GoDaddy Inc. Q1 FY2024 Earnings Call

Welcome to GoDaddy's First Quarter 2024 Earnings Call. Thank you for joining us. I'm Christie Masoner, Vice President of Investor Relations, and with me today are Aman Bhutani, Chief Executive Officer; and Mark McCaffrey, Chief Financial Officer. Following prepared remarks, we will open up the call for your questions. On today's call, we'll be referencing both GAAP and non-GAAP financial measures 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 on our Investor Relations site 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 will be discussing today include forward-looking statements such as those related to future financial results and our strategies or objectives with respect to future operations. These forward-looking statements are subject to risks and uncertainties that are discussed in detail in our periodic SEC filings. 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 2, 2024. 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.

Good afternoon, and thank you for joining us today. At GoDaddy, our mission is to empower everyday entrepreneurs and make opportunity more inclusive for all. Our strategy relentlessly focuses on creating customer value and successfully transitioning it to shareholder value. This is the driving force behind our profitable growth model that maximizes free cash flow. I'm excited by the innovative experiences we are delivering for our customers, the dedication and velocity of execution of our teams, and the trajectory those have created for our company. At our Investor Day, we shared our updated 3-year strategic framework and financial targets. As our Q1 results showcase, we are off to a strong start in 2024. In service of our North Star, we continue to expand our free cash flow meaningfully, delivering 26% free cash flow growth year-over-year. The pillars behind our North Star are accelerating growth in our applications and commerce segment and disciplined margin expansion. In Q1, applications and commerce bookings accelerated to 22%, and normalized EBITDA margin expanded 400 basis points. At our Investor Day, we also shared our progress on the GoDaddy software platform. The GoDaddy software platform helped create game-changing customer experiences like GoDaddy Airo. It combines the power of our infrastructure, large-scale data, AI and machine learning, experimentation, and monetization to power our growth and margin drivers. Today, I wanted to provide an update on 4 of the key initiatives we shared previously. First, enhancing our pricing and bundling capabilities remains an important lever for GoDaddy. This quarter, we focused our pricing and bundling efforts on our productivity solutions, which was a key contributor to the 22% bookings growth in the applications and commerce segment. Our software platform has a vast amount of data, and we leverage that data in more and more pricing and bundling experiments, providing us with powerful insights on how and where to push forward as we continue to roll these learnings into additional products and bundles over time. Second, creating seamless experiences for our customers continues to be a key priority. We are removing friction out of every piece of the entrepreneur's wheel, saving our customers time and money. We continuously work on simplification and performance improvements that deliver value for our customers. Examples from this quarter include simplifying the editor in Websites + Marketing, making it easier for customers to discover new capabilities, reducing provisioning time for the online store to a few seconds and using AI to streamline managing WordPress website creation to just a few clicks. Simplified, smart, and fast experiences come across as magical to our customers; customer delight creates customer value, increasing willingness to pay. Third, on commerce, I am pleased to share that annualized GPV continued to grow at a fast pace, surpassing the $2 billion milestone. The primary driver continues to be conversion within our existing base of customers. In addition, we launched GoDaddy Smart Terminal Flex, a handheld device that allows our customers to accept payments anywhere on the fly. Our commerce offering is growing and sets us up well for our 2024 focus on driving higher-margin subscription revenue through the sale of tailored omnicommerce solutions to our customers. The significant value we are driving with our commerce offerings also introduces an opportunity for us to evolve our pricing structure within payments. Last week, we began rolling out phased transaction fee increases across our customer population, while still maintaining our status as the best value in payments. Fourth, we continue to be tremendously excited about the range of possibilities with GoDaddy Airo. As planned, we started rolling out GoDaddy Airo to our base in late March. GoDaddy Airo opens the door to many opportunities across discovery, engagement, and monetization, representing an incremental opportunity as a powerful growth driver over the next couple of years. We have continued to rapidly iterate this experience, and I wanted to share a couple of examples. More customers are discovering GoDaddy Airo, and we have more for them. We launched a new payment card to test engagement with payments. A card is a visual representation of a product that is automatically set up and configured by GoDaddy Airo on just a domain purchase. We see early indications that GoDaddy Airo does a better job of discovery and engagement with pay links than our normal methods. Another significant change in monetization is that we introduced a paywall for websites built by GoDaddy Airo. We are actively testing different points at which this paywall can be triggered, and this is a new flow that we are excited to optimize. While all this data is early, we are also excited to see that websites built by GoDaddy Airo are performing well. More domain customers are opting in for a website when we offer them GoDaddy Airo, and key product metrics are either ahead or within our expectations. These metrics give us confidence that we are achieving our goal of a seamless, intuitive, magical experience for our customers. I also wanted to quickly share that GoDaddy Airo domain search is now on the home page for all desktop users globally. We are starting to test opportunities to optimize the traditional search experience using these new capabilities. Last but not least, GABI, our guide assist bot, is now rolled out across our entire care footprint and is handling escalations and questions from our guides. GABI also helps with providing call summaries and case notes, helping our guides be more efficient. Every month that goes by, GABI becomes smarter, and over time, we can add use cases and drive further adoption. In closing, we continue to deliver on our key initiatives and unlock new avenues of growth and value creation for the long term. The GoDaddy team is a driven group and shares an unwavering determination to fearlessly push boundaries and prioritize, continuously experiment, meticulously track results, and strive for improvement each day. I am thrilled with the speed of execution as we continue to strive to exceed customer expectations, propel profitable growth, and create enduring shareholder value. With that, here's Mark.

