GoDaddy Inc. (NYSE:GDDY) Q2 2023 Earnings Call Transcript

GoDaddy Inc. (NYSE:GDDY) Q2 2023 Earnings Call Transcript August 3, 2023

GoDaddy Inc. misses on earnings expectations. Reported EPS is $0.54 EPS, expectations were $0.55.

Christie Masoner: Good afternoon, and thank you for joining us for GoDaddy’s Second Quarter 2023 Earnings Call. I’m Christie Masone, Head 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 will be referencing both GAAP and non-GAAP financial measures and other operating in-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 presented 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 statement that we make on this call are based on assumptions as of today, August 3, 2023. And except to the extent required by law, we undertake no obligations 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. In Q2, we continued to make good progress on our mission, providing a breadth of solutions to a growing number of customers globally. The fundamental health of our business remains strong with new high-quality customers robust retention rates and improved attach. We continue to be on track for stronger growth and profitability in our business, exiting the year at approximately 7% revenue growth and 28% normalized EBITDA margin. For Q2, in our highly competitive Applications & Commerce segment, our revenue of $352 million outperformed our guide with 11% growth.

We remain the leader in domains with a 3% growth in private registrations as domains under management grew in the quarter, offset by underperformance in the domain aftermarket. Hosting continues to stabilize from product improvements and the previously announced integration and divestitures of noncore hosting assets. Gross adds remain strong on efficient marketing while maintaining our customer retention for GoDaddy brand at 85%. And Customers are now bundling new solutions at a faster rate than we have ever seen before. Innovation, resulting in higher monetization through attach and pricing with strong retention underpins our confidence in the positive trajectory of our business and our ability to drive shareholder value for years to come.

At GoDaddy, we are focused on creating value for customers through innovation strengthening product market fit, and driving towards a one-stop shop. We move quickly to understand and take advantage of the step function changes, generative AI buffers to our industry. In just a few months, we have already launched multiple new generative AI-based features that our customers are actively using to reduce their workload and there is more to come. As you know, our care organization has guided customers to success for over 25 years. And now for the first time, we can bundle each GoDaddy domain purchase with an AI-powered GoDaddy digital guide. The digital guide will automatically build a free personalized basic website, including a checkout path, they take payments.

It proposes brand colors creates a free logo and embeds it in the basic website. It also creates marketing messages with our customers’ logo and post to social media to generate traffic to their sites. The digital guide built on years of our experience, knows the journey of our customers from identity to presence to commerce and can automatically present solutions in a unique way so they can experience a new product in context. For example, the digital guy can configure e-mail or a new phone number and bring messages from SMS and social sites to our conversation’s app, giving our customers one simple inbox that aggregates their customers’ messages. And at the same time, the digital guide writes proposed responses practically removing the effort and time taken to respond to inbound messages.

Bundling this with the domain purchase is different from anything else available across the industry. and GoDaddy is in a unique position to pursue this disruptive approach at scale. These new capabilities can improve loyalty and retention and bring differentiated offerings to our existing base of 21 million customers driving an increase in lifetime value. We are excited about bringing these new features to our customers and our teams have been energized to build new experiences powered by generative AI. In November at our investor dinner in Tempe, we look forward to showing you demos of these new capabilities. As always, I also wanted to briefly touch on our three priorities: driving commerce through presence, delivering for Pros, and innovating in domains.

— on commerce, we continue to drive strong growth in our OmniCommerce solutions. Customers in our base continue to convert to GoDaddy payments at an impressive rate and attaching to our base was again the strongest component of our year-over-year GPV growth, which is on pace to more than double our last year’s exit rate. We’ll add to this momentum through our anticipated Q3 launch of GoDaddy payments in Canada as we deploy our successful U.S. playbook. Website plus marketing continues to perform well, and we are driving greater engagement with customers with new product launches. We know that higher engagement is correlated with higher retention rates, and we expect engagement to be a driver of website and commerce performance metrics. On delivering for PROS, improvements in our Managed WordPress solutions have reached an important milestone, driving improvement in retention rates as customers begin to recognize and enhance solution.

