GoDaddy Inc. (GDDY) Earnings Call Transcript

Good morning, everyone. My name is Alexei Gogolev, Head of JPMorgan Vertical software team. And today, I'm delighted to welcome back our favorite people from GoDaddy, CEO, Aman Bhutani; and CFO, Mark McCaffrey. Gentlemen, welcome. And maybe if we could begin our discussion with sort of a broader top of the funnel view. What has been so far the dynamic considering somewhat softer formation data that we've seen in the market. What has been the view so far for GoDaddy customers and your vision for 2024?

Yes. Thanks for having us. One of the exciting things about GoDaddy is that people come to GoDaddy when they think of their ideas, right? That's when they want to lock in that domain name, because they know they want that piece of real estate on the Internet, and they don't want to give it up to somebody else. So while there are lots of macro metrics that we try to compare our business to, this idea that people come to us first has continued to be consistent for GoDaddy. And what we see in 2024 is a customer that has always been resilient, has always been bullish about their own business, but now feels a bit better about the macro as well. So we think of that as stability coming into our business, which is traffic coming into our side, customers having good, strong intent, customers exploring a little higher value domain. That's a little bit of a cute metric, which is, when customers come in, are they trying to buy just the cheapest thing they can find, or are they willing to spend a little bit more? And we see that little bit more spender, which shows that they feel more confident, they have greater intent, and likely they're going to do more with the domain than maybe a few quarters ago.

And statistically, we like to go to is, customers are going to that second product 25% faster than they were 4 years ago. And that's that customer that's coming in with intent. And that's what we're seeing in that stable environment of demand at the front of the funnel right now.

That's actually what I wanted to ask, Mark. Thank you for highlighting that, because like this change in, I guess, how entrepreneurs are approaching the GoDaddy story, the business formation, you've been adding so many new products. So can you elaborate how this has evolved over the years? Like how you're seeing the customer adopt more and more products on your platform?

Yes. Of course, traditionally, GoDaddy thought of more as a domains business and then adding hosting. But we're pretty excited about the Applications & Commerce segment. We've got the productivity solution, which is just doing very, very well with us, and the website solutions, where we have one of the best website builders on the market. right? What customers really need to know about GoDaddy is that GoDaddy has all of this offering. And of course, we have a beginning point in Commerce and Payments as well. And that's what we're trying to do with our product called Airo. Airo is an experience that allows our customers to discover the breadth of products GoDaddy offers, whether that discovery happens through a TV ad or it happens through their engagement on our website, where they're just there to do something else, and in a very clean way, Airo appears and tries to help them with it and gets them sort of used to the idea that Airo exposes them to a lot more. Once the customer has this idea of having discovered the breadth of GoDaddy products, our goal is to engage them with those products. And what Airo does, it preconfigures pretty much everything it puts forward. If Airo is going to put forward a marketing calendar for social media for 30 days, Airo is not only going to line that up to the customer's exact needs on certain days, it's going to write the message, and it's going to prompt and say, "Do you want me to post this? If Airo is going to build a logo, it's going to build the whole thing and then give them 10 options and allow them to edit it and change it, right? Because the idea is that you just make it seamless for the customer to engage with it, to try it out. And then the goal is, once we have discovery and engagement, that we're going to deploy monetization methods against it, so that we can monetize in various different ways this sort of customer that has an expanded experience with us, that is getting more value with GoDaddy.

And what we see and we saw in Q1 that we've talked about is our bundling efforts, which is pre-Airo. Airo, we're still in the experimental stage around monetization. So when we talk about our guide and where we're going, we have not included any data points around Airo. But what gives us a lot of confidence is we're seeing the customers bundle and we're seeing their attraction to better pricing when they're getting more value out of it. And you take Airo on top of that as an accelerator. Again, Airo is an experience, not a product in and of itself, and Airo makes that more efficient for them to look at what they can get value out of quicker, and then it all started with the consolidation of our technology stack last year.

I wanted to ask about the recent dynamics and changes in the U.S. social media. Do you think website builders could benefit from some of those bans on certain social media platforms in the U.S.? I mean, would you expect consumers and those small SMB businesses to maybe build more of their initial digital exposure on websites?

Yes. Our customers tend to use whichever platform that they can get comfortable with. And that includes social media platforms and transactional marketing platforms. But at the end of the day, it doesn't matter where they start. Most customers want to have some sort of web presence that is unique to them, right? They ultimately want to bring their customers into their store, whether it's a physical store or their virtual store, right, and provide that wholesome experience. And for that reason, we believe that customers continue to invest in a presence product that kind of builds their brand and their experience just the way they want it, right? In terms of whether they would use more or less, I think we see this path consistently for the last, well, over a decade at least of customers wanting their own experience, so we think it's going to continue to be there.

And, I mean, your Commerce exposure has been growing and phenomenal results there. I was wondering if you have any view on how the customer acquisition dynamic may evolve now that one of the bigger competitors in the space, Shopify, talked about their intentions to invest more into customer acquisition and marketing.