Thanks, Aman. We are pleased to announce our strong Q1 results and continued track record of durable growth. We've demonstrated attractive progress toward our North Star, delivering strong free cash flow of $327 million alongside continued execution of our capital allocation strategy, which reduced our fully diluted shares outstanding at the end of the quarter to 146 million. The key pillars underlying our North Star are the double-digit growth in our application and commerce segment revenue of 13%, coupled with disciplined normalized EBITDA margin expansion to 28%, which converts to free cash flow at an impressive 1:1 ratio. Through our seamless technology and comprehensive one-stop-shop approach, we are building improved customer value. Our strategic focus is delivering results that drive better attach and conversion while maintaining impressive retention rates. Together, these efforts are building a foundation for enduring shareholder value. Moving to our financial results for the quarter, total revenue grew to $1.1 billion, up 7% on a reported and constant currency basis, exceeding the high end of our guided range on the strength of the pricing and bundling initiative as well as strong demand in our aftermarket. ARPU grew 5% to $206 on a trailing 12-month basis, and our customer count remains stable despite the headwinds from our divestiture and migration efforts, which impacted revenue by approximately 100 basis points. Additionally, customers with 2 or more products remained above 50%, and our customer retention rate remained at 85%. Double-clicking into the segments, our higher-margin Applications & Commerce segment delivered $383 million in revenue, growing 13%, in line with our guided range. The drivers of this performance included strength in our bundling and pricing initiatives across all major product offerings, including productivity solutions, website building products, and commerce. Additionally, annualized GPV for GoDaddy payments grew to $2 billion for the first time. Segment EBITDA margin was 42%, up over 300 basis points. Lastly, ARR for Applications & Commerce grew 13% to $1.5 billion. Core platform revenue totaled $725 million, growing 4% which exceeded our guidance on strength in domains, up 7% and aftermarket, up 12%. Our growth was driven by strong demand for domains in the primary and secondary market, increased pricing in the primary market, and a higher average transaction value in the secondary market. This was partially offset by a decrease in hosting due to our divestitures. Segment EBITDA margin for the core platform grew to 30%, up nearly 300 basis points. Lastly, ARR for our core platform segment was $2.3 billion, up 3%. Consolidated normalized EBITDA grew 25% to $313 million, while delivering an expanded margin of 28%, up 400 basis points, exceeding our guidance. Margin expansion was driven by continued leverage gains within all expense line items on the P&L. Moving on to bookings, in Q1, we achieved 9% growth on our reported and constant currency basis, reaching $1.3 billion. As a reminder, bookings primarily represent the cash collected during the period. Applications in commerce bookings grew 22% from improvements in pricing and bundling for productivity solutions, website building products, and commerce. Core platform bookings increased 3% on the performance of domains in the aftermarket due to strong demand for domains in the primary and secondary market, offset by headwinds in hosting. Subscription bookings grew 2 points ahead of subscription revenue. The impressive momentum in our bookings, coupled with our commitment to profitable growth and ability to convert normalized EBITDA to free cash flow at a ratio of 1:1, powers our substantial cash generation. Unlevered free cash flow for the quarter grew 18% to $359 million, and free cash flow grew 26% to $327 million. We are committed to effectively managing our balance sheet, and the proactive measures we took to reprice our long-term debt resulted in a 30% favorable change in cash interest payments compared to last year. Capital expenditures for the quarter were also down 81% from data center divestitures. Through April 30, we repurchased 2.8 million shares year-to-date, totaling $346 million. This brings the cumulative shares repurchased under our current authorizations to $2.9 billion and 37 million shares, reducing gross shares outstanding since the inception of these authorizations by 22%, ahead of our 3-year targeted reduction of 20%. Fully diluted shares outstanding at the end of the quarter were 146 million shares. Our successful share repurchase program continues to drive impressive ROI for our free cash flow deployment. We have $1.1 billion remaining under our current authorization, and we plan to be in the market every quarter, subject to market conditions and other factors, with a minimum offset to share-based compensation dilution. Moving to the balance sheet, we finished Q1 with $664 million in cash and total liquidity of $1.7 billion. Net debt was $3.2 billion, representing net leverage of 2.4x on a trailing 12-month basis. Shifting to our outlook, given our strong start to the year, we are raising the lower end of the range for our full year revenue guidance. We now expect full year revenue to be between $4.5 billion and $4.56 billion, representing growth of 6.5% at the midpoint. Additionally, we are targeting Q2 total revenue in the range of $1.1 million to $1.12 billion, representing growth of 6% at the midpoint of our range. We expect applications and commerce to deliver low to mid-teens growth for Q2 and the full year. In our core platform segment, we expect revenue to deliver low single-digit growth in the second quarter and the full year. We are proud of our track record of margin expansion, and we will continue to maintain operational discipline to drive further leverage in our model. We expect normalized EBITDA for Q2 to be approximately 28%. Additionally, we remain on track to meet a 31% normalized EBITDA margin in Q4. Full year normalized EBITDA margin is expected to be approximately 29%. We are on track for our full year unlevered free cash flow and free cash flow targets of $1.4 billion plus and $1.2 billion plus, respectively. On capital allocation, we will continue to evaluate opportunities for shareholder return, subjecting them to our published rigorous returns-based framework to ensure we achieve the optimal mix for cash flow deployment. The entire GoDaddy team remains committed to delivering against the 3-year framework we shared at Investor Day, with 6% to 8% annual top-line growth fueled by our Applications & Commerce segment, accelerating normalized EBITDA margin expansion to 33% by 2026 and generation of $4.5 billion plus in cumulative free cash flow. Our profitable growth and 1:1 normalized EBITDA to free cash flow ratio, coupled with our disciplined capital allocation framework, creates significant value for our shareholders. While I am pleased with our progress towards our North Star, we are far from done, and I continue to have strong confidence in our strategy and execution.

