GoDaddy Inc. (GDDY) Earnings Call Transcript

All right. Thanks, everyone, for being here. Got Mark McCaffrey, CFO of GoDaddy, up next. I'm really looking forward to this conversation. Mark, thanks so much for being here.

As am I.

Great. We'll have some mics, if anyone has any questions towards the end or really want to jump in, just raise your hands. I've got plenty for you, Mark. Okay. So I would say broadly, the biggest theme in the space over the past couple of months, probably longer -- a little bit longer than that has just been the impact of Gen AI Vibe coating in particular, and how this is going to change the world of website building, came up at earnings. We talked about it a little bit, but I want to kind of expand on that. And what are you guys seeing today with Gen AI? We'll talk about your products, obviously, but this theme of you can just kind of talk a website into creation, how that -- what that opportunity is for you? Is it a risk around business model? What are you seeing today? Just start with that at a high level, given the importance that we're seeing?

Yes. Absolutely. And I'll start with -- this is exciting. AI is really changing the game and the velocity at which it's moving and creating value is extraordinary. And we feel we are in a fantastic position to not only take advantage of things like website building, things like running a business, even the domain space in and of itself as people gather more of their presence on the Internet is extraordinary. Now we introduced Airo Out 2 years ago, almost 2 years ago to the day when we started talking about it. I think it may have been hinted here with you back then.

I remember.

And look at the impact it's had on us. Look at our ability to attract high-intent customers, look at our ability to get to higher average order sales. Look at the success our customers are having now using one application being able to drive their business and their growth. And remember, GoDaddy focuses on the micro business, the mom-and-pop shop, the sole entrepreneur, maybe up to 9, 10 employees, but that's even a large customer for us. And their ability to do more with tools that are helping them be better at what they do is just evolving at a rapid pace. Airo introduced their ability to now do things seamlessly to do things that they couldn't do before without having to hire employees now they could do on their own. And when you start thinking about the next version of this, ask Airo out, which we've talked about, we'll introduce at our next investor dinner coming up. Now you're getting to helping them with predictability, with solving solutions, with insights that how do they go to market versus helping them go to market where they want to, it suggests where they might be able to grow their business. So the evolution of this in our market is extraordinary. And look, when you take our scale, our brand, our technology, our customer care, you take what I've always said, you have to own the customer relationship and you have to be able to innovate. You put that all into where AI is taking this and you look at the technology we have and the data we have around turning this into useful insights for our customer group, we think it's amazing. And we think this is a huge opportunity for us going forward. And we can't wait for people to see Ask Airo.

Okay. Anything you could expand on Ask Airo and how it works and the flow for customers?

Well, now it becomes more conversational. And now it becomes more -- we went from demand -- or sorry, discovery to engagement to monetization. The engagement by the customer, there was things offered up to them based on what they were doing. Now it expands that out even further as to, hey, have you thought about doing this? Have you thought about doing this price? What about this market? Here's maybe a channel you can consider to grow. So it gets more into this predictability based on the data it's seeing versus, I would say, just addressing the immediate need right in front of you. I don't want to take too much away, but it should.

It's not rolled out yet.

It's not rolled out. It's in testing. We're getting very, very positive feedback on it. By investor dinner, I think you're going to really appreciate the demo. .

Okay. And so just to tie up this LLM vibe coding conversation before we move on. So there has been or at least reported a kind of fast-growing ARR from some of these new entrants and smaller platforms. It sounds like you're not seeing any impact to your business or your customer at all from that, and it's kind of a different swim lane. Is that fair?

Yes, it's a fair statement. Now remember, we're a broader business than just websites. Websites is a part of our business, but we have domains, we have e-mails, we have commerce. So you take that all in its entirety, and we haven't seen any shift or variation in our ability to attract traffic into the front of our funnel, the attach we're seeing, average order size. All that momentum continues. There's no doubt that there is an LLM and a vibe coding going on. And I think at the enterprise level, it's helping things like engineers be more efficient in how they're working. So I don't want to take away, but that seems to be a different business model than ours. And ours is more focused on that entrepreneur who wants to get up and running, not necessarily the engineer who wants to be coding faster, right? The velocity of which the products are going to be produced, no doubt is going to change significantly as there's more efficiencies related to all this technology. Ultimately, it has to give value to the customer and the customer group in order to support that valuation going back. And that's why we think we're in a great spot.

Got it. Okay. So Airo has been talked about driving conversion, retention and product attach. So maybe if we could take kind of Airo and Airo Plus concurrently, right? So on the attach and the monetization, conversion attach monetization. And any KPIs, color you can share on what you're seeing in retention on product attach? And then any updates on the Airo Plus monetization side?

