GoDaddy Inc. (GDDY) Earnings Call Transcript & Summary

Good afternoon, everyone. Welcome to the Oppenheimer Technology Conference. I'm Ken Wong, software analyst at Oppenheimer. Very pleased to have with us the GoDaddy team, Mark McCaffrey, CFO; and Christie Masoner, Head of IR. Welcome.

Thanks, Ken.

And for everyone in attendance, this is a fireside chat format. I will run through a slew of questions. We will hold some time at the end for some questions. You can shoot those into the Summitcast portal. I already see some of you guys have queued up. So that's fantastic. And then I will run through those questions and then circle back to some of my own if there's additional time. So with that, Mark, welcome. I think most of the audience is aware of GoDaddy, but to the extent that we have some newcomers. Just maybe a quick background on GoDaddy, what you guys did.

Yes. So to put it simply, we are where people come to start their ideas, right? We allow people to launch Idea and create a presence most often with -- starting with a domain name, but then it include things like website, e-mails, commerce and basically gives them the ability to whatever their passion is, whatever their side hustle is, whatever their dream is, get it online, get it up and running and get them making money now. And it's not always about making money. Sometimes it's best sharing content, sometimes other avenues that it will take. But we focus on the micro businesses and the micro businesses to us are the small end of small businesses. So it could be a 1-person shop, it could be 2 or 3 people but at the high end of our, I would say, target audiences somewhere around 7 to 10 employees, and I do say that's the high end. And I say that to differentiate us. We have over 20 million customers. 20 million. We've been around for 30 years. We know this customer base very well. This is not the enterprise. This is the 1- or 2-seat type environment. This is the underdog who's trying to compete with much bigger players out there and trying to do that not only through offering products and services in the local market, but also trying to extend that out to other markets that are now available and may not have been available in the past. So it has a tendency to be a very passionate customer group of very, I would say, resilient. I like to use the word [indiscernible] at times, but Christie always corrects me that I shouldn't call our customers gritty. It has a different connotation to it. The way we make money, it's about the LTV equation, we always talk about. We have a strong brand in the domains. It's the top of the funnel. [indiscernible] our customers attached to that second product. We have a strong overall retention rate of 85% for our customer base, which is fantastic. But when our customers get to a second product, we even go up higher than that. They get to a third product. We have a customer almost for life, that LTV equation, the slide we've shared in the past if you're just a domain holder with us, it's 1x. If you get all the way to commerce, that LTV equation goes to 83x. And we will be having an investor event on December 1 here, and we're going to be sharing the new metrics and what that looks like for the LTV equation. But the underlying durability of the model and our ability to generate free cash flow and continue to compound on that free cash flow. Those underlying principles still remain intact even as we're transforming the company to our new Airo Agentic AI platform. So I'll stop there. I can keep going, obviously, but I do want to once the question.

Yes, I'll just add to the competitive advantages, of course, that we have is we're one of the most trusted brands and small businesses with the highest brand awareness for over 3 decades like Mark said with a breadth of customers, a distribution advantage, a broad set of solutions that help micro small businesses get started and converse with their customers, sell to their customers collect payment and a care organization that knows our customers and small businesses better than anyone. And you've heard us talk a lot about Airo, which is our Agentic operating system for small businesses. It's the centerpiece of our largest initiative as we transition into an AI first platform.

Fantastic. And that's a perfect segue into my next question. So the -- the business is transitioning all of tech seems to be transitioning. You guys have Airo front and center would love kind of a quick primer kind of what is [indiscernible] how is that differentiated from what you guys are offering today and kind of why you feel comfortable that is the future of GoDaddy?

Yes. So Ken, I would say where we're going is more of an immersive experience with our customers. We're meeting them where they want to engage with technology. And I think the world has to acknowledge not only our customer base but customers across the macro environment or changing how they engage with technology today. And we're meeting them not only where they are. We're getting to know where they want to be. And that technology is what we call Airo. Now Airo has matured. It started off as an AI platform in and of itself that brought a discovery and engagement to the customers at a certain pace. Now this is an interaction where customers can interact within the Airo engine decide what they want, edit make changes. It's basically typing in, in real time, drawing on not only our technology in 30 years of history and data that we have, but also drawing on the LLM that we provide them in order to do that. When you think about it, it is our customer base isn't sitting there saying, "Oh my God, I want to use AI. They're sitting there saying, I want this faster. I want this easier. I want this better. I want it smoother, I want it at better price points for the value that I'm getting, and I want to be able to compete more effectively." And that's what Airo brings to them. Now we just launched in the second quarter. Within weeks, we saw an annual run rate of $10 million and then within 1 quarter, that number has jumped up to $50 million. Now it doesn't come, I would say, without a transition phase because as we are moving everybody to this Airo platform, in this Airo immersive experience, there are historical products that are not going to be as attractive to our customers going forward. The example we used was DIFY -- no longer are people going to spend a few thousand dollars to have you do their website for them. Why? Because Airo can do it right on the spot for them. Now that customer is going to now do different things through the Airo platform over time, which will drive LTV over time. but the immediate bookings we used to get around if in and of itself upfront will start to go away, will start to narrow. It doesn't mean it's going to go away entirely overnight, but it will definitely narrow as people get more comfortable with the Airo platform. So we're okay with the trade-off. We're doing it from a position of strength. Our technology is, we think, second to none. It really meets our customer base and the ease of use around what our customer needs are. And we're doing it in a manner that we can control the outcomes and control what the customer how they're going to use it, how they're going to attach incremental products going forward, what will be included in the capabilities of Airo in and of itself. -- how we're going to sell them tokens, -- what are going to be the price on those tokens, -- how -- what are going to be the cost on those tokens and quite frankly, even the limitation on those tokens because you want to be able to limit put expiry dates on when people can and can't use those in order to make sure you're not creating a downstream impact that you can't control. So when I put out there, things like hey, we're going to see certain shifts in our product base around A&C and even domains to a certain extent. We do it but we do it with the comfort of saying, hey, we're still going to -- we're still going to meet our $1.8 billion free cash flow target, we're growing free cash flow per share at a higher CAGR than originally anticipated a couple of years ago. We had said 20%. Now we're heading towards 25% or better percent. We're still expanding our margins because we put a lot of things in effect a couple of years ago around getting better leverage from our operating model that are now paying even more dividends in this current environment. And we feel really good about our ability to continue to expand margins even into the future while investing in new AI environment.

