GoDaddy Inc. Q3 FY2024 Earnings Call

Welcome to GoDaddy's Third Quarter 2024 Earnings Call. Thank you for joining us. I'm Christie Masoner, VP 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. If you'd like to ask a question on today's call, please use the raise hand feature in the webinar to be added to the queue. 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 to our Investor Relations site at investors.godaddy.net 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'll 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, October 30, 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 all for joining us today. At GoDaddy, our mission is to empower everyday entrepreneurs and make opportunity more inclusive for all. Our strategy is relentlessly focused on creating customer value and transforming it to shareholder value through better conversion, attachment, and retention. This is the driving force behind our profitable growth model, propelling us towards our north star of maximizing free cash flow over the long-term. Our strong Q3 results demonstrate our effective execution of this strategy, delivering both innovation and operational efficiency. We drove meaningful growth in free cash flow increasing 29% year-over-year, and application and commerce bookings were up 20% and normalized EBITDA margin expanded by over 400 basis points. We are excited to share updates on our growth and margin initiatives driving success in 2024. Pricing in bundling, seamless experience, commerce, and cost optimization are all ahead of schedule, driving the strong results mentioned. The enthusiasm for GoDaddy Airo continues to resonate within our teams. Along with an update today, we are looking forward to more live demos at our investor dinner in early December. Pricing and bundling continue to deliver solid results with productivity-focused efforts remaining a key contributor to the 20% application and commerce bookings growth this quarter. As we have said before, we view the pricing and bundling initiative as a multiyear journey that leverages our software platforms, vast data and machine learning capabilities allowing us to bundle solutions in a way that offers greater value to customers with pricing aligned to the value delivered. While our efforts this year have been concentrated on productivity solutions, we will expand the initiative across more of our product suite, extending this initiative beyond the application and commerce segment. Putting a finer point on this, this means the financial impact of pricing and bundling can favorably drive growth in both A&C and Core platform segments starting in Q4. Our seamless experience initiative exceeded expectations as we continue to remove friction in the customer experience and improve purchase, onboarding, and renewal path. Given our scale, even modest improvements in conversion and renewal can yield meaningful results. In Managed WordPress, we added security enhancements to all new domains attached to the platform as well as expanded AI-powered features, making it easier for customers to build and manage their websites. Additionally, with the recent launch of the GoDaddy Digital Marketing Suite, we are giving customers an intuitive all-in-one product to help grow and market their businesses regardless of where their website is hosted. Features like these empower our customers to better acquire, engage, and expand their own customer base. For our commerce initiative, we continue to enhance our offering by introducing new AI-powered features that simplify operations for merchants. The two new SaaS plans we launched last quarter, Point-Of-Sale Plus and Invoicing Plus have had positive adoption trends since being fully rolled out. We have set aggressive attachment targets, and the team is making progress against them. Finally, within our cost optimization initiative, we augmented care interactions in 20 international markets with our new generative AI-powered conversational bot providing our customers with better instant self-service access to solutions for common issues. We found that the use of this technology led to double-digit improvement in containment rates, representing a savings of over 16 million incremental contact minutes without sacrificing customer satisfaction. We are excited with the progress on the conversational bot and along with GABI, we expect these to continue to drive leverage in care while delivering a better experience globally. Airo is starting to provide a magical experience to customers that we aspire to provide across every interaction. It is a compelling proof point to our multi-year journey to successfully leverage our software platform and unleash the combined power of our infrastructure, large-scale data, experimentation, AI, and machine learning capabilities. With the capabilities of Airo, we evolved the domain to represent so much more. It is now a gateway to a true business-in-a-box experience, allowing our customers to go from idea to online in minutes. Our teams are moving at a fast pace even before celebrating the one-year anniversary of the initial customer testing for Airo; it was available in over 180 countries globally. Nearly 3 million customers have discovered Airo with over half of them engaging with the experience. We are pleased with the momentum in discovery and engagement, and just as exciting are the proof points we are driving in Airo monetization. With many months of data, we can clearly see that the largest engagement winner is website building. Over half of engaged users published a coming soon page, which is a customizable one-page website. Customers engaged with Airo are quickly becoming the largest funnel for websites plus marketing; with over 40% of websites plus marketing paid subscriptions in Q3 originating with the Airo experience. Our goals with Airo are about discovery, engagement, and monetization. And with these large discovery and engagement numbers and multiple paths to monetization, Airo is off to a great start. There is so much more we can do given the positive traction, and we’re eager to expand the Airo experience across all on-ramps at GoDaddy. We plan to increase investment in marketing initiatives to support this broader launch. So far, the customer exposed to Airo starts with a domain purchase. In the next few weeks, we will start rolling out Airo to customers that start with a website purchase. Just as websites have become the highest attached product for domains on Airo, we expect to drive attachment with other products when every website customer starts with an Airo experience. This underscores our commitment to rapidly scaling products enabled by Airo as it continues to transform the customer experience and drive new avenues of growth. We look forward to showing you more during our upcoming investor dinner event on December 3. We plan to showcase paid tiers for Airo with premium offerings like advanced logos and imagery as well as AI-powered marketing tools to help our customers grow their businesses. Equally exciting, we will highlight our conversational experience to building and maintaining WordPress sites, which reimagines harnessing the power of WordPress through a simplified intuitive interface. We will also demo our site optimizer tool, which can inspect any website and provide actionable recommendations to improve performance with just a click. While these products themselves will be brand new, they represent our continued focus on leveraging AI and machine learning and our unique scale and data to deliver magical seamless experiences for our customers. We are thrilled to give you a first look at these innovations that will drive our growth and success in the future. In closing, we remain steadfastly focused on executing our key growth initiatives. I am delighted with the speed of execution and our relentless commitment to help our customers thrive. The GoDaddy team remains dedicated to propelling profitable growth and creating enduring shareholder value. With that, here's Mark.