Yes. GoDaddy has a differentiated go-to-market here than anybody else in the market. GoDaddy is targeting its Payments and Commerce offering to its existing base of customers. And we've maintained that consistently. And we've shared that going into the base and penetration in the base has been the largest driver of our Payments and Commerce growth, right? That annualized GPV hitting the $2 billion milestone last quarter. The existing base has been the largest contributor to that fantastic result. So when we think about that, we think we have a great relationship with these customers, and it's constantly proven, because when they call care, when they have a problem, we solve that problem very, very well. We believe that we are able to offer them a one-stop shop, where they're not just sort of delighted to see that GoDaddy has these range of products, they're delighted that it comes together in a manner that's really simple for them. And then, in payments, we have the best value for money, really competitive pricing. And it's those 3 things, when they go together, it really works to convert our base and get that penetration. So from our view, we have a very focused strategy for Payments and Commerce. It allows us to have competitive differentiation with a low CAC, with great pricing, fantastic experience, and relationship with the customer, and we're going to continue to sort of invest behind that.

Yes. To those who are hearing the GoDaddy story maybe for the first time, just a very important point here. Our customer base -- a lot of people talk about small businesses. Our customer base is focused on micro businesses, the mom-and-pop shops, the entrepreneurs. That is something we do fantastic, we're known for. We can continue to be able to penetrate. We have 21 million customers, and our ability to sell into that base as well as attract new entrepreneurs has been our sweet spot and will continue to be. So when others talk about markets and small businesses, just differentiate between what we do best, which is the mom-and-pop shop, the underdog, those who want to get to market.

And Mark, to double-click on that, you've reported phenomenal bookings in the first quarter for A&C.

Thank you for that adjective, but yes...

Yes, 22%. Can you maybe talk about the components that drove such dynamic? So you've mentioned things like hardware, payments, and software.

Yes. And again, we always talk about the 2-plus products for us that is a very key point, because it gets us to the LTV 83x, it gets our retention rates up. That materializes within our A&C segment. That is normally the second plus, third plus products. And what we're seeing today is the efforts of our bundling. Now while we saw double-digit growth across all components of A&C, great momentum, great strength there, productivity led the charge, and we saw, the ability to bundle additional functionality with our productivity products was phenomenal. And we saw it take place in 2 aspects, not only for new customers coming in, but also in the renewal cycle that we were able to offer a bundle and we saw that as a very attractive component to our customers who are renewing. And again, this was one renewal cycle in Q1. We'll have other renewal cycles as they come up. But it gives us a lot of confidence that customers, if they see value, will bundle multiple products. When we get to that second plus product, our retention rates go up from our already fantastic 85% retention rates. When we get to a third product, we pretty much have a customer for life. And that's the dynamic that drives that 83x over time. But you're seeing the materialization of all of the efforts we put into place last year to allow for the bundling efforts that now can go out to the customers and provide that value.

And then maybe it's also good to say that one of the things about our pricing and bundling initiative is that it really does focus on the value the customer has. So this is a sophisticated way of doing value-based pricing and bundling. And we really look at who the customer is, what products they have, what are they using? And we feed a lot of attributes into an algorithm that allows us to just optimize both for the customer and for GoDaddy.

And Aman, you talked about Airo. Great product. Could you maybe talk about the attach of that product? What it has been doing so far? Obviously, very early days, but the progress would be great.

Yes. It's very early days. And right now what we're really focused on is the time lines and the attach rates and engagement rates for Airo, and this is before we get to monetization. Where we are today is that in the first step, which is discovery, our existing base of customers is starting to see Airo. And the way they see it is not just through us e-mailing them, but actually within the experience they have. So if they come in to GoDaddy to take an action, to do something else for another product, Airo will very cleanly sort of appear to help them. If they adopt it, it will then expose them to a whole set of products that we call cards that suddenly help the customer discover that, oh, actually, I pulled on this little thing and I got all these things with it, right? We go into our base of customers in cohorts. It's not in one shot. We've taken the same approach with Commerce and productivity in the past. So we know that as we go, we want to iterate that experience and make it better and better. So with discovery on its way, we're starting to work engagement. It's not exactly what we call attach. What it's really focused on is getting the customers to use the products that we have. And we're seeing good engagement for our customers with the Airo products. And we're able to optimize it very quickly. For example, Airo builds a great website for our customers. And initially, we would build them 1 website and somebody -- product manager said, maybe we should build them more and just give them choices and we went up to building 13 of them, and then we found that, that's too many. So we're back down to 8. But the idea is just give customers more and more choice and see what they engage with, and that's what we're excited about, being able to give them that choice. And then we know with that engagement, we'll have monetization options. And we are testing certain monetization options, but it's still ramping.

And how does the Airo product differentiate from some of your competitors?

