Good afternoon. My name is Connor, and I'll be your conference operator today. At this time, I would like to welcome everyone to the GoDaddy Second Quarter 2015 Earnings Conference Call. [Operator Instructions] Marta Nichols, Vice President of Investor Relations, you may begin your conference.

Thanks, Connor. Good afternoon, and thank you for joining us for GoDaddy's Second Quarter 2015 Earnings Call. With me today are Blake Irving, Chief Executive Officer; and Scott Wagner, Chief Operating Officer and Chief Financial Officer. Blake and Scott have some prepared remarks, which we'll follow with a question-and-answer session. On today's call, we'll be referencing both GAAP and non-GAAP financial results, such as total bookings, adjusted EBITDA, unlevered free cash flow, net debt and ARPU. 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 website at investors.godaddy.net or on our Form 8-K filed with the SEC with today's earnings release. The matters we'll be discussing today include forward-looking statements, which are subject to risks and uncertainties that are discussed in detail in our documents filed with the SEC. Actual results may differ materially from those contained in the forward-looking statements. Any forward-looking statements that we make on this call are based on assumptions as of today, August 5, 2015, and we undertake no obligation to update these statements as a result of new information or future events. With that, I'll turn the call over to Blake.

Thanks, Marta, and good afternoon, everyone. And thanks for joining us today. We delivered another strong quarter, with solid results from all of our major product lines, and we saw some really nice improvements in our customer experience. We remain laser-focused on our vision to radically shift the global economy towards small business by helping individuals easily start, confidently grow and successfully run their own ventures. We're a trusted partner and champion for organizations of all sizes in their quest to build a successful online presence. Our employees are inspired by our more than 13 million customers. We focus on giving them simple, powerful solutions that help them deliver online. We offer them a growing suite of elegant, easy-to-use and increasingly integrated cloud-based products built on a single global technology platform, supported by empathetic, consultative customer care, real people that are here to talk with and help our customers every single day. Our strategy and model have yielded a large, high-growth business with strong cash flow, serving a massive global market with growing needs. At the end of the second quarter, we've grown to serve over 13 million customers, an increase of more than 1 million customers versus a year ago. Our annual average revenue per user, or ARPU, rose nearly 9% to $118. Second quarter bookings grew 16% to $476 million, and together, our strong customer and ARPU growth drove our revenue up 17% to $395 million. Our adjusted EBITDA, which excludes IPO-related expenses, jumped 29% to $82 million in the second quarter, producing a solid adjusted EBITDA margin of nearly 21%. I'd like to share 3 big themes in our recent accomplishments in our second quarter results with everyone today. First, we're expanding our product portfolio and delivering innovative services; second, we're posting strong financial performance and growth;…

Thanks, Blake, and thanks from me for joining us as well. As Blake said, we feel great about what we delivered in the second quarter. We grew customers 9% over the last year, ending Q2 with approximately 13.3 million paying customers. Our annual average revenue per user, or ARPU, grew nearly 9% year-over-year to $118, up from $108 a year ago. As Blake said, our second quarter bookings grew 16% and solid growth in both customers and ARPU drove revenue up 17%, with each of our 3 product lines, Domains, Hosting and Presence and Business Applications, growing at double-digit rates. As a reminder to everyone, we report and measure our top line in 2 ways: bookings and revenue. Our bookings represent the cash we collect when a customer purchases a product. We typically collect the full purchase price at the time of sale, then recognize our GAAP revenue ratably over the term of the customer contract, which averages more than 1 year. Over the past 5 years, on average, we've generated 90% of our revenue each year from customers already in our base at the start of the year. While we experience annual customer churn of less than 15%, the 85% of customers who do stay with us typically spend more, which translates into limited revenue churn. In short, we have a very stable revenue model. Now I'll briefly run through the results in each of our 3 revenue lines. First, on Domains, we continue to extend our market leadership, with Domains revenue up 10.3% in the second quarter to $209 million. The domain market continues to grow on a secular basis as more businesses and individuals claim and name their ideas online, and we're working hard to continue to outgrow the market. While Domains revenue continues to expand for…

[Operator Instructions] Your first question comes from the line of Mark Mahaney with RBC Capital Markets.