Thanks, Aman. We delivered strong Q3 results, demonstrating our disciplined execution of the strategy we shared at our recent Investor Day. Our focus on building increasing customer lifetime value through developing and delivering seamless technology that drives conversion, attachment, and retention is demonstrated in our financial results. In the third quarter, we drove sustained double-digit A&C revenue growth, increasing 16% as well as impressive normalized EBITDA margin expansion to 32%. We made progress toward our North Star, growing free cash flow 29% to $363 million. In addition, we continued to execute our disciplined capital allocation strategy, which focused on share buybacks, reducing our fully diluted shares outstanding to $144 million. Total revenue grew to $1.15 billion, up 7% on a reported and constant currency basis. For our high-margin A&C segment, we drove 20% growth in bookings and 16% growth in revenue to $423 million, in line with our guided range on the strong performance of the growth initiatives Aman spoke about earlier. The segment EBITDA margin for A&C improved to 46% on the strength of our high gross margin proprietary solutions partially offset by the strong performance and lower gross margin profiles of our commerce offerings and third-party solutions. A&C segment EBITDA was also boosted by significant leverage gains across all operating expenses. Our proactive effort to simplify our infrastructure and recruit global talent were the main driving factors behind this strength. In addition, ARR for Applications & Commerce grew 15% to $1.6 billion. We delivered $725 million of revenue for our Core Platform segment representing growth in revenue and bookings of 3%, in line with our guided range. Performance this quarter reflected the strength in primary domains partially offset by hosting divestitures and end-of-life migrations. Segment EBITDA margin for the Core Platform grew to 33%, and ARR for our Core Platform segment grew 4% to $2.4 billion. ARPU grew 8% to $215 on a trailing 12-month basis, while our customer count declined slightly to $20.7 million. With the previously mentioned divestiture and migration efforts behind us, we expect to return to customer growth in 2025. Currently, our consolidated customer retention rate remains at 85%, and over 50% of our customers have two or more paid products with us. Moving to profitability. We drove expansion in normalized EBITDA in the third quarter, growing 24% to $367 million and delivering an expanded margin of 32%, up over 400 basis points. This was driven by the gross margin tailwind noted above, coupled with operational discipline that drove leverage in our P&L. The front-loaded benefits of our 2023 restructuring, infrastructure simplification, and global talent recruitment are evident, and we are pleased with these accomplishments. As we look forward, we remain on track to deliver our Investor Day targets of approximately 33% by 2026. Additionally, as we look to the upcoming quarters, we expect to increase investment in marketing to support our broader launch of our Airo enabled solutions to showcase our top-rated AI website builder and capture customer demand. On bookings, we delivered $1.2 billion in the third quarter representing 9% growth on both a reported and a constant currency basis. As a reminder, bookings primarily represent the cash collected during the period. Subscription bookings grew 2 points ahead of subscription revenue. Unlevered free cash flow for the quarter grew 25% to $399 million, and free cash flow grew 29% to $363 million. Capital expenditures were down approximately 46% because of data center divestitures. Through October 28, we repurchased 5.2 million shares year-to-date, totaling $668 million. We repurchased 39.4 million shares for $3.2 billion under our current authorizations, and we have $767 million remaining. We drove a 23% reduction in gross shares outstanding since January 2022, 3 points ahead of our three-year targeted reduction of 20%. At the quarter end, 144 million fully diluted shares remain outstanding. On our balance sheet, we finished Q3 with $767 million in cash and total liquidity of $1.8 billion. Net debt was $3.1 billion, representing a net leverage of 2x on a trailing 12-month basis. Pivoting to our outlook. We are raising the full-year revenue guide to $4.545 billion to $4.565 billion, representing growth of approximately 7% at the midpoint of our range. For the fourth quarter, we are targeting revenue between $1.165 billion and $1.185 billion, also representing growth of approximately 7% at the midpoint. In Applications & Commerce, we expect mid-teens revenue growth for Q4 and the full-year. In Core Platform, we expect low single-digit revenue growth in the fourth quarter and the full-year. As our track record demonstrates, we are committed to maintaining our operational discipline driving further operational leverage in our model and expanding margins. Including the additional marketing investment we expect to make in the fourth quarter, we remain on course to deliver a 31% normalized EBITDA margin. Given our year-to-date performance, we are also raising our full-year normalized EBITDA expectation to 30%, keeping in mind our nearly 1:1 normalized EBITDA to free cash flow conversion ratio, we are also raising our unlevered free cash flow target to $1.475 billion plus and free cash flow to $1.325 billion plus for the full-year. Our disciplined capital allocation approach remains unchanged, and we will evaluate all opportunities for shareholder return according to our rigorous and returns-based framework. We are committed to the path we outlined at our Investor Day, executing our strategy to deliver both durable top-line growth and expanded profitability as we drive toward our North Star. Our robust cash generation, strong balance sheet, and capital allocation framework underpin our investment thesis and power our ability to create enduring value for our shareholders. We are pleased with our progress towards our Investor Day target of $4.5 billion plus in cumulative free cash flow generation supported by 6% to 8% annual revenue growth and expansion of our normalized EBITDA margin to 33% by 2026. Lastly, we look forward to welcoming you to our annual investor dinner on December 3 in our new Tempe, Arizona headquarters. I will now turn the call over to our Vice President and Head of Investor Relations, Christie Masoner, to open the call for your questions.

