GoDaddy Inc. (GDDY) Q4 2015 Earnings Report, Transcript and Summary

Good afternoon. My name is Connor and I will be your conference operator today. At this time, I would like to welcome everyone to the GoDaddy fourth quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions]. Thank you. Marta Nichols, Vice President of Investor Relations, you may begin your conference.

Thank you, Connor. Good afternoon and thank you for joining us for GoDaddy's fourth 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 will follow with a question-and-answer session. On today's call, we will be referencing both GAAP and non-GAAP financial results, such as total bookings, adjusted EBITDA, unlevered free cash flow, net debt, ARPU and constant currency. A discussion of why we use non-GAAP financial measures and reconciliations of our non-GAAP financial measures to their nearest GAAP equivalents maybe found in today's press release, presentation posted to our IR website at investors.godaddy.net or on our Form 8-K filed with the SEC with today's earnings release. The matters we will 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, February 17, 2016 and we undertake no obligation to update these statements as a result of new information or future events. I will now turn the call over to Blake.

Thanks Marta and thanks to all of you for joining us today. GoDaddy's fourth quarter was a good one with contributions from all of our major product lines driving strong topline growth and exceptional cash flow. The strength of our execution and our financial results have remained just as consistent as the vision we shared with you on our roadshow last year: Our vision is to radically shift the global economy toward small business by helping individuals easily start, confidently grow and successfully run their own ventures. Millions of global customers use our growing suite of elegant, easy-to-use and increasingly integrated cloud-based products, built on a single global technology platform and supported by outcome-driven, personalized customer care to create a successful online presence. I would like to share three big themes around our recent progress and accomplishments with everyone today: First, we are consistently posting strong financial performance and growth. Second, we are continuing to expand our portfolio and our geographic footprint with our recent entry into Asia. And third, we are making meaningful shifts in the way we communicate with our customers through merchandising and marketing. On my first point on our business results, GoDaddy's unique combination of great products, fast, reliable and high performance technology and empathetic customer care continue to differentiate what we do and have together yielded a large, high-growth business with strong cash flow. At the end of 2015, we have grown to serve nearly 13.8 million customers, an increase of more than one million customers versus a year ago. Our annual average revenue per user, or ARPU, rose over 6% to $121 at year-end, in spite of currency headwinds. Q4 bookings grew nearly 17% on a constant currency basis, or over 13% on a reported basis, to $464 million. Our strong customer and ARPU growth together drove our fourth quarter revenue up 17% in constant currency, or over 14% on a reported basis, to $425 million for the quarter. Full year bookings grew to over $1.9 billion and revenue rose to $1.6 billion, both up over 17% in constant currency. Our adjusted EBITDA jumped 30% to almost $74 million in the fourth quarter, bringing our full year adjusted EBITDA to over $337 million, an increase of more than 24%. For the year, we converted over 87% of adjusted EBITDA into unlevered free cash flow, near the high end of our long-term expectations. And we feel great about our delivery of consistently strong topline growth, expanding margins and nearly $300 million in unlevered free cash flow for our shareholders in 2015. On my second point about our expanding product portfolio and geographic footprint, we reached another major milestone in our company's history in January 2016 with the launch of key new markets in Asia, bringing our total there to 10 languages and 14 markets, including Hong Kong, Indonesia, Japan, Malaysia, Philippines, Singapore, South Korea, Taiwan, Thailand and Vietnam. With this launch, we are now in 26 languages and 53 markets globally. When customers in these markets visit GoDaddy today, they see content that looks and feels local. Our scalable technology platform enabled us to roll out these Asian markets simultaneously, including a localized suite of GoDaddy products and ccTLDs, with advanced personalization and flexibility, like allowing customers to toggle between languages and switch currencies, payment types and more. At the same time, we also deployed a new in-region customer care team and facility in Dalian, China providing local language care for all these new markets. Today, when a customer in South Korea comes to godaddy.com, they are directed to kr.godaddy.com. They see Korean language and imagery on our site and in our products. They have the ability to pay in dollars or Won and when they need help, they call a local phone number and have the ability to speak with a care professional in our Dalian care center in Korean. Launching across Asia immediately after