Thanks, Mark. Our first question comes from Ygal Arounian from Citi.

Maybe I'm just going to start on the strong bookings growth. I know you talked about pricing particularly in A&C. But 22% booking growth there, 1Q. Almost 10% overall coming off of the strong booking number in 4Q as well. Typically, we think of that type of acceleration as really meaningful in driving revenue growth acceleration in the back half, but we didn't see that in your guidance. So how should we be thinking about how that translates and what all that means as we kind of look through to the whole year here?

Ygal, thanks for the question. We couldn't be more excited about the bookings growth in A&C and the momentum we have coming out of Q1 and the impact on the rest of the year, no doubt about it. As we get into the bundling, just a reminder, revenue is recognized from the bookings, and it can be over different periods of time. So that momentum will continue. But given the size of our business, obviously, it takes a while to show up in the revenue growth numbers as we go on; couldn't be more excited about it, though. Just a reminder too, we do have a few headwinds out there relating to the dispositions. Those will peak in Q2. We expect them to abate throughout the year. But again, we still have a few of those headwinds out there. So again, we have great momentum, but we're trying to balance some of the actions that we took. So when you put that all together, I would say we're comfortable that lowering the low end of the guide was the appropriate thing to do, and we'll continue to keep everyone updated as we go throughout the rest of the year. But yes, we are pretty excited about some of the pricing and bundling initiatives and the impact they had on Q1 bookings.

Okay, great. Really helpful. Regarding Airo, while you've shared some qualitative insights, could you provide any additional details? You are expanding internationally and have a couple of months of experience. You mentioned that you're observing domain customers shifting to Airo when it's available. Are you noticing any increase in conversion rates or growth in ARPU, whether for applications collectively or just for Website and Marketing? Is there anything else investors can rely on to understand how well Airo is performing or what factors might influence the expected conversion?