Hey, thanks. Can you hear me?

Yes.

Hey, great. Thanks. I wanted to ask two questions about the Applications & Commerce segment. The first one is on bookings growth. Yes, I realize you don't guide to that metric, but just wondering if you could give us any thoughts on how that could track in the fourth quarter this year and some of the puts and takes we should be considering for bookings growth as we go through the rest of the year. And then, second, this is your third straight quarter now of Applications & Commerce bookings growth of 20% or higher. I'm wondering if you could remind us of the relationship between that metric and forward revenue growth for that segment and some of the puts and takes that influence the conversion there. Specifically, if I go back to the Investor Day, you talked about this segment being a low to mid-teens type of revenue grower. But given the bookings momentum that you've seen to date, should we be thinking about a higher level of growth in the near term for that segment? It would be great to get any thoughts on those topics, and I'll leave it there. Thanks.

Thank you, Vik. There are a couple of points to discuss. First, the acceleration in bookings can positively impact our revenue, which is a straightforward observation. When we consider the differences between bookings and revenue, especially with our A&C, it's important to note that timing varies based on the product mix within that category. For instance, in transactional and commerce, we have monthly, annual, and multiyear terms. It's essential to view this on a broader scale in terms of product sales and their mix. Yes, it will contribute positively to our revenue overall, and we're enthusiastic about the momentum. We'll provide further insights during the Q4 earnings call regarding 2025. However, we are confident in the 6% to 8% growth projection we've discussed for the next three years. We anticipate that, for the year, overall bookings will exceed revenue by about 2 points, primarily driven by A&C.

Okay, great. Thank you.

Thanks, Vik.

Our next question comes from the line of Trevor Young from Barclays. Trevor, please go ahead.

