GoDaddy Inc. Q2 FY2021 Earnings Call

Vice President of Investor Relations. Joining me on the call today are Aman Bhutani, Chief Executive Officer, and Mark McCaffrey, Chief Financial Officer. After our prepared remarks, we will open the floor to your questions. If you would like to ask a question during this call, please use the Raise Hand feature in the webinar to join the queue. Today we will refer to both GAAP and non-GAAP financial results and operating metrics, including total bookings, unlevered free cash flow, normalized EBITDA, and net debt. You can find a discussion on the use of non-GAAP financial measures and reconciliations to their GAAP equivalents in the presentation posted on our Investor Relations website. We will cover matters today that include forward-looking statements regarding our future financial results, strategies and objectives relating to our operations, new product launches and innovations, partner integrations, our ability to integrate acquisitions and realize expected synergies, as well as the impact of the COVID-19 pandemic on our business. These forward-looking statements are subject to risks and uncertainties that are detailed in our SEC filings. Actual results may differ significantly from those expressed in the forward-looking statements. Any forward-looking statements made during this call are based on assumptions as of today, August 4th, 2021, and we do not have an obligation to update these statements due to new information or future events unless required by law. Now, I will turn it over to Aman.

Thank you, Mark, and thank you all for joining us today. At GoDaddy, our mission is about making opportunity inclusive for all. We are committed to making everyday entrepreneurs successful through bold innovation and disciplined execution; we will succeed in our mission. More than 20 million customers rely on GoDaddy’s seamless and intuitive technology, highly performant products, and world-class customer care to help them grow their business online and offline. As I look back at the last quarter and the last year, I am most proud of the acceleration in innovation at the company, even in the face of a pandemic. Our teams have done a fantastic job delivering new functionality for our customers and every quarter we are delivering more. Today, I will highlight some of those key product launches driven by the increasing velocity of experimentation in every part of our business. I have never been more confident in our ability to deliver value to our customers faster and drive long-term financial results for our shareholders. The vaccines have provided a new normal, but now we find the world challenged by the Delta variant. We’re staying vigilant regarding any short-term impact from the difficulties our customers continue to face coming out of the pandemic. As I look at the rest of the year, and given our history of providing prudent guidance to our shareholders, I am confident that following a strong first half, we remain on track to achieve our full-year financial targets. Our core focus is to drive value over the long-term through continuous improvements in our products and services. The long-term secular tailwinds in our industry continue to play to our strengths. As more people and businesses seek to sell their products and services online and offline, they need intuitive solutions and a trusted partner that can help guide them to growth. Our priorities are aligned with our customers, and they remain clear. First, driving commerce through presence; second, GoDaddy Pros; and third, innovation in domains. Everyday entrepreneurs look to GoDaddy for help with their number one priority: to reach more of their customers and grow their business. It is also our number one priority and our investments reflect that. True to our promise, we have moved quickly this year with the launch of GoDaddy Payments, already available to all Websites + Marketing customers and managed WordPress customers in the U.S. Our ability to integrate Poynt and launch Payments quickly is a proof point of our platform-based approach to commerce and presence. We’re dedicated to creating a seamless and intuitive experience for our customers built on a common platform. That increases our agility and speed to market. As further proof, we’re already looking beyond Websites + Marketing and managed WordPress. We’re launching GoDaddy PayLinks and Virtual Terminal. With PayLinks, GoDaddy customers will finally be able to say goodbye to sending paper invoices. PayLinks enables customers to take payments from anyone in the U.S. through a secure link. With the Virtual Terminal, they can accept payments through iOS and Android on their phone or