I think Airo brings a level of simplicity that's really different. And the way we're making it intuitive, we call it almost magical, right? When a customer buys a domain and they just want an e-mail address, for our customer, it feels magical that Airo creates the e-mail address for them, and not just that there's no configuration, that it actually tells them that you should have this e-mail. Or when Airo creates a logo, you see that surprise in customers when we do live sessions with them. And they're like, "How did it know that this is the business I'm in and that I would like this logo. This is perfect." And the way we know or the way AI knows is that GoDaddy has the largest set of data around domains. So we actually have an AI model that looks at the domain name that you bought, tries to determine what you're going to do with it, what business you're going to be in, and then generates a logo based on that, right? And it's the power of that data and being able to do it instantly, right, that creates that magical feeling for our customers. And that remains differentiated in the market. And it's not something that is new to GoDaddy. It's part of our core ethos. We call this a guided experience. If a customer wants to build a logo, it's not just about putting in a prompt and getting an image back. It's about guiding that customer to build the best logo for them, so that it feels personal for them. So that it's easy and they can just take the first one that the tool generated, or they can change it and really make it their own, and that's powerful.

And keep in mind, 27 years of history, 21 million customers, 14 million interactions with our customer base annually, 1.2 billion signals we get from them daily. That's a lot of data to create an experience that goes back to the customer and has an idea of what their needs are, and that just keeps building on itself. The logo AI was just remarkable. We started it, and then it got better and better the more people clicked on it, and we could see it was producing premium logos. And now you get into, okay, now you can start to level out. Is there an opportunity on the premium logos going forward? That's the beauty of the experience around Airo.

And Mark, quite a lot of investment already made into this incredible technology, but the Applications & Commerce division is still very profitable, more profitable than your core operation. What do you think the long-term EBITDA margin potential is for that segment?

Well, we've talked about it on an overall company basis. The 3 things that contribute to our normalized EBITDA growth are the growth in A&C, because it is a higher margin point. I think we're at 42% right now. And then we have opportunities around extending our global footprint to our employee base as well as other operational efficiencies. So what we haven't guided specifically to what the segment long-term margins are, it’s pretty clear that the acceleration of A&C and the growth in A&C will continue to contribute to our growth in our overall normalized EBITDA margins as a company. And let's not forget, for us, on a 1:1 conversion ratio, that's free cash flow for us, right? And that continues to generate our North Star and continues to allow us to push towards that overall. So A&C is a primary growth driver of that entire equation.

Right. And sort of switching to your core business, Aman, maybe talk a little bit about the demand in domains, both primary and secondary markets.

Yes. On the primary market, domains has been stable and our share has been stable, and we continue to see opportunities to put a better and better mix of domain names in front of customers. We have the best search in domains, we believe, by far. We have the most amount of data. We sell 500 TLDs to what the domain names end with. And we have the richest mix in terms of what we offer our customers. So when we think about that product mix, when we think about that experience, we continue to see fantastic opportunity. And customers come and search on GoDaddy and find great experiences. We've now taken that to the next step over the last few months, where now we're doing domain search that's based not just on ML and AI, but it uses a mix of ML/AI and generative AI. And that's the path that we see over the next year is evolution of that path, where what you're searching for is not token-based search or a prompt-based search. It can be either/or. And the data from GoDaddy mixed with, let's say, LLM data produces a domain name that a customer couldn't even have imagined. And we're starting to see that already, where when customers type in descriptions of what they want to do, the names that come back are just completely different. And that's an exciting part of the domains business for us, which is reinventing search of domains sort of all over again, having done it 25, 27 years ago. So that's super exciting. The aftermarket business, I'm sure Mark wanted to talk about it, doing great, and it's hard to tag the aftermarket to the macro. But when folks feel better, when customers feel better, we do see them coming into the primary market and buying a secondary market domain. And the way that works is that we have real-time models that, based on the search, pull domains from the secondary market into the server, which is the search results, and offer it at a buy now price. And we've seen a little bit of an uptick in what customers are choosing, which tells me that they're more bullish, not just about their business, but the general macro overall on the aftermarket.

Yes. And we've talked about the aftermarket. We're the largest player in the aftermarket. We see a stable growing of the business at the, I would say, steady volumes at the lower level, and they continue to grow, and that's what we use to guide towards our aftermarket and the growth going out there. But from time to time, we see larger transactions come in. And we can't predict them. We generally don't have a lot of forewarning around them. But when they hit, they can add a boost to any given quarter. And what was nice in Q1 is we saw the return of those large transactions that we hadn't seen in 2023 within the quarter. So that helped the aftermarket growth at about 12%. But more importantly, we continue to see that stabilized growth at the lower level, which means people are really looking for specific domain names and willing to pay in a secondary market to get them, which I do think goes to the confidence of the macroeconomic environment. You'll pay a little bit more if you're more confident that you're going to get that back, because you have an intent to use that domain name. And all those are just -- we're the biggest domain player. Having the largest secondary market is very important to us. And even our competitors come in and use that secondary market. So again, it's a large area, a little bit unpredictable, but we're happy to see some of the return of the transactions that we're missing in 2023.

And Mark, how sustainable do you think that leading market share in the domains business is longer term? Like this 20%, it's pretty significant market share.

Yes. I always come back to, hey, we've been there and we're still there, and we'll continue to be there.

Are you seeing any kind of change in incremental competition?