Great, thanks. First, just on the pricing and bundling going forward. I think you made comments that it's an opportunity near term in Core Platform. Can you expand upon that a little bit? Should we assume that that’s going to happen in some of the bigger line items such as domains? And then the second question, aftermarket growth slowed quite a bit in Q3, kind of flattish year-on-year versus double-digits earlier in the year. Was that consistent with your expectations? And was there anything kind of one-time there? I know it's very transactional in nature, so tough to predict, but just any color on what's going on in the aftermarket would be helpful.

Thanks, Trevor. I can take the pricing in one-line approach. As we've talked about, pricing and bundling is about finding the right cohorts of customers, where we can provide the right value to customers and then price along with that value. The way we do this is by experimenting at different price points to find the price elasticity curve. What that curve helps us do is find the right cohorts where we can balance attrition for customers, right, or let's say, retention of customers with the pricing opportunity in front of us. That's a great balance. Right at the company, we want to drive as much growth as we can while maintaining our high customer retention rates. For pricing and bundling, that approach of using machine learning, using experimentation, using the scale of our data and our competitive advantages there, we can direct that way of working across our product suite and cohorts within that product suite. So what I'm really talking about here is that we have identified other cohorts of customers that we will be applying this approach to. Some of those are going to have products that sit in the Core Platform, which is now going to take sort of the benefit of pricing and bundling across both segments.

And Trevor, on aftermarket, yes. Just a reminder, it's a volatile business. We think over time, it will be a low single-digit dollar growth. We always talk about there could be volatility from quarter to quarter. This quarter, it was down slightly. Nothing to call out in and of itself. We saw some pressure on valuations at the lower level, all of the demand seems to continue. Again, we don't control the pricing on the aftermarket. It's a buyer-seller pricing spectrum. Our thesis still holds that we believe it will be a low single-digit grower over time, and we'll see a little bit of variability in the quarter-to-quarter.

Great, thank you both.

Thanks.

Our next question comes from the line of Ken Wong from Oppenheimer. Ken, please go ahead.

Can you guys hear me? Okay.

Yes.

Okay, perfect. I just wanted to touch on an earlier statement that you made in terms of resuming customer acquisition in 2025. Was that just generally meant as a sort of as you anniversary the divestitures? Or should we assume a heavier pace of investments in '25 to kind of pursue a more attractive growth opportunity?

Yes, I want to highlight that we are moving past the divestitures, integrations, and the end-of-life situations we've discussed before. As we progress through this year, the challenges associated with net customer additions will diminish. Aman, feel free to share your thoughts on the marketing aspect we discussed.

Yes. Look, we're super excited, Ken, about the product portfolio we have in play right now, brought together by Airo. Just an almost magical experience for our customers. We've got the product rolled out; we've always had sort of very good guardrails for our marketing spend. Given the product offering that we have, there's an opportunity for us to spend up in marketing, and we do expect to get more customers as a result of that. Like Mark said, there is a normalization of the divestitures and some of the actions we've taken. It also includes some actions that we took with viral offers that we have out there, and we're going to lapse on that too.

Got it. And then maybe a quick follow-up on a similar question to Vikram. A&C ARR accelerated on a tougher comp. Is that something we could continue to see considering the pace of A&C bookings at that 20% level?

Yes. Higher level, obviously, as we go into Q4 and into 2025, the strength of A&C will get harder to compare to. On a percentage basis, we like the momentum overall that will continue. But obviously, the percentage comps get a little harder as we go on into next year.

Just to confirm, I think you have the sort of A&C comparatives from last year for Q3 and Q4, and you can see the sort of step up in Q4 comps that happens.

Perfect. Thank you guys.

Thank you.

Our next question comes from the line of Ygal Arounian from Citi. Ygal, please go ahead.

Hey guys, good afternoon.

Hey, Ygal.

Great to see some of the early starting points with Airo, and Aman, you called out some of these things around the engagement that we're seeing. Last quarter, you talked about starting to put in some paywalls testing around that. I want to see how that's progressing. And then maybe kind of connecting the dots with the engagement and the expectations around moving into the starting point of the website piece versus the domain piece. Are you starting to see real financial results? Presumably, if what was it, 40% of what's that marketing subscriptions are originating with Airo? That means yes. But maybe just help us understand that a little bit better.