I had 2 housekeeping questions, and then, a broader one. If you could just talk through the FX impact on your overall bookings growth rate, and then, the -- what the organic growth rate of the Business Apps segment would have been. Those are the 2 housekeeping questions. And then, on the customer service side, I know how much of a priority it is for the company, are there any metrics you could call out in terms of improvements you've made there with -- on the customer service function? Anything you could call out there?

Yes, great. Mark, it's Scott. Thanks. So 2 housekeeping items. First, FX. Last quarter, we described to everybody that our bookings had about 200 basis points of FX impact. And then, the currency markets really haven't changed all that much, and that's about the year-over-year impact that we saw in the second quarter as well. Now our bookings overall of 16% had that headwind in it, so we feel really good about how bookings fell in the quarter, particularly relative to, still, where currencies sit. So that's one. And second, in terms of Business Apps, it's all organic. So the 51% is just continued trajectory in the business, and it's all organic. In terms of C3 and our care improvements, we are investing in a couple of things now, which we're particularly excited about. One of which is a best-in-class CRM system that's going to provide our agents with a true realtime view of what's happening with our customers across all aspects of their environment, and even things that they do online that may be outside of GoDaddy. This is in pilot mode right now, and we're excited about what it means for our customers, and that will continue to roll out in the coming quarters. And all of our time tool set has really improved both call response times, satisfaction and other quality-of-service metrics that have been great. And from a business side, I think we've mentioned before that care is also a channel that delivers bookings as well, and the team continues to perform really well on those numbers.

Your next question comes from the line of Deepak Mathivanan with Deutsche Bank.

Great. First question, maybe for Blake. So you mentioned that you have tens of thousands of developers for the Pro product. Can you discuss the level of engagement on the product among these pros? What features are the most commonly used inside the product? And then, maybe how many end-customer accounts have they onboarded? Do you also see like incremental customers coming in, maybe to your Hosting products, at this time? I know it's still like early stages, but perhaps, some early feedback on it. And then, I have a follow-up.

Sure. Thanks, Deepak. Okay. Yes, this is Blake. So what we've seen in -- the new GoDaddy Pro features enable a developer or a designer to have a relationship with their customer and actually see it the way that their customers' sites are performing. So they can buy on a customer's behalf, they can manage the customer's cart, they can see how their website is performing, and instead of being called by a customer and told that, "Hey, my website's down," they actually can make the phone call to a customer and say, "I've noticed you have a problem, I'd like to go solve it for you." Or if you're -- you have a WordPress plug-in that's not performing for some reason, they can follow on that with the customer. That -- we have 2 features. One's called delegation, the other is monitoring. Those are the 2 features that are the ones that are strongly differentiated in the marketplace and are having a lot of pull with these guys. We have, of those tens of thousands, we've seen thousands of folks that are new customers for us, and we're starting to see an increasing number of customers of theirs show up on the platform. So we're pleased with results. It's not a service that we pay for, it's a service -- or the developers pay for, it's a service that provides them value in some of the top critical issues they have that we're solving on their behalf.

Okay, that makes sense. And then, ARPU continues to grow on a good trajectory, up 9%, and it's definitely due to a mixed shift towards higher ARPU products. Can you qualitatively maybe discuss what up-sell rates you're seeing in the last, say, couple of quarters? What products are seeing good adoption there? And maybe specifically on the site builder, the DIY site builder, can you discuss the growth rates there?

Yes. Hey, it's Scott, Deepak. Yes, I mean, ARPU was up 8.6% this quarter. It was a shade over 9% last quarter. It's nice trajectory. And really, you're looking at just continued growth in Hosting and Presence and Business Apps. I mean, it would be -- it'd almost be misleading to point out any one particular product. It's really the growth across both of these -- those 2 segments and, obviously, the subsegments underneath them, whether it be Managed WordPress or Office 365 or some of the more sophisticated hosting offerings. I could rattle off, sort of -- I did 3, I could rattle off 7 more, and all of which contribute. And I think the headline for everybody on the call would be, the ARPU gains are really just a reflection of the product innovation and the product strategy that's been underway for probably the last couple of years.

Okay, that's helpful. Scott, if I can squeeze in one more, just housekeeping. What was kind of like the revenue contribution from the Marchex domains acquired? And how do you treat it in the domains under management?