tablet without a card reader, ideal for farmers' markets, craft fairs, and other remote sales. We have much more coming. We are on track to launch GoDaddy’s OmniCommerce solution by the end of the year, empowering our customers to sell everywhere in their physical store, online store, and across major platforms. We have deepened our partnerships with the major platforms, especially Google and Facebook. GoDaddy customers can now display their product inventory directly within Google Search, Shopping, Image Search, and YouTube for free. They can also create listings and manage their Google Smart Ad campaigns directly within their GoDaddy Websites + Marketing dashboard. Customers can manage their Facebook and Instagram ad campaigns from the same dashboard. Websites + Marketing continues to launch new capabilities including functionality for job listings, critical in the current environment, a robust FAQ widget, an enhanced email composer, and much more. We have also completed the integration of Over, rebranding it as GoDaddy Studios. We’ve expanded the functionality as well, and now GoDaddy customers can seamlessly create content on iOS and Android, and leverage that content on social networks and their website. Moving on to our second priority, GoDaddy Pros. We continue to focus on creating a seamless and intuitive experience with WordPress, while maintaining flexibility for Pros. We are committed to driving real improvements in the WordPress ecosystem, and are thrilled to share that one of GoDaddy’s own led the release of the latest version of the Gutenberg editor for WordPress. WordPress has been the winning platform for Pros for years, and we are confident that WordPress will continue to be the winning platform for years to come. Earlier this year, we created a dramatically simplified onboarding experience, and we’ve invested to make managed WordPress even more performant. We’re hearing from customers that they are noticing the difference. Our goal is to save time for Pros, and inside the GoDaddy Hub, we are seeing continued improvement. We are launching new capabilities in the Hub on a regular basis, and we are particularly excited about introducing invoicing. With invoicing, Pros can bill their customers without needing a separate system. We also launched the new GoDaddy Pro brand in India this quarter and we are starting to see early signs of traction. India represents an enormous opportunity for GoDaddy, and we’re looking forward to hosting our first event for Pros in India later this year. Regarding our third priority, we continue to see remarkable strength in domains, driven by innovation in our aftermarket business, strong renewals, and continued new registrations. As you may recall, in Q4 last year, we introduced List for Sale and multiple improvements in domain search. These innovations contributed to the nearly 20% year-over-year revenue growth in domains through the first half of this year. In Q2, we launched Buy It Now landing pages for domain investors to sell premium domains faster and more efficiently. Customers have reacted positively to it. One major domain investor moved approximately 50 thousand domains to GoDaddy’s platform, and the improvement in their sales was so immediate that they decided to move over their entire portfolio of ccTLDs as well. The customer described the experience as an absolute game changer. We’ve also continued to enhance the experience for buyers, with improved search in our Auctions experience. We’re thrilled with the outcomes in this space and excited about continuing to innovate. We’re also seeing good progress in scaling our GoDaddy Registry business. With the recent acquisitions of additional Top Level Domains or TLDs, GoDaddy Registry now manages more than 240 total TLDs, and we continue to look for ways to out-punch our weight in the Registry business. I’m also super excited to share that we published GoDaddy’s first Environmental, Social, and Governance or ESG report in June. I encourage you to read our report and learn about the fantastic initiatives going on inside GoDaddy. We look forward to setting goals and reporting on our ESG results regularly going forward. In closing, we have accelerated the pace of innovation within GoDaddy. Our strategy remains centered on building incredible products and creating value for everyday entrepreneurs around the world. We are prudent stewards of capital and remain committed to delivering value to our shareholders. With a number of organic and inorganic investments, especially around commerce and our upcoming OmniCommerce launch, we believe we are positioning GoDaddy for continued growth in our top line and our profits for years to come.

