinds go away, but we also have good momentum in the business. Mark already mentioned the growth in A&C, but also the domains business has done well, and demand has been better and improving. So we're very sort of encouraged by the momentum, and that's what we're really talking about.

Great. And then just wanted to ask a follow-up on gross margins. It dipped sequentially in the quarter. I'm guessing that's probably due to payments. So is that true? And how should we think about that trend throughout the year as presumably payments continues to gain traction?

Yes. No doubt, Matt, that we've talked about that product mix will impact our gross margin, and we're focusing on operating margin as we run the business and expansion of that. But as we get into more of the transactional businesses, we can continue to see pressure on the gross margin, but be in that 60 -- low 60s to mid-60s range. As it scales, it becomes more accretive, obviously, we get the leverage on the operating margin, and it'll help us deliver on our normalized EBITDA.

Our next question comes from the line of Trevor Young from Barclays.

Just first one, Mark, on the 1Q segment results. Core platform a bit below guide, A&C a bit ahead. On either of these, could you maybe speak to which areas drove relative under or outperformance, specific versus your expectations? And then on repurchases in the quarter, a bit below run rate over the prior 3 quarters and a bit below what you'd expect given the $1 billion guide. Realized capital allocation strategy was reiterated here, but just wondering if there was something that gave you pause on those repurchases, such as macro or just a conscious effort to kind of bolster cash on hand a bit. Any color there would be appreciated.

Yes. Thanks, Trevor. On core platform, aftermarket in the larger transactions continues to be the area that is uneven for us and becoming difficult to predict. We saw some strength as we were exiting the quarter, but it continues to be uneven, and that pretty much drove our underperformance. So a moderate impact from some of the actions we were taking on integrating the noncore hosting platforms, but I would say aftermarket was probably the area putting us below the original range. On Application and Commerce, the AGV fee is ahead of what we do at a great rate. We're seeing a lot of conversion of our existing customer base, which is driving the GPV, including new customers signing on. So we're really pleased with the momentum there. Really pleased with the attach we're getting around the websites related to our commerce SKUs. So all that has got great momentum in the quarter. We also saw the benefit of the stickiness of -- as our customers in Applications and Commerce are adding more than one product, the retention rates are improving. We've always seen that trend, and now we're seeing it more in Q1 with Commerce. And with that, we're issuing less refunds, and that helped us in the quarter as well that we didn't have to -- we're seeing that stickiness start to take place. So we're seeing -- between the 2 segments, I would say, as we're integrating the core hosting assets, we are seeing some headwinds around retention of, what I would say, customers with more in the area of one product, but we are seeing a pickup in A&C of the customers with multiple products and multiple services, which is helping us. On capital allocation, sorry, I almost forgot there was 2 parts to that, nothing to call out. We are ahead of schedule at the end of the year. We came into the year with the $1 billion target. That hasn't changed. There hasn't been any changes to our capital allocation strategy. And I would still put in there a target of $1 billion for the year.

Our next question comes from the line of John Byun from Jefferies on for Brent Hill.

Okay. I think it was double muted. So good sequential improvement in GPV from Q4 from $760 million to $1 billion. Wondering, in terms of the driver, was there anything more besides, I guess, the existing base converting pretty well? And for existing customers, would those be switching from other payment solutions? And if so, how do you convince them to do so, other than pricing?

Yes. John, thanks for that question. Mark has talked about the pillars of revenue for Commerce, and we actually saw goodness across all of them. But selling into our existing base of customers was the largest driver of this acceleration and growth, and we continue to be very excited about it. In terms of how that sales cycle works, our customers have a fantastic relationship with GoDaddy. And we're bringing not just sort of the surprise and delight element of, hey, you have this relationship with GoDaddy and we have more to offer, we also have great pricing for them. So when you put together the relationship, all -- the basket of sort of one-stop shop and the pricing, that leads to them switching over from other folks. And we -- this is the -- of course, we're excited about payable domains, and that did its part and resellers did its part. And everyone -- every piece helped, but the prime focus for us is selling into our base. We're seeing goodness there. We're going to keep attacking that. And from what we can see, it seems to be a bit of a unique competitive advantage for GoDaddy because of the relationships we have. So we absolutely are continuing on path on that.