Thanks, Ygal. The progress with Airo goes on a timeline of discovery, engagement, and monetization. Discovery is about getting Airo in front of as many customers as possible and getting them to discover that GoDaddy has a breadth of products available to them. The engagement piece is about getting them to engage in some of those products, and you’ll remember that we call those Airo cards, getting customers to click on them, engage with them, and set something up. We're seeing really good traction on discovery and engagement. Over the last quarter or two, we started to put up paywalls where, along with that engagement, if, for example, a customer got a coming soon page and wanted to customize it a little bit, if they wanted to do more, a paywall would appear and say you need to buy a subscription or websites plus marketing. It's possible that a customer would have bought it anyway, two months or three months down the line, and we would have gotten that attachment. But what Airo offers is the ability for us to paywall right there, getting the customer to make that decision. That paywall is connected to the 40% that I talked about today. Airo is becoming a bigger and bigger on-ramp for our website products. Today, we have two in Airo. We have a coming soon page that's doing really well, and websites plus marketing subscription. As Airo becomes a bigger on-ramp, yes, we’re happy to see monetization happen, but what that opens up in the future is paywalls, an opportunity to sell other products because we see in customer behavior that customers have a need for the other offerings we have. It's just that today, they don't discover those offerings, they don't engage with those offerings, and they definitely don't see a monetization for it. But Airo is going to let us do that.

Okay. Great. And maybe one more on the bundling initiatives. Still, I think if I'm understanding correctly, still majority focused on the productivity suite. You called out a few specific products in the past quarters. Maybe if you could update us on where you are within productivity? And could we expect to see that come out with commerce in the coming quarter or two? Thank you guys.

Yes. Our pricing and bundling, the folks working on it really have the ability to test across various customer cohorts, and what they're looking for are the cohorts where we can generate the best results fastest. The best result here means creating that customer value and then being able to monetize that value as well. When I look across our products, we have other products that are much larger in terms of the base of customers. We think that those likely are going to offer some of the better opportunities, but we'll keep you informed just like we did with productivity. We applied this thinking to multiple products. We said what you're going to see stronger or a large chunk of the return come from productivity because we're going to zone in on that because that's where we see the opportunity. Similarly, as we go over the next few quarters, we'll guide you better on where we're seeing that return. Our testing this year as we plan for next year is going well. One of the things that we have shared today is that we see ourselves going across customer cohorts that will now be in A&C and in Core. You'll likely see a bit of different behavior going into next year than you did this year.

Got it. Thank you so much.

Thank you.

Our next question comes from the line of Arjun Bhatia from William Blair. Arjun, please go ahead.

Hi, everyone. I'm Willow on for Arjun Bhatia. Thanks for taking our question. So just wanted to ask on macro questions. Last year, you called out you're seeing stability in your base. Can you comment if you're seeing any changes here? And then also comment on any impact to net new as well, please?

Overall, on the macro, we track the metrics I think we've talked about before. If I look at my dashboard, generally, we see some good, but we're keeping a close eye on things, especially with the election in the U.S. coming off. Broadly speaking, when we think about our customer base, and Mark always likes to talk about our high retention, I'm sure you will jump in with that. We're absolutely proud of that. When we look at traffic coming in the door, we continue to see good gross adds. We continue to see good traffic coming to the site. In pockets where we do see some sort of weakness, that's more than made up by how we've improved conversion, how we've improved pricing, and all the mechanics that we're applying within our seamless experience initiative. If there are a few, those are more than overcome. Broadly speaking, we continue to get good traffic, continue to get good gross adds, and continue to maintain our higher retention rate for customers at 85%.

Just to add, when you take out the divestitures, when you take out the decisions we made around virals, and we look at the strong top of the funnel, what we are seeing is customers coming in with intent and how are we seeing it? Well, our ARPU is increasing, driven by higher average order sizes from our customers when they initiate with us at the beginning. We see our customers attaching overall at a faster rate than they did years ago. When you peel through the ins and the outs of the customers, taking out the divestitures, turning off the virals, we're seeing very strong behavior with intent at the front of the funnel. We are always subject to things like valuations in aftermarket, and we've talked about that a lot, but the overall behavior of the funnel and the attachment is strong.

Got you. That's helpful. And one more follow-up, if I may. Can you comment on the bookings growth? It looks like for A&C, it decelerated quarter-to-quarter. It seems like customer strength is good, and pricing that were continuing.... If I can understand it better?

I understand your point about the deceleration, and I'll address it. If you have more to add, feel free to let me know, as there were some issues with the connection. Regarding the deceleration, we are facing tougher comparisons. We transitioned from the Q2 comparison in 2023 to the Q3 comparison in 2023, which presented the most challenging comparisons. However, the underlying momentum remains consistent.