Thanks, Aman. It’s great to be here on my first earnings call as GoDaddy’s CFO. I’m two months in, and I can tell that there is something special about GoDaddy’s culture, people, vision, and commitment to our customers. As Aman mentioned, there is an incredible opportunity ahead of this company, and I am very excited to join at this stage of the journey. I want to take a moment to discuss our financial results for the second quarter, and then I’ll provide an update on what we’re seeing now, and our financial outlook for Q3 and the rest of 2021. Q2 was a strong quarter, and that showed up in the financial results. Total revenue came in at $931 million, growing over 15% year-over-year, which includes about 1 point of currency tailwind. Our International business grew 19% on a reported basis, with approximately 3 points of currency tailwind. Business Applications was our fastest-growing product line, increasing 22% year-over-year. We continued to see new customer attach, strong renewals, and existing customers adding additional seats of email and productivity solutions. Domains grew 18% year-over-year. As Aman mentioned, the innovation that the teams put in place late last year is driving performance in the aftermarket, which was a large contributor to the growth we saw in the second quarter. We are also seeing strong renewal rates from huge cohorts that joined last year and continued new registrations. Finally, hosting and presence grew 9% year-over-year, in line with our expectation of high single-digit growth. We continue to see very nice growth in our presence products like Websites + Marketing, tempered by slower growth in our legacy hosting and security business with continued year-over-year declines in social. Bookings came in at $1.05 billion, rising 13% year-over-year, with 2 points of currency tailwind. Strength in bookings in the quarter reflects similar drivers to what we called out for revenue. Gross margin came in at 64% in the quarter, in line with what we saw both last quarter and in the second quarter last year. Product mix continues to drive the company’s overall gross margin, and we’re pleased with the 16% year-over-year growth we saw in gross profit dollars in the second quarter. Growth in both G&A and tech and dev expenses decelerated this quarter. As you’ll recall, there were some one-time expenses related to our Poynt acquisition that were recognized in T&D and G&A in Q1 that didn’t repeat in Q2. The growth rate in T&D remains above what we saw in 2020, reflecting the outstanding talent we added via the Poynt acquisition and our continued investment in product development. Our marketing and advertising investment remains strong in Q2, though the year-over-year growth decelerated as we start to lap the elevated investment we made to capture the extraordinary demand we saw last year. Our growth and investment in the second quarter resulted in normalized EBITDA of $198 million, representing a growth of 22% year-over-year. Unlevered free cash flow for the quarter was $237 million, growing 27% year-over-year, driven by strong profitability, continued positive impacts from working capital, and disciplined CapEx investments as we continue shifting workloads to the cloud. Now onto the balance sheet. We finished Q2 with $1.4 billion in cash and total liquidity of nearly $2 billion. Net debt stands at $2.6 billion, below 3x net leverage on a trailing 12-month basis, and near the midpoint of our targeted range of 2x to 4x. GoDaddy has a strong liquidity position, access to both debt and equity capital markets, and resilient cash-generating operations. During the second quarter, we repurchased nearly 1 million shares for an aggregate purchase price of $81 million and announced acquisitions in the Registry space. Our priorities for capital allocation haven’t changed. Our strategic priority is to grow the business, and we’ll continue with organic investment as well as through acquisitions. We will continue to prioritize M&A over share repurchases. That said, we still have approximately $1 billion remaining on our repurchase authorization, and we expect to deploy capital to repurchase shares opportunistically. Moving on to our outlook. GoDaddy has a strong, resilient business model giving us confidence in our ability to achieve our full-year targets. Following a strong first half, we want to acknowledge the evolving impact of the pandemic, COVID variants, and access to the vaccines and we want to be prudent with our guidance for the second half of the year. We expect our full-year revenue to be approximately $3.75 billion, or 13% growth year-over-year. And we continue to expect unlevered free cash flow of $955 million or 16% growth year-over-year. While we don’t typically guide to bookings explicitly, we want to provide some color. We expect bookings growth to be a couple of points below revenue growth in the back half of the year. Our forecast assumes that FX tailwinds will abate, and we’re facing tough comparisons. We expect revenue growth in domains to moderate, especially in Q4, exiting the year growing low double digits. We’re also facing tougher comparisons in the aftermarket as we lap the impact of the List for Sale tool and other improvements introduced in Q4 last year. The aftermarket, as you know, is a non-subscription business. We expect hosting and presence revenue to deliver mid single-digit growth for the full year. We continue to see low single-digit growth in our legacy hosting business. We’re also lapping very difficult comps in our higher-growth products like Websites + Marketing, and continued declines in Social. We also note that the moderation of the FX tailwinds will disproportionately impact this line. We’ve got a strong track record of driving growth, and our goal is to accelerate the growth in this category beyond 2021. We continue to expect high-teens growth in business applications for the year. With respect to investments and expenses, we continue investing in tech and dev, as we drive development of OmniCommerce and better scale our engineering and developer teams for long-term growth. Marketing spend is governed by returns, so we’ll continue to monitor and adjust based on the demand we’re seeing in the market. Investments here will likely be offset by continued leverage in customer care and G&A. For Q3, we expect total revenue of approximately $945 million, or 12% growth year-over-year with high-teens growth in business applications, mid-teens growth in domains as we lap a slightly tougher comp, and mid-single-digit growth in hosting and presence. As I wrap up my comments here, I want to express my thanks for the incredible welcome I’ve received from all of the wonderful people at GoDaddy, as well as our partners throughout the industry and our analysts. I will do everything I can to ensure that we are executing against all the financial and strategic priorities we’ve laid out, and that we’re communicating clearly and transparently with all of our stakeholders. I know I have big shoes to fill, and I’m looking forward to meeting many of you in the coming weeks and months as we virtually hit the road.