closing the books on our very strong 2015 illustrates the power of our strategy and our financial model. We brought all these new countries online and launched local language support in Asia simultaneously, even as we were continuing to grow the business in 2015 and delivered huge unlevered free cash flow growth. This demonstrates our ability to meaningfully expand the markets we serve and produce operating leverage in our model at the same time. We have steadily and deliberately expanded our overseas presence over the last several years from English-speaking markets to Latin America to Europe and now Asia. International countries now contribute more than a quarter of our annual revenue and in 2016, we expect more new customers to come from international markets than from the U.S. for the first time, which is a huge move for a company that was nearly entirely focused on the domestic market just a few years ago. My third theme for this call is directly connected with our growing global presence. We are making a real shift in how we communicate with our customers, including both how we market to them and invite them to experience GoDaddy as well as how we present and bundle products to better match customer needs. One example of this is a clear shift you have seen in our approach to marketing. As you know, we already have over 80% brand awareness in the U.S., so we have been strategically shifting our marketing effort from singular big brand and mostly U.S. events, which focus primarily on driving name recognition, to increasing our customer touches through much broader reach and greater frequency at the top of the customer acquisition funnel. Well, you saw this illustrated in our approach to the Super Bowl this year. Instead of spending on a traditional 30-second spots sponsoring the broadcast game, we reached a sizable audience through digital channels, notably social and display, which included video content from Fox Sports, pre-game, free-time and post-game feeds, more social ads and a major presence across a number of large digital publishers like CBS Sports. In 2016, you will see several major extensions of this new marketing strategy: First, we are planning a larger and much more consistent presence in top-of-the-funnel channels like TV and radio throughout the year versus singular events and sponsorships of years past. Second, you will see more deliberate and consistent linkages between our top-of-funnel customer acquisition activity and our mid-funnel, especially in digital channels, similar to our multi-channel Super Bowl approach this year. Third, you will see brand creative and messaging that are distinctive and resonate specifically with the value proposition we offer our customers. This is a real change for GoDaddy and the right approach as we build on our exceptional brand awareness and push to extend our reach globally. As we market more consistently throughout the year, we expect to see more balance in our business pacing throughout the quarters of the year versus the seasonally stronger Q1 we saw in past years, which is also absolutely the right approach. Another example of our changing approach to how we interact with our customers is the product bundling Scott mentioned on our last earnings last call. You know that historically domains was really our primary customer on ramp. Over the last couple of years, we have presented customers a much broader range of offerings, often merchandising and marketing domains, presence and/or email together with introductory offers to make it super easy for customers to get started. When we make it easy for customers to attach and use our core products like site-building or email, they renew at very healthy rates and have attractive long-term economics. Our evolving approach to marketing, product presentation and bundling are all designed to better engage with our customers and address our increasingly global audience. Look, we feel really good about the quarter and the year. I am super proud of what our teams across the company delivered in 2015. We launched new capabilities with a comprehensive and just wicked-fast domain search, added over 100 new top level domains, expanded our domain aftermarket liquidity and grew to 62 million domains under management. We introduced our GoDaddy Pro tools, launched our new Search Engine Visibility service and we rolled out hundreds of features, performance and availability improvements across the company as well as filling out our international foot print to 53 markets and 26 languages. That all feels very good and creates a great foundation for growth in the years ahead. And as an aside and before I turn it over to Scott, just yesterday I noticed another timely proof point that reinforces the incredible importance of owning one's personal identity and presence online. I would encourage you all to check out what's presented when you type jebbush.com into your browser. Whether you are a presidential candidate, a small business or even a sellside analyst, I think we can all agree that with the increasing importance that the Internet plays on our daily lives, claiming and owning your digital identity just continues to become more and more important. Now let me turn the call over to Scott now to talk about the financial results in more detail. Scott?