Thanks, Ygal. Super excited about Airo. It's the best vehicle we have built to carry products to our customers. We know it's doing very well with new customers. And as I've shared, we've started to roll it out to our base as well. Airo just does a fantastic job of getting our customers engaged. The metrics we shared around it continue to focus on discovery, which means our customers finding that GoDaddy has all these products, engagement, where they start using those products or you can say, attach them, and then monetization where they start to pay for those products. We're very methodically moving through those 3 phases. What I can share today is that on discovery, we're seeing fantastic results there. Customers buy a domain, they see their cards, they engage with the cards; customers are starting to learn that GoDaddy has way more products for them, way more offerings for them. I shared a little comment about pay links in the prepared remarks, but I'll also share a coming soon site, which is a one-page website that gets created with a domain, gets a great amount of engagement. Just a regular website is getting more engagement with Airo than when we didn't have Airo. So these cards are really starting to take off in terms of discovery and engagement, which gives us confidence that as we move towards monetization, we're going to have multiple levers at play. We've started to build the pay walls and do stuff, and over the next couple of years, we think this will roll out very well and deliver results for years to come.

Next question comes from the line of Mark Zgutowicz from Benchmark.

Maybe just a follow-up on that impressive A&C bookings number. Curious how much you'd attribute to product attach versus pricing in terms of that acceleration? And on the pricing side, just curious how pervasive your AI or value-based pricing initiative is across your A&C base. Does it touch all A&C customers at this point? That's the first question.

Thanks, Mark. Our value-based pricing, AI-based pricing, and bundling initiatives have not gone across all A&C. It's starting to roll out across a lot. What you're seeing in the 22% application and then bookings growth is the combination of pricing and bundling, really touching our productivity and starting to hit our website business, too. So super excited about that. There is more to go there. So we're going to continue to invest in that area and go across not just AMC, but over time, go to every customer of GoDaddy and bring them on to these new pricing and bundling approaches that we have.

Okay. Got it. And then I think you had mentioned that Airo is leading to some increasing website attach rate for your domain customers. I was just hoping you might be able to expand on that a bit, maybe just some KPIs that you're seeing, maybe conversion rate, but that seems to be maybe awakening a sleeping giant there for some time. Just kind of trying to get a sense of how significant that could be.

Yes, it's still early with our new customers. This group is smaller, but we see significant take rates for coming-soon websites and actual website attachments. Engagement and discovery are going really well. However, the larger opportunity is within our existing customer base. We are only about 5 or 6 weeks into integrating Airo into our existing customers, so it will take some time to navigate this large base systematically. We have learned a lot from our previous integrations of productivity and commerce, and we're applying the same careful approach here. It will take additional time to collect data before we can share our findings publicly, but we are very excited about the potential. If the engagement from new customers is any indication of what we can expect from our existing customers, we anticipate discussing this for many years to come.

Our next question comes from the line of Ken Wong from Oppenheimer.

Great. I wanted to maybe kind of pick your brain in terms of the rationale behind changing payment pricing structure and then how you think about how that could impact the near-term dynamics and if you're sensing any kind of customer pushback there.

Yes. We're very methodical, Ken, on our approach to pricing. As we talked about, everything is tested. So we have tests out there, as we said, it's on a phased basis. We are really trying to create multiple offerings for our customers. While we maintain our position in the industry as being the best value for money, it allows us to have differentiated products within our portfolio and reach more customers. This is something you'll see more of, and we'll discuss it over the next few quarters. But, really, what it opens up opens us up for a broader commerce solution with differentiated pricing across different bundles. We're trying to set things up for the same mindset of pricing and bundling activity together for commerce as we are bringing available products.

Got it. Mark, can you remind us about the lag we should consider between revenue and bookings? Specifically, for A&C, where there seems to be a significant difference from the teens to the 20s, can you help us understand what that convergence looks like?

Yes. I'll take it up a level, too. When we think about bookings to revenue, we have multiple different products with multiple different terms; the revenue can come out in many different ways. The way we look at it is we think bookings are going to be 1 to 2 points ahead of revenue for 2024. That will give us a lot of momentum as we continue to see the results of the bundling and pricing initiative as well as the momentum we're seeing in things like aftermarket.

Just a quick add, Ken, that our general term is just around 12 months, a little over. So that can give you an idea of how bookings will take about 12 months to distribute over revenue.

Our next question comes from the line of Josh Beck from Raymond James.

