GoDaddy Inc. (NYSE:GDDY) Q1 2024 Earnings Call Transcript

GoDaddy Inc. (NYSE:GDDY) Q1 2024 Earnings Call Transcript May 2, 2024

GoDaddy Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Christie Masoner: 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. [Operator Instructions] 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.goddady.net or in today’s earnings release on our Form 8-K furnished at the SEC.

Growth rates presented 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, May 2nd, 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.

Aman Bhutani: 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 transitions it to shareholder value. This is the driving force behind our profitable growth model that maximizes free cash flow. I am 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 three-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.

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 AiroTM. 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 four 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 our 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 experimentations. This gives us 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.

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Q&A Session

Examples from this quarter include, simplifying the editor in Websites + Marketing, making it easier for customers to discover new capabilities, reducing provisioning time for online store to a few seconds, and using AI to streamline Managed WordPress website creation to just a few clicks. Simplified, smart, fast experiences come across as magical to our customers and 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, this quarter 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 of 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 and represents 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 Paylink 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 indication that GoDaddy Airo does a better job of discovery and engagement with Paylinks 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 homepage, for all desktop users globally and 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 overtime, 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.

Mark McCaffrey: Thanks Aman. We are pleased to announce our strong Q1 results and continued track record of durable growth. We 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 and 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, and 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, also impacting revenue by approximately 100 basis points. Additionally, customers with two 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 initiative across all major product offering, 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 guide 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 our divestitures. Segment EBITDA margin for 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 guide. 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 aftermarket on strong demand for domains in the primary and secondary market, offset by headwinds in hosting. Subscription bookings grew two 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 three-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 2.4 times 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 in 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 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 three-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. With that, we will have Christie Masoner from our Investor Relations team, open the call for questions.

A – Christie Masoner: Thanks, Mark. [Operator Instructions] Our first question comes from the line of Ygal Arounian from Citi. Ygal, please go ahead.

Q – Ygal Arounian: Hi. Good afternoon, guys. Maybe I’m just going to start on the strong bookings growth. And 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?

Mark McCaffrey: Hi, Ygal. Thanks. 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 on different periods of time. So that momentum will continue. But given the size of our business, obviously, it takes a while to show up into 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.

Ygal Arounian: Okay. Great. Really helpful. And maybe on Airo I know you gave some qualitative comments here, but any more you could share? You’re rolling out internationally where we’ve got a couple of months under our belt here. You mentioned, you’re seeing kind of domain customers move to Airo when they’re offered it. Anything you’re seeing incremental uplift in conversion ARPU growth on the – whether it’s applications account collectively or just Website + Marketing anything else investors can kind of hang their hats on how well Airo is doing? Or what is sort of going to drive the conversion you’ve been expecting? Thank you.

Aman Bhutani: 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. And the metrics that we shared around it, they continue to be about discovery, which means our customers finding that GoDaddy has all these products about engagement where they start using those products or you can say attach them and then monetization where they start to pay for those products. And we’re very methodically moving through those three 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 me way more offerings for me. And I shared a little comment about pay links in the prepared remarks, but I’ll also share coming soon site which is a one-page website that gets created with a domain gets a great amount of engagement. Just 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 give us confidence that as we move towards monetization we’re going to have multiple levers at play. And 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.

Ygal Arounian: That’s great. Very helpful. I am excited to see how this progresses. Thank, guys.

Aman Bhutani: Thanks, Ygal.

Operator: Our next question comes from the line of Mark Zgutowicz from Benchmark. Mark, please go ahead.

Mark Zgutowicz: Thank you. 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.

Aman Bhutani: Thanks, Mark. Our sort of 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 customers of GoDaddy and bringing them on to these new sort of pricing and bundling approach that we have.

Mark Zgutowicz: 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.

Aman Bhutani: Yes, it’s still early days Mark with our new customers. Obviously, that’s a smaller stream of customers. With our new customers, we do see significant take rates for like a coming-soon website or actual website attach. So we see that engagement – sort of discovery and engagement and are doing really well. But the large, large opportunity of course is in our base. And we’re literally not even five, six weeks from putting Airo into our base. So it’s going to take a little time given the large customer base and our approach of going into it in a systematic manner. We have lots of learnings from taking productivity into our base, taking commerce into our base. We’re taking that same methodical approach in going into the base.

It’s going to take a little bit more time for us to gather data to be able to sort of share it publicly to say, this is what we see. But I can tell you, we’re super excited about it. And if the new customer engagement is any indicator of the base, there will be years — many, many years we’ll be talking about this.

Mark Zgutowicz: Sounds great. Thanks a lot.

Aman Bhutani: Thank you.

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

Ken Wong: Great. I wanted to maybe kind of pick your brain in terms of the rationale behind kind of 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.

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

Ken Wong: Got it. And then maybe, Mark, just in terms of — just remind us kind of what we should be thinking in terms of the lag between kind of revenue and bookings. And specifically, on A&C where there’s obviously a much larger delta from kind of the teens to the 20s, like how — what — just help us kind of think through what that convergence looks like?

Mark McCaffrey: Yes. And I’ll take it up a level too. When we think about the bookings to revenue, we have multiple different products, multiple different terms the revenue can come out in many different ways. The way we look at it is, we think bookings is going to be one to two points ahead of revenue for 2024. And that’ll 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.

Ken Wong: Got it. Thanks very much.

Aman Bhutani: Just a quick add Ken that, our general term is just around 12 months a little over. So that can give you sort of the idea of how bookings will take about 12 months, get distributed about over 12 months for revenue.

Ken Wong: Perfect.

Aman Bhutani: Thank you.

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

Josh Beck: Sorry about that. Yes. I just wanted to ask about some of the success with the pay links. It sounds like it’s driven am 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?

Aman Bhutani: 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. And we introduced Pay Link in a very similar way as we introduced the other capabilities. And 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, sort of brought it together in a very simple manner. It was right there in front of customers and we saw the customers engage with it at significantly higher rates than without Airo.

So that’s what’s driving sort of the engagement with Pay Links. Overall for GPV, we did hit the $2 billion annualized GPV milestone this last quarter. And the biggest part of that continues to be going into our base of customers and converting them to GoDaddy payments.