Thanks Blake. There's three key financial points that I would like to cover with everyone today: First, we continue to deliver strong, consistent revenue growth with a really nice balance between customer and ARPU increases. As Blake said, our bookings grew 17% in constant currency in Q4 or 13% on a reported basis. Revenue also grew 17% in constant currency or 14% reported. Looking at our two revenue drivers, customers grew nearly 9% during the last year and we ended Q4 with approximately 13.8 million paying customers. Our annual average revenue per user or ARPU grew over 6% to $121, up from $114 a year ago, even while absorbing the impact of the stronger dollar. Second, we are consistently delivering even faster growth in cash flow. Adjusted EBITDA grew over 30% year-over-year in the quarter and frankly, we had spectacular performance in unlevered free cash flow with an increase of more than 145% last quarter and more than 50% growth for the full year 2015 versus 2014. Those are great gains in our two key profitability measures, achieved while we continued to invest in growth. Third, we feel well-positioned to continue delivering a solid combination of top and bottomline growth going forward. I will provide some color on the performance of our three product lines. First, domains revenue finished the quarter at $218 million, up 9% year-over-year. Our domains business continues to be fueled by international growth, strong and improved renewals and continued expansion in the domains aftermarket. While in recent months, we have received a handful of questions about China, specifically on the surge of domain registrations coming from Mainland China in Q4 and how it's affected us. Here's some background. For several months in Q3 and Q4, interest in short domain names spiked in China, particularly those with three to six characters, both in Pinyin and numeric names. Now, the vast majority of those registrations were done through Chinese-based registrars, often at below cost, so that activity didn't affect our results. We do believe that most of the incremental registrations were by local Chinese domain investors. Now, the surge was positive for our domain aftermarket business as we facilitated the secondary sale of several short character names, given our unique position as the largest domain marketplace in the world. While the surge in the primary market didn't affect us, we do see it as great proof point of the value of domains in character-based languages and the prospect for our growth in Asia over time. With our January launch of localized GoDaddy offerings in Asian markets and languages, we look forward to building our presence and participation in those markets in a meaningful way going forward. The interest we saw in the purchase and sale of domain names in the aftermarket also highlights the value of domain names as unique digital assets with real value. With our growing domain marketplace, we are well positioned to help grow the global aftermarket in names and make these secondary name transactions both easier and more transparent for our customers and for the industry. Now, today Asia is still very small for us, generating less than 4% of our total company bookings. We are excited about our recent launches and the opportunity to build those markets into a more meaningful business for us over time. This will be a multi-year process that I will address a little bit more when I discuss our outlook. Now, turning to our products beyond naming. Our hosting and presence revenue was $156 million in Q4, up about 13% year-over-year. As Blake mentioned, we are increasingly bundling our products bringing domains, our basic presence offerings and email and productivity products together in introductory offers, which we believe will benefit renewals and the long-term economics and value of our customers over time. Recall that when we sell products in a bundle, revenue gets allocated across all the products in the bundle according to their list prices. Bundling like this, for example, combining our website building tool with free Office 365, shifts revenue recognition among product lines in the short-term, but our focus is always on the overall lifetime spend of our customers in aggregate. When you look at the growth rates of our three business lines this quarter, it shifted several hundred basis points of growth to business applications from our domains and hosting and presence lines in the fourth quarter. Business applications revenue of $52 million accelerated to growth of 50% year-over-year in Q4, driven by continued strong growth in both productivity and email marketing and the bundling effect I just mentioned. Like all companies with a meaningful international presence, our 2015 topline growth also reflected the impact of currency, which became more pronounced through 2015. For the full-year 2015, bookings growth would have been 17% or 320 bps higher and revenue growth would have also been 17% or about 140 bps higher in constant currency. Most importantly, we remain happy about our international growth and our future prospects. Our international business now represents 26% of total revenue and grew 25% in constant currency in Q4. Over the last three years, we have grown share and accelerated growth in our primary non-U.S. markets at attractive economics. Looking ahead, we are going to continue to focus on extending our gains in Asia, the U.K. and other key geographies while building up our Asia business. Turning to profitability, we continue to deliver strong cash flow. I mentioned adjusted EBITDA grew over 30% in Q4 to $74 million and for the full-year, EBITDA grew over 24% to $337 million, producing a 21% margin, a gain of 140 basis points versus 2014. Unlevered free cash flow was up dramatically, growing 147% in Q4 to $52 million, bringing our full-year unlevered free cash flow to $294 million, a gain of almost 54% versus 2014. In 2015, we converted 87% of adjusted EBITDA into unlevered free cash flow, near the high end of our long-term target range of 70% to 90%. Now, just a minor note on our operating cost lines in Q4. Two items in the fourth quarter a year ago produced somewhat unusual growth for a couple of our cost lines. Specifically, our tech and dev costs would have grown a bit faster than we reported in Q4, more like 7% year-over-year and our G&A growth would have been quite a bit slower or about 8% year-over-year without the non-recurring items in the year-ago quarter. Looking forward, both tech and dev and G&A should continue to be sources of leverage for us in 2016. Now overall our combination of strong top and bottom line performance demonstrates the inherent leverage in our operating model, allowing us to steadily grow the topline, invest in growth across the business and deliver excellent unlevered free cash flow, all of which contributed to delevering the balance sheet throughout 2015. We finished the year with approximately $353 million in cash and short term investments and net debt of $731 million or about 2.2 times our 2015 adjusted EBITDA. So turning to our outlook for 2016. Today we are providing guidance for revenue and adjusted EBITDA for both the first quarter of 2016 and the full-year. Our strategy is designed to generate consistent, steady growth over the long term and that's reflected in our outlook, which is right in line with the expectations we shared with you at the time of the IPO and throughout all of last year. For Q1, we expect revenue in the range of $428 million to $432 million, implying approximately 14% year-over-year growth at the midpoint. For the full year 2016, we expect revenue of $1.82 billion to $1.845 billion, also implying approximately 14% growth at the midpoint. Now this outlook incorporates the continued impact of currency, as past bookings translate into revenue in 2016. In other words, without the dollar strength that trimmed bookings in 2015, our 2016 revenue outlook would have been a bit higher what I just shared. But even while absorbing this, the ranges are right in line with the long-term revenue expectations we had shared with everybody before. We expect adjusted EBITDA in the first quarter in the range of $111 million to $114 million and for the full-year 2016 of $400 million to $410 million. The midpoint of our full year adjusted EBITDA range implies 20% growth year-over-year, also in line with the long-term targets we have shared. Two quick comments on our 2016 expectations. First, this outlook incorporates the costs associated with our recent entry into the new markets in Asia, but relatively limited top-line impact from that region. We expect to spend 2016 tuning our product offerings and marketing in these countries to lay the foundation for a more meaningful contribution from these markets in 2017 and beyond. So although Asia won't dramatically affect our P&L much in 2016, we are excited about the long-term potential there as these geographies build into meaningful contributors over time. Second, Blake described our marketing evolution and specifically our focus on reinforcing our brand message more frequently and consistently throughout the year, as opposed to our historically big brand awareness push in Q1. As we broaden our marketing reach and expand the tactics that we use, our Q1 and full-year outlook reflect our expectation for slightly less first quarter seasonality than we have experienced in past years. But overall, I am taking a step back. We are well positioned for continued growth at scale in 2016 and beyond. We serve a huge market of small businesses, organizations and individuals who are looking to build an online presence. We deliver a true lifecycle experience to these customers that combine products, an integrated tech platform and care in a distinctive way. And the products and services that we offer grow with our customers over time. This value proposition translates into a proven financial model with great customer unit economics and strong and consistent overall revenue and cash flow growth. So to wrap, our Q4 performance and execution were strong and we are focused on continuing to deliver for our customers and our shareholders over time. With that, we will open it up for your questions.