Yes, I just wanted to ask about some of the success with the pay links. It sounds like it's driven an uplift on discovery and engagement maybe versus what you had in place prior. So are there certain channels, whether it's tech or social, where it's doing a better job of driving engagement? Just, would like to understand a little bit, just some more context behind that comment, if possible.

Yes. The biggest sort of encouragement for our customers, the best vehicle we've put in place for pay link attach is being in Airo, right? And the way it happens is that when the customer buys the domain name, all these cards, all these capabilities get set up automatically. We introduced pay link in a very similar way as we introduced the other capabilities. What we found is we obviously had existing ways of helping our customers discover pay links, helping them engage with them and start to transact using pay links. But Airo brought it together in a simple manner. It was right there in front of customers, and we saw them engage with it at significantly higher rates than without Airo. That's what's driving engagement with pay links. Overall, for GPV, we hit the $2 billion annualized GPV milestone this last quarter. The biggest part of that continues to be converting our existing base to GoDaddy payments.

Okay. That's super helpful. And maybe just kind of a follow-on to that last point. When you look at the existing base and you think about the conversion opportunities, should we be looking at, really, when these customers come up for renewal with their existing payment provider, that's an opportunity for you? Is there maybe a chance to kind of put some type of firmer pressure on them to really kind of incentivize them to move over? Just help us kind of understand how you're helping promote that conversion.

Yes. There are some customer-side events, for example, like you said, a customer coming up on a renewal. That may create an opportunity. But what we really lead with is that we have a relationship with these customers, right? GoDaddy has 65-plus transactions in NPS and in Care. Our customers are used to having a great relationship with us. So when we engage them, number one, they're open to the idea of GoDaddy offering them GoDaddy Payments. The second pillar of our approach is that we offer them the one-stop shop. They have other relationships with GoDaddy. We can introduce one bill, one partner to work with. We can make it easier, and that's attractive to our customers because many of them start by saying, 'Oh, I didn't even realize that you had payments. Oh, it's pretty great. Oh, I like the way this works. Oh, this works seamlessly with all my other stuff I do with GoDaddy.' So that's a win for us too. And then you've got pricing that's the best value in the market today, which sort of comes in as a third pillar of that sales pitch. We're continuously finding that that works. That encourages our customers who have great relationships with us, who run micro-businesses, to adopt GoDaddy Payments, and that's what's been driving our GPV growth.

Our next question comes from the line of Vikram Kesavabhotla from Baird.

Hey, can you hear me?

Yes. Hey, Vik.

My first question is for Aman. I think you mentioned in your prepared remarks that GABI has now been rolled out to the entire care team. Just curious what the early data points have been there in terms of the impact that's having on efficiency. I know at the Investor Day, you talked about the potential for that to reduce time and interactions for the team. Just curious what you're seeing so far there and what the early reception has been from the care team. And then my second question is for Mark. It looks like you exceeded the first-quarter guidance on EBITDA margin. Just wondering if you could talk more about some of the drivers of the outperformance there. And how much of that was specific to the quarter versus factors that could ultimately benefit the balance of the year? And I'll leave it there.

Vikram, I want to share my enthusiasm for GABI. It has great long-term potential for us. GoDaddy has access to a vast amount of data from 21 million paying customers and many more over the years. By leveraging AI, we can organize this data and make it easily accessible to all the guides in the company. The tool has been rolled out and guides are beginning to utilize it. As with any new tool, there will be a learning period for adoption and training, especially since it's powered by GenAI. I am really excited about it. I've mentioned a few use cases that are already operational with GABI, allowing it to handle summaries and tasks that guides previously managed. This shift is moving us towards automation. We have many use cases planned and an excellent roadmap for the next couple of years. Overall, I’m very optimistic about what’s ahead.

And Vik, on the normalized EBITDA margin, I would say quarter-to-quarter, you may see some fluctuations depending on the timing of spend. Overall, if you look at Q1, we've always said accelerated A&C will be a tailwind to our ability to expand our margins over time. With the pacing you saw in Q1, we saw some of the benefits of that. For the year, we're on track for the 31% exit, and we feel good about that, and we're on track for the 29% for the entire year. Obviously, we've talked about our ability to expand that going out. All that framework remains in place, and we continue to see the benefit of the A&C tailwind related to that.

Our next question comes from the line of Aaron Kessler from Seaport.