Got it. Lots coming out there. On this AI disruption, you mentioned, yes, maybe hits AMC bookings a little bit. I think in 2Q, we saw a bit of a deceleration from what you saw in I guess would love to unpack like some of the moving pieces there, how much of that was the kind of this transition? And how much of it may or may not have been any underlying weakness to the extent it was or wasn't. Would just love a sense of kind of what happened in Q2 and how you think that plays out as we head into the back half?

Yes. So what we saw Q2 was our customers' engagement around Airo was great. quite frankly, it was higher than we expected. And when we put choices in front of them, the continuation of the existing websites marketing product, testing a new website developer with them or allowing them to use Airo, it was pretty clear that they wanted to use Airo. The feedback we got was -- we don't need multiple products. They don't need multiple products. Airo is an engagement tool that allows them to do everything they need to do -- why don't you just build underlying fundamental technology into Airo itself. An example would be, we weren't going to give edit capability in Airo, that was going to be a website development functionality that we were giving. And after the feedback, we just moved that functionality into Airo itself, so they could edit their websites on the fly if they needed to and that was, again, listening to their feedback. That immediate shift caused things like website less marketing manage work press some of the underlying things to slow down in our growth, while Airo continued to pick up. Now to be clear, Airo is a meaningful contributor to our Q2 results. I haven't given a number, but it wasn't an insignificant number. It wasn't enough to overcome some of the slowdowns we saw in the other products just yet. But we are seeing through the increasing engagement around Airo, that point in time will come. It just wasn't going to be when we first launched Airo in and of itself because of the immediate shift over. And we're excited, right? So when we look at the rest of the year, I gave some nods out there to where I thought the growth rate would generally fall for A&C going forward. The confidence there is we still have a few steps here that we're launching. We're testing into market now Airo in the domain purchase path. I mean, that is our biggest funnel, right? That is our powerhouse funnel of how we convert our customers, not only convert them, but attach and put Airo into that purchase path is a huge deal for us. So we're testing that right now. We're adding commerce functionality in the third quarter as well. We are finding that there's going to be a trade-off on the subscriptions around our commerce offerings. But putting the basic functionality into Airo itself and allowing people to transact immediately takes away the choice of which payment provider they're going to be used because it is just given to them. And I'd rather have -- instead of getting 1 customer out of 3 on our payment platform, our view is we'll now have 3 out of 3 because that is just base core functionality within Airo itself. And the LTV equation starts to work better if I have 3 versus 3 customers over the long term transacting and using us as their payment provider versus that one, right? So again, these are subtle shifts, but they are big shifts, and we're pretty excited about how this Airo is engaging and how the customers are engaging in it.

And then one clarification. We're talking about -- and we talked about in the calls that it was the websites plus marketing and the Dify so the do-it-for-you, not management press, it's to do it for you, that is. So there's one quick correction on that. But we have a lot of acronyms here, so sometimes it's hard to keep the straight.

That's okay. I enjoy [indiscernible]. And so through this transition, as you guys have alluded to, there's some of the core that's getting moved into Airo. So that's naturally impacting bookings. I guess for investors, when we think about like the Airo opportunity, I assume it's fair that you think you'll capture more customer wallet from an Airo customer than a GoDaddy customer. Any color you can provide in kind of why you feel that way, what you're seeing in the underlying customer attach again, probably too early for retention, right, because you guys just launched it. But any data points that you can offer would be fantastic.