[Operator Instructions]

And hey everybody, while the operator gets the queue going, we understand that the phone line was cutting out a bit that during Blake's remarks. We apologize for that. Let us know if there was any elements that people need us to come back to during the Q&A. We are certainly happy to.

Your first question comes from the line of Ron Josey with JMP Securities. Your line is open.

Great. Thanks for taking the question. I wanted to spend a little more time on international expansion and the plans around Asia specifically. On international, I think Blake you said that more users have come from international this year than the U.S. So I just wanted to see if you can remind us, I think you said there are about four million international users as of 3Q, so maybe an update there. And then given Asia has just launched, to the Scott's point, where do you think these users would be coming from in 2016 going forward? I guess obviously your more established markets, but any specifics would be helpful. And then lastly on marketing, just any more details on how you plan to the grow that brand awareness in those 11 Asian countries throughout 2016 would be helpful. Thank you.

So we will try to knock those off at this point in order. So yes, roughly about four million customers internationally today. This year will be the first time that we will take on the more international customers than domestic customers, as we cross that last, more new customers, I should say, internationally. So very good for us. Which markets do the new customers come from? We see that coming primarily big Tier 1 markets, whether it's Brazil, the U.K., Canada, India and then we have got Tier 2 and Tier 3. But the majority are coming from those large Tier 1 markets. And honestly, we do brand spend in those big Tier 1 markets. That is something where we have feet on the street with top-of-the-funnel advertising. In Tier 2, we do things that are more search engine marketing and direct in-display. Brand spend in the U.S., U.K., Australia, India, Brazil and Mexico for the most part. And we have seen good uplift and good uplift of brand when we spend and when we do localize markets, when we globalize and make sure we are managing payment types and currencies and languages. As we spend into those markets, we see an immediate win. So we are pretty happy with what have been doing so for over the last few years internationally and think that Asia is going to follow that pattern, follow that same pattern that we have seen in both Latin America, Europe, India and the other English-speaking markets we cover. That cover it, Ron?