Could you provide an update on the macro environment and the trends you are observing? It appears that customer numbers are flat year-over-year, possibly due to some disposition impact. Can you elaborate on that? Additionally, what trends in gross additions are you seeing in relation to this?

Thanks, Aaron. On the macro, I think the word we internally feel represents it best is steadiness. I think that's been positive for us. We had strong gross adds and customers continuing to come in at the top of the funnel. There are of course some divestitures and integrations as an offset to that, which I view as a short-term gain. But we see strong gross adds continuing. The steadiness in the macro, we believe, will continue to power that. Again, we have a lot of firepower in terms of marketing at our disposal that is improving. It's driven with data and provides opportunities for us to continue to explore to put more dollars at play and get optimal returns on them.

Our next question comes from the line of Jian Li from Evercore.

I want to revisit Airo. It seems that Airo is still in the early stages of generating revenue. Are you factoring in any revenue or bookings contribution for this quarter from Airo? Could you elaborate on its contribution? Additionally, during the Investor Day, you mentioned that Airo is relevant for both DIY and Pro users. I'm curious if there are specific product features for Airo that you're developing for the professional or agency market.

Yes. Thanks, Jian. The way we're looking at Airo right now, we are in the discovery and the engagement phase. We haven't hit the monetization phase. We're very early on. We are looking at all the statistics. We're observing the level of engagement around it, but nothing has been built into our bookings or revenue for that matter in our model today.

Yes. The way you might think about it, a lot of value is being created for customers with Airo because they're getting a bundled experience that's seamless and connected. Some of that monetization opportunity we have talked about, like Airo Premium and paywalls, but there's also a monetization opportunity that would happen at renewals, but that would be a year out from the time the customer bought the domain. On your question of Airo features for Pro, the feature that I'm personally very excited about is Airo Insights, which is the capability where Airo assesses an existing website and gives actionable advice to Pros on how to improve that website. We have a version of that that's going to work for customers, too. But that product, from the first day, from the ground up, was built for Pros. Its first implementation is with WordPress and it's a fantastic product. We get great engagement from Pros on it. Again, as with all Airo products, that is still at the discovery and engagement phase. We have not added monetization yet, but this year we expect to test a number of monetization methods for Airo Insights as well.

Great. Wonderful. And then just a quick follow-up on the GPV strengths that you're seeing. If you can parse it out a little bit, is that more customer attached growing? Is it more just the growing GPV per customer? And it's coming from WordPress marketing? Or more on the managed WordPress side? If you can just talk about also the growth of these 2 segments separately as well.

Thanks, Jian. The biggest piece of the driver for the GPV growth is actually converting our customers in the base. A lot of that has to do with a broader solution than just the online solution, right? We have our hardware. We own the full stack from the hardware to the operating system to the applications on top of it. What we want to do is sort of provide this omnicommerce solution that we're trying to bundle in different ways and target to our existing customers. That's the biggest driver of the GPV; it's a fantastic driver.

Like we've always said, the biggest opportunity in front of us for commerce is converting our existing customer base. That's where we're seeing the growth in the GPV today.

Our next question comes from the line of Elizabeth Porter from Morgan Stanley.

I wanted to ask again on Airo. We're clearly seeing the benefit with more attach and ARPU, but I wanted to better understand how Airo might be changing any sort of top-of-funnel demand. You noted some stronger gross customer adds. And then second, what is the potential implication on improving customer growth after some muted growth over the last couple of years?

Yes. On Airo changing the top of the funnel, we're excited about marketing GoDaddy as a provider not just of this expansive set of products and capabilities, but a provider that can bring you those capabilities in a seamless, intuitive, almost magical manner. Airo is not just an experience for our customers, not just a platform that GoDaddy has; it's something we're taking into our marketing and looking at ways to really dive into customer perception. If the customer thinks about GoDaddy and thinks about domains, Airo is going to help the customer think about GoDaddy and think about many things together. That is the largest piece of shifting the top of the funnel with Airo, Elizabeth, if that makes sense, is really taking the go-to-market plan for Airo into every bit of our marketing and into every channel that we have and making that really successful. In terms of customer growth, yes, we absolutely see in the medium and long term a growing customer base for GoDaddy. We see that as a key point of growth. We have fantastic global brand awareness that is unparalleled. We have amazing products to bring to them, and we have plenty of firepower in our P&L to reach those customers.