Thanks, Mark. Our first question comes from Trevor Young from Barclays. Trevor, please go ahead.

Great. Thanks for taking the question. Just on a segment basis, it seems like the H&P guide was a bit softer than prior commentary. If I heard you correctly, Mark, you said mid single-digit growth for the full year. Can you help us understand what changed? And then also remind us to what the impact is in 3Q from lapping M&A or is that more of just a 4Q impact? Thank you.

Thanks, Trevor, and happy to elaborate a bit. Let’s start with – we’re facing tough comparisons when it comes to some of our higher product growth, right? Websites + Marketing and things such as that. I would also say, FX is not working in our favor in the second half where we assumed we will not have the same tailwinds. We continue to see low growth in our hosting and security. So that coupled together kind of has put us today mid-single digit growth for the year. I would also add we’re being pretty prudent when it comes to looking at customer behavior, especially as we get into the second half of the year. We just want to acknowledge there’s a lot going on with our consumers. And we think this is the place to be right now. As far as the lapping in Q3 and Q4, we see part of it in Q3 and the bulk of it in Q4.

Hi. This is Clarke Jeffries on for Brent. Firstly, I’ll say Aman, really encouraging to hear about the product innovation and how quickly the company has been able to iterate on the Poynt portfolio. It’s exciting progress so far. On that point, could you help us understand what’s the current level of adoption you’re seeing in Payments? And maybe what are some of your key strategies for encouraging adoption? Some of your peers have pursued transaction feeds for not selecting the preferred payment rails. So, correct me if I’m wrong, but you’re not doing that strategy specifically. So I just want to see where do you see potential for push versus pull strategies to increasing adoption?

Thanks, Clarke. As you know, we’ve just launched GoDaddy Payments and we’re seeing a good reaction from customers. They’re excited, they’re clicking on it, they’re choosing the product. So it’s a great, great start. Overall, our timing on commerce was about getting to the OmniCommerce solution later this year; next year is about marketing and experimentation with pricing. You’ll see us experiment with a lot of our models out there. And as we go through that, we’re going to pick what’s best for our customers and shareholders together. No specific comment on various pricing strategies, but we’ve got to start and we’re going to try a lot of stuff out.

Great. And if I could have a follow-up for Mark, just could you comment on the legacy hosting and security business? Just what are the growth expectations long-term for that segment? How should we be thinking about the moderation currently in that segment? And is there an R&D push here, any kind of change in industry demand that we should anticipate for that segment going forward?

Yes. Thanks. And I’ll start with saying, a lot of the hosting and security is driven by traffic. As in that particular area, we’re monitoring the traffic very closely. We think it will continue with low digit growth throughout the year. We’ll take a look at what the long-term prospects are. I’m looking forward to checking in with everybody six months from now and looking at the 2022 guidance as we put it forth.

Sorry about that. Good afternoon. So you guys had good outperformance in the quarter and just trying to think through the second half and the puts and takes. I know you addressed it a little bit. So if I remember correctly last quarter, you talked about how we’d be facing some challenging comps in domains, but continued innovation there can keep growth elevated for longer. So, on the domain side, where do you guys think you are relative to that kind of target that traction that you talked about last quarter in terms of innovation and keeping growth stronger? And similarly on the presence side, we’ve got a lot of pieces coming together around commerce and the omni-channel piece is coming in later this year, and I know it’s still early on the omni-channel front, but payments and everything else. What are the things that investors should be looking for to get better confidence that that the Presence segment is growing faster and getting stronger as you put these things together. Thanks.

Thanks, Ygal. I continue to be super excited about the innovation in the domains business. As I’ve talked about last time as well, we’re continuing to do more every quarter. The goal here is to build the innovation factory, where we’re the leader in this space, and we’re going to just continue to innovate. We can only guide what we see; we can’t guide to sort of future innovation. But it’s happening every quarter. Just this quarter, I talked about it in the prepared comments, we launched Buy-It-Now landers, and they’ve been adopted really, really well by our domain investor customers. You’ll continue to see us do it. It’s just – when it comes to guidance, we’ll talk about what we see and what we know. In terms of presence, we continue to see fantastic growth in our growth products like Websites + Marketing and managed WordPress. They’re still outgrowing our overall business, even though they have some really tough comps year-over-year, so super excited about the work happening there as well.

Yes. Can you hear me okay? Just maybe I missed it, but did you guys talk about subscriber growth in the quarter? How it compares to the past few quarters. And maybe another question, you can help us understand and bit of summarize just a mix of e-commerce in Websites + Marketing roughly e-commerce, is that still the case?

Thanks, Naved, for repeating the question. On subscriber accounts, we don't disclose that on a quarterly basis. So we'll share that with you at the end of the year, and in terms of our commerce solutions, that part of Websites + Marketing customers continue to lean into that. We've continued to lean in and add more and more functionality. So that continues to do well for us.

Thanks. There were some questions around Verisign price hike and how you intend to pass that through. Can you just comment on that intended price hike? And then secondarily, Aman, when you look at the business apps with high teens growth, could you just lay out the engines of how you're getting there, maybe if you could just talk about, you know, what's underlying that confidence to get to that growth rate on the business app side, on the components of growth.

Yes, sure. Brent, thank you. On the pricing increase with Verisign, what I talked about was that we have a segmented strategy. So we have different types of customers and we change pricing at different levels for them. Traditionally, registrars have passed on the pricing from registries. There is a pass on from us, but as Mark commented, that's been in our guide. But it's a segment in nuanced approach. So I just want folks to understand that about the company as a whole. In terms of the second part of your question, sorry, what was the second part?

In terms of the business apps growth, that continues to be a function of customers onboarding on our email products, both the Microsoft solution that we have and OX and us growing with our customers. But those customers do well, are successful, is to see growth with them. We continue to be underpenetrated here. There's a ton of opportunity as we reach more and more customers as we make the experience. What are there have been some onboarding improvements for customers that we've been able to do. We've come been able to continue to drive growth with existing customers and new customers there.

Thank you all for joining. A quick thank you to all the GoDaddy employees for accelerating the innovation at the company, and we look forward to talking to you next quarter.