Yes, so it was immaterial in the quarter. So we closed that in the second quarter, it was immaterial for the quarter. What we did see, though, and the reason that we even did and -- did the Marchex deal was that we're big believers, over the long term, of the ability and potential in the aftermarket, which is to merchandise names in a liquid fashion for -- that are already held, and obviously, this was a portfolio of names that were really unavailable on the market. And when we merchandised these names, we saw nice activity across our entire aftermarket business for the quarter. This was just one element that had domains revenue growing 10% year-over-year, which was basically about what we did in the first quarter, too.

Your next question comes from the line of Jason Helfstein with Oppenheimer.

Three questions. First, results would suggest a greater mix to annual subscription. So just talk about any dynamics there and kind of what impact that might be having as potentially an offset to ARPU. Second, are you guys seeing any impact as far as on the stronger dollar, i.e., customers choosing lower -- international customers choosing lower-priced plans? And does that have any impact on the back half guidance? And then, lastly, should we expect you to be more aggressive in product acquisitions? It just seems like there are some interesting things out there that would be -- you could really utilize, given your customer mix and kind of just all the customer support you're offering to up some more products.

I'll try it. Yes, Jason, it's Scott. I'll do the first 2 and let Blake talk about the second one. In terms of bookings to revenue, it's -- there's not a meaningful difference in the shift of plan mix. Given that we've got a portfolio of products and some of them just have different characteristics or mechanisms on recognition, and obviously, sometimes, we're selling different term lengths, there's not one thing happening. And actually, we think that the annual -- the bookings-to-revenue relationship and our mix of annual plans is just a really healthy one. And there's nothing specific to call out that would suggest things are lengthening or the terms are dramatically changing. So that's one. Second, on the strong dollar, just like with Mark's question, the strong dollar, obviously, it's still out there on a year-over-year basis. It's approximately 200 basis points of headwind, but yes, I think, we're managing through it. And the trade-off, we are balancing the trade-off of customer acquisition, which continues to be healthy in our international markets and, still, the currency effect, and we think we're doing a pretty good job and are pretty happy about it. And our guidance reflects a currency environment that stays where it is. So we don't think that there's any special things in the second half that we'd call out because of this. We think we're basically managing through it right now. Blake?

Jason, this is Blake. So on your M&A question, so we continually make -- well, I'll just call it, make buy partner decisions on areas that we think our customers are demanding or we believe will benefit them. And those exist in, whether it's Domains, whether it's in the Presence and Hosting business or whether it's in the Business Applications business, customers are pretty clear with us what's important to them, and we keep an eye on the market carefully. We talk to a lot of companies, as I know you know. We've acquired -- been pretty acquisitive and have acquired 9 companies over the last 24 months or so. So we are looking in areas that we think, frankly, matter to our customers in both Presence and Hosting business, the Business Apps business, and as well as international, too. So I think, without getting any more specific than that, I think that kind of covers where we're -- what we're thinking.

Yes, I mean, our organic trajectories did really good. I think, Jason, you framed it as, boy, there's opportunities, they're out there, it's just we've got a high bar for success. We'll do -- when we do stuff, it's going to be because it's adding real value and distinctiveness for our customer experience, but we've got a pretty high bar on the inorganic stuff.

Yes, big time.

Your next question comes from the line of Mark May with Citi.

I had 2. First, I was hoping you could remind us about how the gross margins roughly differ between the 3 segments, in particular, with Domains, just so we can get to -- continue to think about the upside to gross margins going forward from the revenue mix shift. And then, on Business Apps, can you remind us -- I know that Office 365 has been a real good product for you guys. Are we going to hit a point where you kind of comp that and the growth rates that we see there will kind of differ? Remind us where we are and how to think about that going forward. And I know you have a relatively new email marketing product there. Is that something that, you think, will help to offset some of that comping issue if, in fact, that's something to be thinking about?

Mark. This is Blake. Scott and I are going to riff back and forth on this one. So margins on the 3 product segment. The first, which is Domains, we're roughly in the high 30s. And both in Hosting and Presence and Business Applications, they're what you'd expect from a software business, so they're typical software margins, whether it's on GEM or whether it's on O-365.