Okay. That answers my questions. Thanks.

All right. Thank you.

Our next question comes from the line of Elizabeth Porter from Morgan Stanley. Elizabeth, please go ahead.

Hey, Elizabeth.

Hi, thanks so much. I wanted to just circle back on the pricing and bundling expanding into the core platform in Q4. When we think about the A&C segment, you guys saw a big improvement with this strategy and growth there almost doubled. How should we think about the benefit unfolding for the core segment, where this bookings have been a little bit more muted in the 3% to 4% range? Is there anything we should consider about the opportunity in core being larger or smaller than what you saw with productivity?

Yes, Elizabeth. It's a little too early to sort of put numbers on it. But we will definitely talk more about it in the next quarter's call. Generally speaking, our approach is the same. The way we're using the data, the way we're cohorting customers, the way we're testing the price elasticity curve, all of that methodology is similar, but it takes us really sort of getting into that customer cohort in a few weeks of executing that plan to really see what it’s going to be. What we do see so far is that we are ready to start it in Q4, but likely it will take a quarter or more for us to get that run rate going where we can talk about it with a little bit more data than we have today.

Yes. And Elizabeth, nothing to change what we've put out there as guidance for Q4. We're talking about the initial steps of it, and then we'll talk about 2025 when we get to the fourth quarter earnings call.

Understood. Thanks. As a follow-up, I wanted to touch on the margin side. You referenced in the prepared remarks just increasing marketing initiatives to support the broader launch of Airo. Is that the main factor driving some of the margin contraction to 31% in Q4 from 32% in Q3? Is there anything else to call out? What are some of the puts and takes set up more broadly as we think into next year? What are some of the key levers that can offset increased marketing spend around ARPU?

Yes. Thanks, Elizabeth. Just a couple of high-level comments. In Q3, we benefited from a favorable product mix. Generally, we think our gross margins are going to be around 64%, give or take 100 basis points. We saw a favorable mix within Q3. For example, aftermarket was down about 1%, and that's a lower margin business for us. As we see our higher margin proprietary software be a better part of the mix. If we see our higher margin proprietary solutions take greater share, our margins will lean towards the high side. If we see transactional having strength, we will see movement towards the lower side. There will be product mix in there that will determine or impact the gross margin. We had seen some front-loaded benefits from some of the restructuring simplifications we had, and global recruitment we talked about; hit into Q3. Some of that was front-end loaded; we'll continue to see those. The rest is what we alluded to regarding the timing. We just had timing of expenses like marketing that we'll see start to pick up a little more in Q4, still on target for the 31% we talked about, with some of that just the timing in the expenses.

Got it. Thank you.

Our next question comes from the line of Josh Beck from Raymond James. Josh, please go ahead.

Yes. Thank you so much for the question. I wanted to go back to some of the Airo comments, realizing that you kind of had this discover, engage, monetize framework. So I think the discovery element of it was up maybe 3x quarter-over-quarter to $3 million. So is that, when we think about the marketing spend that Elizabeth just asked about, is that really the key metric that we should be thinking about in terms of it really ramping up in the year? And is there some type of – maybe not a specific goal, but could it reach a pretty sizable number? Could it be half of your base? Just curious on how we should be considering that.

Thanks, Josh. Discovery is definitely an important metric because without the discovery metric, we can't feel confident that our customers are seeing the breadth of our products, both new and existing products. But if you had to sort of fall in on one metric and say, hey, which is the one that we really are focused on optimizing on, it’s really the engagement metric that we want to keep very healthy, and it is very, very healthy. As we spend in marketing, discovery will definitely go up, but we don't want engagement as a percentage to drop. Engaged customers enter the monetization phase in a much more favorable manner than non-engaged customers. Metrics like attached conversion do much better for engaged users than they do for non-engaged users. That's if you will, the quality metric. That's the thing that makes sure that our efforts are valuable and are going to create more value in the future. While I'm very happy about the multiple paths to monetization for Airo, I would say overall, in our three-year plan at the Investor Day earlier this year, we purposefully put Airo outside of the three-year planning because we wanted to build a very large mode of discovery and engagement. That very large mode will generate sort of recurrence for years to come.