We now offer one of the industry’s fastest, most secure and easiest managed word breast platforms. in a recent third-party performance benchmarking study, sites hosted on GoDaddy’s WordPress loaded an impressive 2x faster, which results in improved search engine rankings for our customers, and domain customers are not the only ones with a digital gun. We have launched similar capabilities in the Pro hub and are measuring the time saved for Pros, including generating site content and client communications on innovation in domains, while bundling the GoDaddy digital guide and its enhanced offerings is the most exciting change we are bringing to domains. I wanted to quickly share an update on payable domains as well. payable domains made a meaningful contribution to GPV growth this quarter with healthy double-digit month-over-month growth.

This is a unique product that only GoDaddy offers. And with GoDaddy’s digital guide, we expect to continue to make it simpler for customers to understand and adopt it. In closing, we feel good about our continued progress and how our organization is positioned to take us into the next phase of our growth with strong applications and commerce momentum? We have also continued to be efficient with our marketing spend, especially with the improvements we have made in search engine marketing, and we are eager to duplicate those results in other channels. we expect growth to accelerate as we exit the year and remain committed to our growth algorithm with increasing margins and expanding free cash flow per share, and we remain eager to continue to deliver value for all GoDaddy stakeholders.

With that, here’s Mark.

Copyright: ralwel / 123RF Stock Photo

Mark McCaffrey : Thanks, Aman. In just the last few years, GoDaddy, successfully built a growing competitive and robust set of tools and services, including our websites plus marketing product and OmniCommerce solution at a one-stop shop, empowering entrepreneurs to build and manage their ventures and accept payments with a dedicated partner by their side. The product innovation and targeted investment over this period has led to a better suite of products. And with our soon-to-be launched GoDaddy digital guide, we will provide an even further differentiated experience for our customers. propelling long-term growth for GoDaddy through faster product attachment and stronger retention. As we consider the many headwinds we faced in the first half of the year, we are thrilled with the continued momentum of our applications in commerce revenue and the acceleration in our Create & Grow solutions.

Our durable model continues to generate free cash flow, and we expect to reaccelerate our growth and improve our profitability as we exit the year while delivering on our cash flow targets. Moving to our financial results. Our applications and commerce revenue grew to $352 million, up 11%, surpassing our guide of 8% to 10% and delivering a segment EBITDA margin of 41%. The strength in our Applications & Commerce segment is fueled by our create gross solutions, which accelerated to $465 billion in ARR, up 11%. Additionally, we drove rapid growth in GPV comparable to last quarter, and we are on pace to more than double the 2022 exit rate by the end of the year. as we continue to attract and convert customers within our 21 million base to GoDaddy payments.

ARR for applications and commerce grew 10% to more than $1.3 billion. with a 20% growth in annualized GMV to over $33 billion. Core platform revenue totaled $696 million, flat year-over-year with a segment EBITDA margin of 27%. ARR for our core platform segment was $2.3 billion. Core platform revenue was supported by 3% growth in domains on stronger customer additions from higher demand and price increases. This was primarily offset by greater-than-expected declines in our aftermarket on aftermarket. Revenue decreased 5% to $101 million on a tough compare from last year. Over the last five years, we’ve built upwards of a $400 million revenue two-sided marketplace. As a reminder, this business allows a buyer and seller to transact on our platform at their agreed upon valuation.

This business rapidly grew as we scaled the operations, participants, and partnerships. What we see now is a post-COVID normalization of this business as valuation of larger transactions have decreased and volume growth has slowed. With that, we expect steady low to mid-single-digit top-line growth for the business on a go-forward basis. On our core platform restructuring initiative, we completed the migration of Media Temple and Main Street Hub customers to the GoDaddy technology stack. And the 123 Reg migration is planned to be completed by the end of the year. As expected, these migrations produce a slightly elevated churn on these brands this quarter, but will deliver further cost efficiencies in the future. The retention rate of customers for the GoDaddy branded products remains above 85%.