Yes. I think the data point we put out there, Ken, was 70% of our customers that are engaging in Airo have a second product today, which is much higher than the non-Airo cohorts from beforehand now. Over 50% of our customers have a second product overall. So when I say 70% of the Airo cohorts are coming in with the second product, it's an indicator they're getting to that second product much faster. And to put that shed light on that as well is -- and that's not having it in the domain purchase path right now. So these are customers that are either coming in for renewals and now renewing and adding products and they're doing it through Airo or there are customers coming directly to Airo for the first time, and they're adding that second product as they're engaging within the in the product itself. The customer satisfaction with Airo is significantly going up, right? Again, for a product that was just launched several weeks ago, the feedback we're getting from the customers and our ability to tweak, adjust and make modifications but also see the satisfaction around it go up is tremendous. And listen, overall, even the 5x which is a combination of both subscription and tokens. And I will say, well, it's too early for renewals. We are seeing a good chunk of the population come back in and get more tokens. So they're continuing to build on it. They're continuing to engage in the platform, and they're continuing to hate to use the term, burn through their tokens, they're doing it pretty fast, right, which is great, which means they're getting use out of it. They're getting value enough that they want to come back and get more.

One thing that I'll add to it and while this is a new product and a new experience, and our customers are obviously flocking to it and really enjoy it. I think it's important to understand that we have a long history of understanding customer behavior of this type of customer. So when we see metrics like better attach and better engagement and better activation, we know that, that translates into strong retention. So even though it's a new product, all of those customer behavior characteristics really matter to inform how we feel the health of this product is performing.

Understood. Yes. I guess aligned with your earlier comment that a single solution customer has x renewal rate, which is really high and then with that second product, which 70% of customers are already attaching arguably should give you that elevated retention rate. And since we're on this line of questioning -- a question just popped up, which kind of fits perfectly. Do your initial test of putting Airo into the domain purchase path show a significant uplift in Airo attach rate versus prior customer cohorts? I realize it's early, but any color that you might be able to shed?

Yes. It's too early to give any data points because we're literally just testing it into market today. I will say from our path past test, though, when we put a website developer -- development tool in front of them, the new website was marketing and Airo, people overwhelmingly selected Airo and got to that second attached product a lot faster within that platform. So that's a little bit of pretesting in the domain funnel in and of itself, but we have enough data points from the previous launch that we feel really good that the Airo attach once in the demand path will perform. And obviously, we have high expectations given the launch of Airo itself in Q2 and what we saw.

Yes. And one of the things that Aman talked about even on our call recently was that the tests are performing well. And we had originally talked about getting Airo fully baked into the domains purchase path before year-end. He thinks [indiscernible] he had said this on the call that it's possible that it goes earlier than that because of the success we're seeing. And like Mark talked about, people choosing that Airo over websites plus marketing.

Understood. That's great to hear. And I feel like I could probably spend the whole call on Airo, but I want to make sure we attack a few other talking points as well. Another source of confusion and you mentioned earlier that maybe you could see some impact on the domain hosting business. But again, we will be within the range of outcomes, moving stuff to Airo. Is like what's happening with API domain how LLM interact with GoDaddy? And admittedly, like I probably kind of was misinformed on this as well. Could you educate the audience on the situation and how GoDaddy is attacking this opportunity kind of good or bad?

Yes. So LMs are obviously becoming a larger service for creating software and business, right? That's undeniable. And so we've -- and I think it's stepping back, GoDaddy has had a long history of developing and using APIs too. And a lot of people don't know this, we used to serve the back end for a lot of really large tech companies out there for domain. So we have a lot of experience in doing APIs. So what this does is having those APIs that surface on LLM, it just broadens the surface area at which we can attract more in different customers as they're engaging in different places to start over time. So it's just -- it's a broadening of the [indiscernible] for lack of a better phrase. So it's extending the discovery of our products and more services.

Got it. And so as we think about the results of the first half, there was no erosion in terms of, hey, customers that would have gone to GoDaddy, all of a sudden got rerouted somewhere else. You guys see this as sort of just a new channel that you guys hopefully can optimize to have the same type of leadership position you have with your current channels?

Yes, I would say that's generally the right way to think about it. And I think it's important to remember for folks here is that GoDaddy already has the strongest brand awareness and what that translates for us is really strong direct navigation to godaddy.com anyway. So talking about a small percentage of the traffic that comes to GoDaddy is nondirect navigation so that now we're solving for the smaller piece of how customers find us, and it's a smaller piece of the smaller piece, right? So it's just continuing to ensure that much like and people have heard me say this already before, much like we are creating pathways for our customers to be in all the places that matter, we, too, want to be in all the places that matter for our products.

Ken, we don't want to walk -- anybody to walk away saying this isn't an area that has to be focused on traffic is evolving. It's changing. You can solve for it 1 day and then 2 days later, it's changing again, right? So our ability to do this just like when search first came out in and of itself. You have to stay on top of the process of optimizing for it, and you have to keep your ball or else you can fall behind it. And this is something we've been doing for years upon years. So we feel really good that we have the ability in the internal mechanisms to continue to make sure that we're focused on the again, we have the luxury of a strengthened brand that is out there around domains in and of itself, and that allows us to continue to focus on make sure we're growing this channel.