Super helpful. And then I also wanted to follow-up on this stat around double-digit containment rate improvements, I think with these GenAI bots, which I assume is similar to a deflection rate. I wanted to clarify that. Could that be a much larger number over time and at some point, could you see benefits with respect to the P&L? Just curious how we can think about maybe where that could head.

Yes. The containment rate is like a deflection rate. It points to the sessions where a customer asked the question, and the conversational bot was able to answer the customer's question satisfactorily. Seeing a double-digit percentage increase in the bot being able to resolve customer queries or issues is a great first step. Whether it's this or our guide assist part, which we call GABI, these are relatively new technologies. They're off to a great start; we see great momentum in those over the next two to three years. Our ethos around this is that in care, we want to provide a better experience at a lower cost. We expect that care will continue to leverage providing a better experience for customers. One of the ways that we're doing that is by having better technology in care.

Really helpful. Thanks so much.

Our next question comes from the line of Ella Smith on for Alexi Gogolev at JPMorgan. Ella, please go ahead.

Hey, Ella.

Hi, Aman. Hi, Mark. Hi, Christie. Hope you are all doing well. First, I have yet another question on Airo for you. Airo is clearly a powerful on-ramp for new customers and it's clearly driving bookings. How are you balancing that with your ambitions to monetize the products? And when might monetization begin?

Ella, thanks for the question. Our first goal is to build the largest mode of discovery and engagement. We want to be able to spend against Airo and build a virtuous cycle, a flywheel, if you will, where customers care about Airo. They come in, they discover the set of products we have and they engage and buy into those products. That creates a flywheel effect driving average order size up and allowing us to invest more in marketing to bring more customers to our site. That's the first thing we’re trying to build. In terms of monetization, we are super excited about it. Our teams are ahead on some of the monetization experiments versus what we had originally designed. Airo is becoming a great on-ramp for websites plus marketing. We want Airo to become a bigger on-ramp for other products, too. However, it has to follow the discovery and engagement cycle because we would like to be able to sit here and give you numbers on discovery and engagement that are much larger than where we are today.

I think when you think about our overall framework, we're always trying to ensure we're heading towards our North Star of maximizing free cash flow. That means balancing our investments with where we see the return and making sure we're doing it to drive LTV and shareholder value over the longer term without pushing ourselves into a specific area too quickly that would jeopardize that.

That makes a lot of sense. Thank you both so much. And for my follow-up, we saw news at the end of the day that you launched a reseller program. Can you shed some light on the strategic thinking around that program and how the economics will look?

The reseller program reflects the maturity of our products. It's a natural progression of our capabilities. Consider our website plus marketing product, which includes APIs we recently announced. This product not only offers an excellent website builder but is also among the best in creating high-performing websites. To reach customers beyond those coming to us directly, we can extend our capabilities into partner systems through APIs. Our advantage lies in not just offering APIs for website plus marketing but also integrating APIs that enhance what Airo offers. Just as we engage directly with customers and expose them to Airo, the reseller program and the APIs are our means to collaborate with partners and leverage our expanded capabilities and toolset.

That makes a lot of sense. Thank you so much.

Thank you.

Our next question comes from the line of Brent Thill from Jefferies. Brent, please go ahead.

Hi, thank you. This is Chand on for Brent Thill. Two questions. One, as you made Airo available in over 180 countries, just wondering if you could talk about how the response has been different versus the initial launch within the U.S. Any sort of change in behavior or attachment? The second question is around the normalized EBITDA margin. Obviously, that's been expanding faster than expected. Your goal is still 33% in '26. Wondering if there are any factors why we shouldn't be extrapolating from here? Thank you.

On the launch of Airo, John, the way we look at it is that we've got the U.S. market, which is obviously where we started and is our largest market. We've shared some of the data with you on how well that is going. The next stage is the English-speaking markets, which are our bigger markets around the world, just what you would expect them to be like Canada, U.K., Australia. We have a set of developed markets and, I would say, emerging markets. It's too early to talk about those emerging markets and how Airo is going to perform there. In the broader English-speaking markets, we’re taking the learnings from the U.S. and looking to apply them in all other English-speaking markets. We expect it to perform at a level similar to that in those markets.

On the normalized EBITDA, we've talked about the three buckets that are a tailwind to get us to the 33% in 2026. We’ve talked about the acceleration of A&C being a big part of the picture. We've talked about the infrastructure simplifications. We also talked about the global talent pools. We’re pleased with our accomplishments, especially around some of the front-loaded elements of this. Some of that was front-end loaded. We will continue to see those benefits in the three buckets to get to the 33%. We feel very comfortable with that.