Yes. We continue to be impacted by the divestitures and migrations that we've discussed. A lot of that's peaking in Q2, and some of these are starting to lap but will abate over time. While we're attracting more of the customers with higher intent, that are attaching to that second product and engaging on the bundles and are very happy with, we're losing, on the back end, what I call low-calorie customers that weren't really in there with intent. We're happy with the model. It should start to abate over time, and then we'll keep everybody posted on a quarterly basis.

Great. That makes a lot of sense. And then a follow-up on the margin side of the equation. There's the kind of mix shift to A&C, also leverage as revenue growth reaccelerates, and you guys are taking also some specific kind of cost actions to manage expenses. So just wondering if there's any way to, like, stack rank some of these drivers as it relates to the margin expansion that you guys have in the outlook.

Yes. Elizabeth, I look at it in 3 buckets. We have the tailwind related to A&C growing at a higher profit point, which continues to be a big driver. The other big driver is our access to global talent pools now as our international base grows; our ability to move into more cost-effective markets is helping us. The third, probably not as big as the other 2, but the third continues to be our infrastructure simplification, and that is just getting more efficient by reducing locations and getting out of leases. Those 3 buckets are the big contributors to how we continue to expand our margin, and that will continue as we go into the outer years.

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

On aftermarket, second consecutive quarter here of double-digit growth, but meanwhile, it looks like your full year expectations there are still kind of in low single-digit territory. What's driving that outsized growth right now? It looks like ATVs are up almost 20% on the year plus the benefit of easier compares. Just trying to understand if something has structurally changed in demand for that business. What's causing that resurgence? And relatedly, what would cause it to slow from here?

Thanks, Trevor. We have seen a pickup, what I would say, in the average transaction value. In Q1, we saw the return of the larger transactions that have been missing in prior periods. Again, we don't build that into the model because they come in the short term, and they can create some volatility. But we did see the benefit of that and the 12% growth in aftermarket this quarter. From a steady-state point of view, we think this is a business that is going to be low single-digit growth. We're seeing the volume at the lower end grow. We're continuing to see good average transaction value with the lower end grow. But we definitely saw the benefit in Q1 of some larger transactions. But we don't build that into the model; we only build in what we can see.

That makes sense. And just a quick follow-up on the Heart Internet sale. How much of a drag will that be on hosting revs? And was that previously contemplated in the '24 guide?

Yes. I think the best way to say that is we previously contemplated that when we were talking about our guide for this year. We hadn't closed it and announced it, but we were far enough along we built it into the model.

Okay. And anything on sizing the drag?

We look at it as overall; the divestitures are about 100 basis points for the year, peaking in the second quarter and abating through the rest of the year.

Our next question comes from the line of John Byun from Jefferies.

John Byun for Brent Thill. You pushed through the price increases on productivity and now on payments. I'm just wondering how much pricing power is left, especially given it seems a lot of SMBs are still somewhat struggling. And then on that last point, I know there was a question earlier on macro, but anything you could share on the health of the SMBs? Anything different this Q1 versus last quarter? I don't know if there's any change, whether better or worse in terms of the SMB health and sentiment.

John, on the pricing and bundling, I want to clarify a little bit. These are not push pricing changes. It really is an approach to create new and differentiated bundles, to have pricing that's value-based. It's differentiated; it's not just a simple price increase that one might see. All the pricing and bundling capabilities are based on large-scale data and machine learning. We have a very large customer base, and the more we apply this thinking, we do see some runway in front of us to do that. We think it's a great lever; pricing and bundling was the biggest pillar. It's about creating the right bundle and pricing it dynamically to get the best return for bookings growth and for renewal. That's just a little bit of context for how you might think about our pricing and bundling initiative. In terms of the macro, we see a steadiness to the macro, and we think that's positive. For our customers, they tend to be optimistic. We never do a survey with our customers that comes back with the sky falling; they're always optimistic about their business. The steady macro just helps them have a little bit more optimism.

Our next question comes from the line of Chris Kuntarich from UBS.

Great. My first question is about paywalls. Can you explain what you mean by that in relation to Airo? The second question is about marketing. Aman, you mentioned the strength of GoDaddy's brand at this time. We saw some significant leverage in the first quarter. How should we consider that leverage for the rest of the year? What factors are included in that guidance from a marketing standpoint? Also, how do you plan to continue raising awareness for Airo compared to focusing on lower-funnel strategies?