Yes. So the stat we gave out at Q2 was we're seeing the customers spend who spend more than $500 with us increased in 2024 from 2023, close to 20%. And we're seeing that continued momentum. And what's driving that momentum is the attach at the front of the funnel, the average order size going up, all that is driving that $500 customer growing now. I think it's close to 9% for us, but continuing to grow. And that's a significant contributor to bookings for us, right? That is a -- that drives a lot of growth in and of itself. Now that customer, what's unique about that customer is the retention rate on that customer is near perfect. So I think the lawyers would not let me say 100%, but near perfect was a close language I could get to that appeals them. But when you think about that in the early stage that we just had Airo into market in 2024 and now into 2025, and we're seeing the strength of that cohort and that ability to retain them. Now our average retention is around 85% for our customers. When you think about the ability to move that number up over time, that's a significant driver of value. We have a great model. Like our North Star is always free cash flow, but the ability to compound year after year and just grow that base and grow that ability to retain that customer, get more attach out of them, get more dollars. I mean if you estimate an average entrepreneur maybe spends $2,000 a year on their website present in its entirety. We started with domain getting $20 of that $2,000. Now we're slowly getting that ARPU up to around $200 and $200-plus and continues to grow. But there is still room to grow on the overall spend for that entrepreneur in that market that can drive our growth going forward. So again, Airo has allowed us to accelerate that process and the ease of use around getting to those second and even third products has significantly improved into 2024, and we continue that momentum into 2025.

Okay. On the landing page that Airo creates when you buy a domain, are you starting to see more of those landing pages convert into full operational websites?

Yes. So we're seeing them go at a good rate, right? And we -- you're talking about the coming soon page. We saw a significant uptick when people came in and the coming soon page. Now we're seeing as they are renewing in that cycle, they're more likely to convert to a website. Now it doesn't get counted as a second product for us until it converts to a fully functional website because the landing page is offered free as part of that process. So it doesn't -- for us, the second product has to be a paid product. That's how we define it. So when we talk about getting to that second product attached, we're seeing websites are going up. Now sometimes it's e-mail, sometimes it's websites. I don't want to say it's one specific path. But that conversion to that second product is definitely happening no matter which direction they go at a faster pace. Sometimes it's logos. Logos has become very popular.

Okay. On Airo Plus, I know it's earlier, but any kind of early signals that you're seeing there?

Good momentum. I would classify it still in the test phase, and we'll talk about it more as we get into 2026. We're testing through the bundles. The key to what we put into market beginning of the year was the logo, was part of the Airo Plus bundle. And the logo was a new on-ramp for us, so we wanted to use something that would drag people into Airo Plus and logos seem like the place to do it. Now once you buy the logo in Airo Plus, you get it, right? We -- it's not a subscription. You get that logo in and of itself. We don't take it back if you don't renew. The trick was to bundle products with the logo that they would renew the subscription. And that's where we're still in the experimental phase of making sure that the customers are using and engaging the additional technology in Airo Plus so that they do convert into that retention, it takes a little while to get to the retention and we got to make sure that we're seeing the right signals. It's positive, but nothing to -- we haven't added anything into our current model to incrementally account for Airo Plus contributing at this point.

Got it. Okay. Well, I mean, in terms of your guidance, Airo also, there's nothing built in...

There's nothing built in. We are seeing some great signs coming into 2025, like I said, of the average order size. But we're a big company, and these kind of manifest themselves slowly over time. At the end of the day, I always say when you see our free cash flow growth, you know the strength of the momentum in and of itself because our ability to generate free cash flow is premised on all these things moving in this direction. And as long as we see that momentum, we see health in our free cash flow. That's why we felt good coming out of Q2 of raising our guidance on the free cash flow because that momentum is manifesting itself.

Okay. Tying free cash flow and AI together for a second. Just -- so on the internal efficiency side, I think you've talked about it from the care organization with Gabby and then produce product development, being able to develop things faster. What are you seeing? And is that -- does -- has Gen AI created an incremental potential benefit to margins over time?

Yes. So I think conceptually, you have to say it's going to contribute to margin improvement over time. There is no doubt that the productivity aspects of using the AI tools is going to come into play. It's -- I would say -- and this is, I think, a general comment, not to GoDaddy comment. People are starting to see it, but don't know where the ending point of that productivity gains are going to be. So it's hard to say, oh my God, by 2028, this is going to add 3 points of margin for me there's no doubt it's going to show upside to margin improvements. And we already are very efficient in and of itself. But when you look to the out years, you have to start thinking about the fact that this will improve productivity. It will improve things like research and development around technology. We've already talked about it in our care organization. We've already talked about the adoption of it in our marketing spend and how we look at it and how we use -- first, it was machine learning and now it's AI to look at the returns where we spend our marketing dollars. But then you start to look at the efficiencies around G&A. You start to look at the efficiencies around some of the simple things like are you getting the right insurance rate, your ability to do analysis becomes better, your ability to find efficiencies using these tools there. This is a step function. We've only seen this a few times in the technology industry, and this is going to be one of them. It is going to change the game and create a lot more ability to analyze, be faster, the velocity is going to pick up. And no doubt the productivity is going to pick up as well.

Okay. Great. I have a few more AI questions, but I think let's maybe move on for a little bit. And if we have time, we can...

Whatever -- you control.