Thank you very much.

Our next question comes from the line of Chris Zhang from UBS. Chris, please go ahead.

How should we consider your investment needs in 2025 compared to 2024 in relation to market investments? Can you rank a couple of areas you are focusing on for next year? I also have a follow-up question.

We'll talk about 2025 when we get to Q4 earnings. No doubt we'll give some details on where we think things like our investments are going to be. Areas we've talked about on this call include marketing for Airo. We see customer engagement and behaviors around it. We think of the two important things within our growth, which are innovation and owning the customer relationship. Spending to innovate and meeting our customers' needs is crucial. We see great leverage across those lines, and we'll continue to invest in what the future is.

Our Investor Day framework is still intact. We're making great progress. Our goal is to maximize free cash flow and the components of it to achieve 6-8% growth and 33% margins in '26.

As it relates to marketing investments specifically, can you share with us what guardrails you're applying to determine the level of your spend? Or maybe just directionally how that differs among the various product offerings in your A&C portfolio?

On the marketing spend, we've invested in very good guardrails driven by data and machine learning that give us great commentary on our marketing spend and return on it. Our goal is to remain within our guidance range. We’re building the opportunity to drive more discovery for Airo, more engagement, and be able to reinvest those returns back in. It's about kickstarting that flywheel with a great product suite in place now.

Our disciplined approach hasn't changed around this. It's about measuring the ROIs and making sure we feel comfortable that where we invest will yield the disciplined ROI we talk about.

Thank you for your color. And I look forward to seeing your team in Arizona.

You too.

You too.

The next question comes from the line of Naved Khan from B. Riley. Naved, please go ahead.

Yes, hi. Thanks a lot. So I got a couple of questions. One is this 40% of paid development subscribers coming originating through Airo. That's impressive. I'm just wondering how that share that comes through Airo has trended over the last three or four quarters since it has been live. That's one. The second question is just around the on-ramps. Now that you're extending Airo into the website-first kind of on-ramp, I'm trying to think about the relative size of the on-ramps for the business. What’s the right way to think about domains versus websites?

The share for Airo over the last few months has been increasing but obviously accelerated by some of the paywall work. It’s going to take a couple of quarters to see how the paywall performance affects our regular TAT. The number jumping to 40% is a clear signal that customers are looking forward. That is a positive. In terms of the size of the different on-ramps, we plan to bring all the on-ramps together with Airo. We're trying to take these things that today are different and make them very similar for the customer in the future regardless of what product they've bought.

Got it. I meant to ask about quarters, not months. Thanks for correcting me. Where do you think this could land as you continue to improve it? Do you think it’s north of 50%, just high-level thoughts there?

We're just starting with Airo and still haven't reached the year-end. We recently celebrated its first anniversary, and I believe there's significant potential for Airo. I'm eager to see how far we can progress. It's still too early for us to determine a specific percentage quickly.

Great, thanks so much.

Our last question comes from the line of Clarke Jeffries from Piper Sandler. Clarke, please go ahead.

Hello, thanks for taking the questions. First, I wanted to ask about specifically a call-out in the prepared remarks about the 46% EBITDA margin A&C being driven by the strength of high gross margin proprietary solutions. I just wanted to ask, is that principally website and marketing? Or is there any other kind of driver in that bucket of proprietary solutions? As a follow-up, there is a notable market event in the last quarter, a disagreement between a Managed WordPress vendor and the largest contributor to WordPress. Aman, do you see that as largely irrelevant to the long-term progress of WordPress? Have you seen any kind of conversations with your customers or partners that reacted to that?

Yes. You generally knew about it correctly in terms of the high margin products and the proprietary systems are all the work done internally. The high-margin proprietary systems rank very high in terms of margin when compared to the third-party solutions, which typically have a lower margin. Our focus is really to build magical experiences on top of the WordPress platform, which is the largest content management system in the world. We believe that WordPress is here to stay. We are one of the top contributors and we're part of the WordPress community. We want to harness the power of WordPress and provide seamless experiences for our users, including enhanced functionalities.

Thank you very much.

Thank you, Clarke.

I'll now turn the call over to Aman for closing remarks.

Just a quick mention. Thank you to all GoDaddy employees for another great quarter, and I appreciate how everyone has worked hard. Looking forward to the next few quarters and years. Thank you.