Great. And maybe one follow-up. On the GMV, it was flat quarter-to-quarter. I don't know if there was -- how that was versus your expectation, whether you expected any seasonality or just increase from continued adoption.

Yes. GMV as a whole, if you remember, is the broader sort of set of customers we have also inherited from Poynt, and it tends to follow seasonality of the business, Q4 versus Q1, and nothing new to sort of report that.

Our next question comes from the line of Clarke Jeffries from Piper Sandler.

First one, I think it's for Mark, I was hoping you could maybe give us some color on that exit rate of 28% EBITDA margins, how we might be able to think about that between the 2 segments, kind of footing the disclosures you gave on A& C, core platform and overhead.

Yes. Thanks, Clarke. So yes, 28%, and we talked about the actions we're taking in the first half that will help benefit as we get through the second half of the year and obviously exit the year at a strong run rate there of 7% and 28% of normalized EBITDA margins. A good way to look at it is as we're going through the core platform actions that we've taken around the restructuring and the integration of those platforms into the GoDaddy technology stack, there is going to be some pressure on our retention rates. And we're seeing customers that don't have a higher propensity to spend with us are making that decision, as we're doing the transfer over to the GoDaddy stack. On the flip side, the -- being on the GoDaddy stack and having Applications and Commerce and our ability for our Care Guides to engage our customer at a better level is really showing that we're getting more customers signing on to more than one product right now, which, again, pushes our retention rates higher. It pushes our ARPU higher. We're seeing a lot of benefit of that. And A&C comes at a higher margin. So we're, in essence, gaining more customers at the higher margin level, while we're seeing pressure on the core platform. Those are the lower margin or lower calorie customers, I would say. And therefore, we're seeing the benefit of the mix start to improve and help us get momentum into the future years -- or into 2024. So hopefully, that helps kind of how we're looking at it.

Yes. And maybe just very quickly, Clarke, if I can add. If you look at items like marketing spend, obviously, I've talked about it a lot over the last couple of years, but we continue to sort of make our ability to measure return on ad spend better and better globally. And what we're seeing is good gross ads, good demand coming to the site, and the lowest marketing spend sort of as a percentage of revenue that we've had in a while. So obviously, that continues to help us as well apart from sort of the actions that Mark talked about, which are more on the people side.

Perfect. And then just one follow-up. I know you've mentioned a couple of times the aftermarket. I just kind of want to be clear on -- compared to the guide for core platform, is where the result came in compared to the guide maybe either at the midpoint or the low point completely describable by aftermarket? Or were there any other factors maybe accelerated movement in the hosting segment that might have also been a contributor there? Helping to clarify, that would be great.

Yes, yes. You just called it. I think the primarily -- primary driver was aftermarket and the continued absence of the large transactions. Just as a reminder, we don't set the prices in the aftermarket. That's a buyer and seller agreement, and we kind of facilitate the transaction between 2. So we're still seeing that disconnect in the market related to the buyer and seller agreeing, which shows up in the larger transactions. So it's primary -- primarily the cause of the core platform missing the guide. There is a little bit on the hosting, no doubt. I don't want to say it's 100% because there is some -- as we are migrating some of the noncore assets into the GoDaddy technology stack, we have seen some pressure there. But I would say aftermarket was primary.

Our next question comes from the line of Aaron Kessler from Raymond James.

Great. A couple of questions. Maybe just first on the macro. I mean, outside of aftermarket, can you just maybe talk to the top of the funnel traffic you're seeing kind of gross sub additions? And then just how should we think maybe about the ARPU outlook for '23? Should we think about it similar to Q1? And just maybe talk about the adoption of higher ASP solutions that you're seeing as well.

Yes. Thanks, Aaron. Maybe I'll just take the top of the funnel. And Mark, if you want to touch on ARPU. So like I started to say earlier, top of the funnel, I think we see good demand year-over-year. We see good gross adds, and we're pretty happy with what we're seeing. And as we had talked about last quarter as well a bit, the momentum seemed to improve through the quarter. So our customers, by just nature, tend to be resilient and tend to be a creative group. So -- and we serve them, like I talked about as well, but it does seem to be showing up in the numbers to a good extent as well. So we remain optimistic about the rest of the year. And of course, we'll keep you updated on it with Mark on ARPU.