Yes. Let me start by talking about the Airo paywall. The type of thing we're discussing is when you buy a domain name, you've got a logo, you've got a coming soon website created, you've got 8 versions of websites created that you can choose one from, you've got an email address that's been created for you, you've got a pay link ready to go. You can take payments on it, 60 seconds later, right? You've got marketing campaigns set up for you already. We're looking for engagement, and we're gathering data about how customers engage with these different capabilities of products, the cards, as we call them. The paywall is a technology that looks at that usage, and at a certain point of value created for the customer, it will interrupt the customer and say, 'Hey, if you want, let's say, a better logo, or if you want to improve this website in a certain way or edit this website here, you need to start to have a paid plan.' Airo did all this work for you, and we love it that you love it, but now you have to pay for it, right? That's paywall; having the ability to dynamically become part of the customer journey and introduce friction where you want to get paid is a sophisticated capability that SaaS companies have. I'm excited to have it at GoDaddy too, right? Airo offers us the capability to have lots of different paywalls that we're testing.

In terms of marketing, as I said, I'm going to say this, and Mark will probably say something related to it, and we laugh about it sometimes internally. I'd like to spend a lot on marketing with Airo and tell the whole world about our capability. But we're very disciplined in our approach to looking at the return on marketing. That has to do with my history of gathering a lot of data and understanding our market; how our channels are working and the value they provide. We'll be disciplined and look to spend whatever we can within our guidelines. But I think in terms of leverage for the year, we feel good about our marketing strategy and its return on investment.

Our next question comes from the line of Naved Khan from B. Riley.

So just a quick question on the booking growth for AMC. It's pretty impressive. In your commentary, you kind of attributed that to pricing and bundling. I just want to develop that. Is it more bundling versus pricing that's kind of driving this? How should we understand it from the outside looking in? And at the Investor Day, Aman, I think you talked about value-based pricing and leveraging dynamic pricing and things like that. How much of that is happening currently? And how much scope of that is there to do it further and more broadly?

Yes, Naved, thanks for that question. The approach we've taken with value-based pricing is that the pricing and bundling initiatives work together. It's really looking at what the engagement is for that customer, what value they have, what bundles and services we can create for them and then how should we price that. Where we are invested in that, we believe there's at least 3 years of goodness for us that we see with the pricing and bundling initiative. We're excited about going after that opportunity because we do have a huge base, 21 million customers that we can approach with that kind of thinking.

The full year guide hasn't changed. It could fluctuate from quarter to quarter. Obviously, we're overall reducing our spending year-over-year.

Our next question comes from the line of Alexei Gogolev from JPMorgan.

Mark, I was wondering if you could give us some insight into how we can grow ARR this year? What is your expectation for the rest of the year?

Without providing specific details about ARR growth, it's important to remember that it is a lagging indicator. It trails revenue not just in the bookings to revenue equation but also in relation to the revenue from the previous 12 months that affects it. We anticipate a healthy increase in ARPU; while it may lag during the year, it is expected to rise over time. We are optimistic about ARR growth as our subscription base expands, which is a positive indicator of our health. ARR has shown significant strength in our applications and commerce sectors, as well as consistent performance within our core platform. Our subscription revenues are expected to be ahead of overall subscription bookings by 1 to 2 points compared to revenue throughout the year.

Okay. The second question was about the WorldPay partnership. Could you provide an update on how it's faring? Has there been any tailwind coming from that WorldPay partnership?

Yes. The WorldPay partnership isn't driving the GPV growth necessarily. We like the partnership with WorldPay. We're excited about the new team there. They had a lot going on over the last few months, but we think they're in a great place. We're excited about the product offering we have with them, and we're excited about their sales growing. But our GPV is mostly growing without selling into our own base.

And our last question comes from the line of Ygal Arounian from Citi again.

Last week, Verisign made some comments about how they're going to ramp up marketing spend, particularly how they're going to work a little bit more one-on-one with their distributor partners to try to open up the funnel for dotcom in particular. So I'm getting a lot of questions; there's been a lot of interest from investors on that point, so I thought I'd ask it from your point of view. What that might mean for you?

Thanks, Ygal. I think you kind of answered the question. We have a diversified portfolio of domains. We have the opportunity to sell over 400 different TLDs. We can create merchandising and offerings that are unique compared to other players. We think we have a great diversified portfolio on domains. Obviously, we love all our partners. If a large partner wants to do more, we're always happy to help. We want to work with everyone.

We have now finished the Q&A. I'll turn it back over to Aman.

Thank you for joining us. We'll see you in a quarter. Bye-bye.