Yes. And your second question on growth rate and trajectory on Apps, it -- we will -- absolutely, that growth rate will end up tapering and slowing. And it's -- it gave up a couple points versus the first quarter, from 53% to 51%. We've already lapped the Office 365 introduction, and there's nothing in the next quarter or 2 that's going to cause a dramatic cliff in the growth rate. But you should expect that area and product segment to continue to slow. We think GEM, and then, plus other category extensions and things that we can do, we'll try to keep that growth growing and push it up, so.

Yes, and just building on Scott's comment, renewal on O 365, very strong. And when -- we've integrated that -- you heard Scott and I both talk about integration of Office 365 and GEM into the Website Builder product, and frankly, we're seeing greater activation and usage. So even while the -- we've lapped those -- we've lapped that introduction. We're seeing, what I'd really call, still really good growth in that segment, and I anticipate it to continue to be good.

Your next question comes from the line of Ron Josey with JMP Securities.

I wanted to ask about cost in tech dev spending, specifically. Scott, I think you mentioned, we can see in the numbers, tech dev growth has been -- the spending has been decelerating for the past several quarters. I think it grew like 4% this year. I understand the balancing of the business, but you're also investing quite a bit in launching new products. So I'm just wondering, is this slowdown in spend more of a pause as you operationalize all the new products? Or are you just well-staffed in this segment right now and sort of -- and this is the right run rate?

Ron, this is Blake. Look, we I think you accurately point out that we've spent -- we had an increase in spend in -- like earlier in T&D, but -- and we're up some 7% year-over-year. I'll say this, the investments that we made years ago, and you always -- when you're making technology investments, you always have sort of a trailing result of those. So what we're seeing now is the investments that we made over the last 24 months are actually starting to benefit the business. And you heard Scott and I both talk about the -- both of us talk about the uplift in platform capability across everything that we've been rolling out, whether it's front of site, whether it's our customer care organization, the integration from other products across the board. So we continue to invest in engineering talent, particularly in both product applications and product teams. We're getting, frankly, good savings in our global infrastructure, and we've actually had, I guess, I'd characterize it, as a shift from spending a lot on IT infrastructure to being able to spend on talent. So you're seeing the numbers not increase, but the balance of how we're spending that T&D spend is quite different, and it's on talent. And we have, frankly, been extremely successful in acquiring talent in our locations in Sunnyvale, San Francisco, Seattle, Cambridge Massachusetts, and we're feeling good about the investments we made and what they're going to yield in the future.

And your next question comes from the line of Brian Essex with Morgan Stanley.

Blake, I just had a question for you, particularly on GoDaddy Pro. You noted how many international customers are coming onboard with that effort. Are you seeing any kind of maybe an outside opportunity internationally or difference in mix of the tax rates of customers that you're onboarding for -- from international markets relative to those in the U.S.?

I'd say no. And I think, the thing to point out that's most important is GoDaddy Pro is very new, right? So we're seeing very good success with it initially. But 50% of small businesses today rely on a professional developer to build a website for them, to develop a web presence for them, and I think that we -- this is not an area that we've been strong in over the last many years. And the products have improved, the quality, the performance across dedicated, managed -- our Managed WordPress products, I think we've seen a considerable improvement there, and it's being noted by developers, so we're starting to see them come on. Now the fact that we've actually localized products in GoDaddy Pro for other markets is something that's unique and new. So I think that, that also has some large pull-through for us.

Got it. And then, maybe a follow-on to Ron's question. A question for Scott. As we look at CAC and your investment in growing the business, both domestically and internationally, I understand that there's rev rec differential there from when you are able to sign a customer on and when you can recognize revenue. Should we expect any fluctuations in CAC, particularly on a per-customer basis as you expand and maybe keep in mind how that revenue is going to be recognized in the future?

Yes, Brian. I think, CAC, probably not dramatic fluctuations in rev rec, as you posited it. So you're not going to see huge swings on a quarter-over-quarter basis. As I said earlier, we should expect CAC spend to go up on average, particularly as we get smarter about targeting high-value segments like Pros or other attributes of small businesses that have higher propensity to spend. And so what you're seeing on our marketing is more dollars aiming at those higher-value subsegments, and over time, that could push CAC up. But it's not going to be dramatic swings. That'll be an evolution and a flow, and that'll happen on a measured basis. And the most important point being that, that's not happening in isolation. It's that we're actually going -- not only finding customers, but we're attaching more things to customers, and the spending profile and the margin profile are going up as well. So we're doing all this while still maintaining an attractive ratio.