Total revenue grew to $1.05 billion up 3% on a reported basis and 4% excluding aftermarket. Constant currency revenue increased 4%. Within total revenue, international revenue grew 3% on a reported basis. and 6% on a constant currency basis. Our ARPU grew 3% to $199 from $193 last year, and we added 100,000 net new high-quality customers despite the headwinds from our migration efforts. Normalized EBITDA grew 2% set to $265 million, while delivering a margin of 25%. Bookings totaled $1.1 billion, growing 2% on a reported basis. and 4%, excluding aftermarket and the impact of the integration of non-core assets. Bookings grew 3% on a constant currency basis. Excluding the impact of aftermarket, the drivers of growth in bookings were strong customer additions and price increases in domains as well as strong attach in applications and commerce.

We expect these factors to contribute to accelerated revenue growth next year. Unlevered free cash flow for the quarter totaled $284 million, growing 3%. While free cash flow was relatively flat at $240 million despite increased interest-related payments. Free cash flow per share rose to $6.44 on a trailing 12-month basis. versus the prior year’s cash flow per share of $5.67, a 14% increase driven by execution, operating leverage, and share repurchases. Through July 31, we repurchased 10.2 million shares year-to-date, totaling $746 million, of which $632 million was repurchased since the end of Q1. This brings the cumulative share repurchase under the current authorization to $2 billion and 27.1 million shares, reducing shares outstanding since the inception of this authorization by 16% and we remain on part for our commitment to reduce our fully diluted shares outstanding by 15% to 20% over the three-year period.

Additionally, today, we announced an incremental $1 billion share buyback authorization to bring the total authorization to $4 billion and extending the program out to 2025. On the balance sheet, we finished Q2 with $583 million in cash and total liquidity of $1.6 billion. Net debt stands at $3.3 billion with a 2.9 times net leverage within our targeted range of 2 times to 4 times. Lastly, we secured a 75-basis point interest rate reduction on $1.8 billion of outstanding principal through a refinance issued at par. This refinance is expected to save $13 million annually in interest payments for each of the next seven years. Moving on to our outlook. We are targeting Q3 total revenue in the range of $1.055 billion to $1.075 billion, representing growth of 3% at the midpoint.

With the current momentum, we expect to exit the year at approximately 7% top-line growth with a normalized EBITDA of 28%, an increase of 300 basis points from our 2021 exit rate of 25%. We are increasing our growth expectations for applications and commerce to be between 9% and 11% for Q3 and the full year. In our core platform segment, we expect revenue to be flat in Q3 and reaccelerate in the fourth quarter to deliver 1% growth for the full year. Q3 Normalized EBITDA margin is expected to improve to approximately 26% with continued acceleration over the fourth quarter, resulting in a full-year normalized EBITDA margin of approximately 26%. This is a 300-basis point increase from our 2021 rate of 23% on better operating leverage from improved marketing performance, restructuring efforts benefits from our continued move of loads to cloud and the incorporation of AI into our operating model.

On the growth bridge we spoke about last quarter, we remain confident in the path to accelerated revenue growth. While expanding margins and improving cash flows. As a reminder, this year’s revenue growth rate includes approximately two points of FX pressure from last year’s bookings. Difficult compares in our aftermarket business and the migration and divested certain non-core assets. We expect momentum in bookings in the second half of the year to drive the reacceleration of revenue growth as we exit the year while we remain committed to delivering our margin expansion and free cash flow targets. We will be posting our annual investor dinner with product demonstrations in November at our Planning and Investor Day in Q1 ‘2024, we consider both a great opportunity to share more about our exciting initiatives in AI and our outlook for the next three years.