All right. Let's -- you hit on customer growth. I think other than what's -- how Gen AI impacts your business? This has been probably the biggest topic from investors, but it's focal point. And I think part of what people are trying to understand is you guys are talking about getting back to customer growth still this year. That's what you've been talking about. The last earnings, you talked about excluding some of the divestitures and I think it was like the migration impacts. Maybe you could elaborate on that. But excluding those, you've seen customer growth in the past few months. At the same time, and you talked about it right now, you're really focusing on that higher end, higher converting multiproduct customer more than the kind of like the broader funnel. I think maybe I'm not characterizing correctly. So can you just talk about your strategy, what you're seeing from customer growth, where you're really focused? And how can you get investors to finally feel comfortable about where you are with your customer?

Yes. It's interesting times. So I'll start with the basic premise. Our strategy is working. We put forth a strategy that said we're going after high-intent customers and just not customer growth. And with that, a couple of years ago, we started to even take actions to not focus on customer growth and get ourselves out of what we call low-calorie customers that really weren't doing anything with a domain name or something they had bought through an acquisition years ago. That was a conscious decision by us. There was a conscious decision by us to also turn off discounting at the front of our funnel because that attracted customers who are just going to come in for the price. And then once you try to get them to the regular price, they were going to churn out at the back end. So we cut off discounting at the front of our funnel.

The discounting was, sorry, just on the domain side or...

On the domain side, right? And it was primarily on the domain side. I'm sure there was a few others in there, but it was primarily on the domain side. And with that, our strategy started to work. We saw customers coming in, our average order size going up, attaching to a second product because they were coming in with intent. Again, Arrow was facilitating that, which was part of our strategy. And that's where we started to see the growth in the customers with $500. And that $500 mark was something that goes back to our IPO and has always been the measure of the high-intent customer for us. So we know the strategy is working. Look at the movement in that number in and of itself. Now -- with that and those decisions, obviously, our total customer number has been all over the place. And it's hard to -- but if I wanted to just grow customers, I could do that. I could turn on the discounting at the top of the funnel. I could do all these behaviors that would drive up my customer number, but would not be consistent with our strategy and ultimately doesn't generate the free cash flow over time that we talk about. So we feel really good about where we are today. And what I always come back to is everybody wants to focus on this number. Can you just look at the totality of the number of customers we have, period, it is over 20 million. That is a phenomenal statement in and of itself that we have over 20 million customers and the fact that we can make decisions that drive us towards our North Star and not have to worry about that 20 million-plus number puts us a huge, huge advantage. where others have to go grow customers and bring them in, we're choosing which customers we want to bring in because we want to serve that entrepreneur that is coming in to do a business that has some purpose that wants to be with us and is going to grow that retention rate over time.

Got it. But any change to the getting back to customer growth?

No, no, there's no change in what I'm saying. And my point here being our strategy isn't to drive that number. It will naturally drive itself because eventually, all the stuff we did...

Right. I mean if you're growing those $500 a year, customers 20% ...

Eventually, after you get beyond the dispositions, the migrations and everything else we did, it returns to growth. But we're not doing anything in particular to make sure we're driving that. We're going for that $500-plus customer.

Okay. Got it. So let's shift to pricing and bundling, which has been a big part of, I think, so Arrow was one and then the pricing and bundling strategy on getting -- growing that $500 a year, the high-end multiproduct customer. You kind of shifted to this -- to the approach around customer cohorts versus product. And so where are you with that? What's -- how much more room is there with the pricing and bundling opportunity? Where exactly are you focused right now? Just spend a little bit of time on that.

Yes. So this is a cycle now for us. We saw it launch at the end of '23, and you saw the impact of the first cycle in 2024 around pricing and bundling. It drove the momentum in our A&C segment, which was fantastic. And now what you're seeing is the growth in the retention and the renewal rates into 2025 as that cohort starts to renew at a better rate than the previous cohorts before we did pricing and bundling. So what we do now is at the end of '24, we experimented with several more bundles out there, and we launched them in -- now not all of them are A&C. You're starting to see the benefits of some of it in the core platform in and of itself because we created bundles around the domain. And we saw the momentum start to take place in the second quarter around some of those bundles that were launched at the beginning of the year. So now what will happen is that will compound on itself next year. So now you'll have 2 cohorts. So at the end of this year, we'll start to experiment with next year's bundles. And we'll start to look at what we're going to put into market. We'll experiment around 4 or 5 bundles in and of itself. And then based on what we see working, we'll put those into market on January 1. So this is a multi-cycle. Now where it gets really fun, interesting is as you start to be cohort versus product specific on bundling, you almost branch off into multiple different layers because every time someone elects into a bundle, you've created a new cohort. So now next year, you can target that cohort with another bundle and then you can go after the predecessor cohorts that didn't bundle and use the same bundle with them and see now if they -- that bundle sticks. So it's this compelling compounding process that we have. And now that we have a technology stack that is consolidated and everything sticks together, the ability to bundle based on the value we can give the customers is unlimited. It's just driven by what we think the customers are going to pay for based on the value they're getting. So we can continue to look at, do we do this with this, do we do this? Do we add on that? Do we put this there? And that's the experiment phase, right, right? Everything we do, we experiment with. We see what the reaction is. If the reaction is stat sig, I think, is what we call it, sorry, early. coffee. Stat sig, then we know we have the ability to launch that into market, and we'll see the incremental benefit of that going forward.