And our next question comes from the line of Sterling Auty with JPMorgan.

Yes, I wanted to give you guys just -- I have a chance to ask this question on the call. The most popular question I got from investors after the print is, you've had 2 straight quarters of very solid bookings, 16% growth in the quarter. Why didn't that give you enough ammunition to actually maybe inch up guidance for the full year?

Sterling, we feel good about where the guidance is and looking forward in the second half, and it's something -- even with FX headwind, as I've said before, that we're incorporating that into our guidance, and we just think that it's prudent with our guidance to have worries right now. Again, I would mention, obviously, we're lifting our EBITDA guidance, and the performance has been really solid there, and we feel very comfortable with the meaningful step-up in EBITDA guidance that we just put forward.

Okay, great. And then, on the international front, can you give us a sense, in the markets that are contributing most to growth, is there any difference in your approach in terms of what you're selling off the bat in terms of the Domain plus any tie to Hosting and Applications? I mean, is there a difference versus what you're doing here in the U.S.?

Not meaningful, Sterling, both relative to the U.S. and across the markets. There's distinction without a difference as you get into certain markets, but it's relatively similar.

But that means that the new users right from the get-go in these international markets probably come on with a higher dollar value initially than, say, what the U.S. did 3 and 4 years ago before you guys came on board, correct?

More way back when. If you look at international, I think we've said this before, there is a lifetime value difference in international. It's probably 10% to 15% less than the U.S., and that's ARPU-driven. And some of that is price sensitivity in more developed markets, and then, some of it is just a less fulsome attachment of some of the other services and just the relative use of the customer base. So punchline is, international ARPU is less than that in the states, but it's not a meaningful difference, it's 10% to 15%.

And this is Blake, Sterling. One other thing I'd point out that is different, if you think about GoDaddy years and years ago, the product portfolio is much more full today than it was a long while ago, and the quality and performance of those products have changed pretty dramatically over the last 2.5, 3 years. So that notably has a competitive product set that's easy to acquire. That on-ramp of domains matters a lot, and we've just made it incredibly simple for somebody to take that next step, either say I'm going to go build a website for myself or I'm going to have a professional developer do it for me. And we've made the services for that professional developer matter a lot more, too. So it's just a different evolution in the company, and so we've made it easier to acquire products.

[Operator Instructions] And our next question comes from the line of Mark Kelley with Barclays.

I'm just curious how you're approaching marketing outside the U.S. I know the Super Bowl has been a huge benefit to your domestic brand awareness, and I would imagine that it's pretty hard to replicate that reach. So it seems like there's a lot of moving pieces with the NASCAR partnership pending, so any thoughts you have there would be helpful.

It's Scott, Mark. Look, if we think about a geography in our Tier 1 markets, we will enter that geography with a mix that has both brand awareness and direct spend, but it's single-digit millions of dollars, and that's a entry into a market. And so take India or the U.K. or Canada, we're on the back end of that investment. And what we've seen is that, again, a relatively modest amount of marketing spend, measured in the single millions of dollars, has created an activation in customer growth that's been a terrific return. So I think what that means, relative to how you framed your question was, we don't necessarily need to go replicate the NASCAR sponsorship or a Super Bowl venue to enter a market in localized form and get a big uptick, not only in awareness and attention in the market, but more importantly, our customer and financial metrics.

Just -- this is Blake. Just a quick example. In India, Mark, over the course of the last of 3 years, we've moved from the teens in terms of -- low teens in terms of brand awareness to over 70% brand awareness today. And that's, as Scott said, using a variety of different media: broadcast media, programmatic display and search. And doing those things in combination, we have found that there is a pretty intense amount of bleed-over from the U.S., in our marketing spend in the U.S. to other markets outside of the U.S. So when we activate the brand in a Tier 1 market like India, we see results happening more quickly than you would expect to see them if we were making those investments initially in the U.S.

There are no further questions at this time. I will turn the call back over to the presenters.

Great. Well, okay, this is Blake. I just wanted to thank all of you for joining us on our second quarter earnings report out, and I look forward to talking to you a quarter from now in our next release. Thanks, everyone.

This concludes today's conference call. You may now disconnect.