In closing, we remain confident in our ability to execute in the areas of our business within our control and deliver the full-year targets. As always, we remain focused on executing against our strategic priorities, committed to being responsible stewards of capital, and strive every day to provide a one-stop shop to micro businesses, along their entrepreneurial journey with an eye towards balanced long-term growth and profitability. With that, we will have Christie Masoner from our Investor Relations team to open the call all for questions.

A – Christie Masoner : Thanks, Mark. [Operator Instructions]. Our first question comes from the line of Matt Pfau from William Blair. Please go ahead.

Matt Pfau: Great. Thanks, for taking my questions. Two of them. First, I wanted to ask on the acceleration of the core business in the fourth quarter in Pleasant healthy sequential increase. Maybe you can just discuss what are the factors that are driving that increase.

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Q&A Session

Mark McCaffrey: Yes. Thanks, Matt. When we look at Q2 and bookings and kind of trade off in the second half of the year, a couple of things to consider: one, — we have FX that will be abating. We have pricing increases that we did towards the end of the quarter, which should help with our bookings and somewhat revenue into this year. Obviously, the aftermarket compares get better going into Q4. And now that we’ve completed some of our migrations to the core GoDaddy stack, we should see start — some of those start to abate as we get through the half year. So that gives us the confidence that we will have that accelerating growth rate as we get through the remainder of this year. That, coupled with some of the demand we’re seeing at the front of the funnel with customers coming in, attaching new products faster. Our retention rates remaining strong and the momentum we have in application commerce, we feel good about that momentum coming out of Q4 and going into 2024.

Matt Pfau: Great. And on the digital guide, maybe you can just help us understand what that rollout is going to look like? Is it just going to be for new customers? Or do you plan to roll that out to your existing base as well?

Aman Bhutani: Thanks, Matt. Yes, we plan to roll it out to the existing base as well. The digital is about literally a guide that works for a customer, even when the customer is sleeping. So even with the base, the guy will be able to offer or create new offerings for them. So, it will start with new, just like a lot of other products do, but you’ll see us quickly take it to the base as well.

Matt Pfau: Great. Thanks, for taking my questions.

Christie Masoner : Our next question comes from the line of Vikram Kesavabhotla from Baird. Vikram please go ahead.

Vikram Kesavabhotla : I wanted to ask about the applications and commerce segment. It looks like you raised the expectation there for fiscal ’23. Maybe if you could talk some more about the primary drivers behind that revision. And then separately, I also wanted to ask about the EBITDA margins. It looks like you posted about 25% in the second quarter. You’re guiding to 26% in 3Q and exiting the year at 28%. Could you just talk through some of the main drivers of the expansion there throughout the balance of the year? Thanks.

Mark McCaffrey: I’ll start with the application commerce. We can continue to — sorry, we continue to see strong momentum in the front of the tunnel and customer bundling payments and choosing payments are coming through with websites really happy and excited about that attach and that bundling that’s happening at the front of the funnel. Again, I alluded to, we have really strong net gross customer adds coming in and they’re getting to that bundled product quicker with that, that gets us to higher retention rates. That, coupled with some pricing increases we’re doing at the back half of Q2, where we did at the back half of Q2 should start to show up in applications and comments as we go. Also seeing great momentum on the conversion.

We’ve talked about it previously, but our existing customers converting over to the GoDaddy payments. That motion is well in work, and we’re seeing that AGV grow as we go out throughout the year. On the margin expansion, we had about 25%. We’re forecasting to get up 28%. We have a couple of things going on there. We’re seeing greater marketing efficiency, which is helping us. We are really starting to see the benefits of moving into the cloud. We’re seeing the cost efficiencies that are coming with more workloads and that are really starting to take hold as we hit certain milestones throughout the year. We also had the restructuring in Q2. And some of that will gain steam as we go into the back half of the year and overall momentum as we go through there.