Thank you. Yes. That's great. Thank you.

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

Great. Thanks. Maybe just two things. Products are becoming more important. Maybe talk about the mix and what you are offering is impacting the bundled packages? And then can you give us a sense of perhaps some product pipeline coming over the next 12 to 18 months? Thank you.

Yes. So Jason, I would characterize us as being a product portfolio of companies. So we actually have a number of products, both domains, presence and ecommerce and hosting and productivity. We have seen a slightly faster growth in our productivity area. We talked about 50% growth in that area. And the pipeline of offering that will come into the next in 12 and 18 months will be in the area of what we believe our customers are looking for. So you have seen our business shift from primarily being a domain businesses to being a much more of a portfolio of digital presence products that help people get found online, be able to transact with our customers, acquire customers, retain them and then help them run their back-office as well. And we are seeing good growth in business, both on digital presence and on productivity.

Thank you.

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

Great. Thanks. This is somewhat related to the prior question. Business applications revenue growth accelerated nicely for a few quarters since you launched email marketing. You call that bundling as one of the reasons for that due to the dollar shift. But can you perhaps qualitatively touch upon what the penetration rate currently is there, in terms of the total customer base and then how you are driving trade for that product? And can you also give some color on the adoption curve of the product? The email marketing product, which is Office 365 and professional email that you saw in the past?

Hi, Deepak, it's Scott. So from a business applications standpoint, I think we have said cause whether we passed few million customers that are using one of our business applications products and so we continue to see nice increases in attach and as our products, both within productivity and email marketing, again continue to get more, let's call it robust, we are also seeing some nice movement and migration into high value packages within those SKUs. So as I have described and talked to you about before, look, we continue to use bundling as ways that allow our customers to easily acquire and activate these business application products because we found and our customers certainly find once they start using them, there is huge value and they renew for a long, long time. And so look, we are just going to continue to drive both attachment and activation of these. And over time, that [indiscernible] to these categories.

Got it. That's helpful. And another one for you, Scott. So refund rates, if I look at it as a percentage of bookings, it was creeping up slightly for the past few quarters, but seem to our stabilized in 4Q. Will you call out anything specific this quarter or is it just due to the mix shift in the business?

We just keep running the business, Deepak. I think that stability is part of it, is a way to think about it.

Okay. Great. Thanks, Scott.

Your next question comes from the line of Mitch Bartlett with Craig-Hallum. Your line is open.

Sure. Maybe a question for Blake. Just could you describe what it is like to enter a new market? You just entered 10 Asian markets in early January. What are the assets and people that need to be in place? And maybe the initial product strategies? Or just what does it look like to start in a new market? And what will it look like over a number of years? I get that you are saying very little revenues from these Asian markets, but what does the trajectory look like for a normal market like, perhaps, Thailand or something like that?

Yes. So let me just talk quickly about how we approach international markets. First, our international markets for us is primarily mostly a software problem. So it's making sure that the code we have written is globalized and localizable, which means we are separating the function of the code away from language, away from market. And then in market you have both currency, you have payment type and you have imagery. We separate those things out that allows us, from a platform perspective, to have very small nuances in the products and to be able to enter markets with literally no personnel in five of those markets, with the exception of a singular care facility that can be in-region that manages the languages, the individual languages of those different markets. What we have found over the last couple of years when we have entered markets with that strategy, we have seen an immediate lift just because we were actually look a lot like a very local company who knows the market well. The India example, we entered in 2012. We ramped up products. We added a local care organization. We added marketing on top of that. And we have seen those 3X growth rate in India over time. So from a cost perspective, I will hand it over to Scott and let him talk about it.

Thanks, Mitch. Let me just pickup on the India example that Blake just gave which is, you have got scaled engineering in a market ramping barren marketing which India drove a 3X-plus growth and has for the last three years. And so think about these markets that we are entering, first on their size, growth and competitive potential. So we are looking at these geographies and thinking okay, well where is their embedded growth, particularly in naming and the local competitive context, mostly which is just local people. And then we are purposefully in year one, for a couple of markets that are big and large and we think we got a way to really meaningfully accelerate growth, spending year one marketing dollars to activate customers. And based on the customer growth rate plus their spending profile, we are measuring the lifetime value relative to our cost of acquisition over time. And then frankly, we are spending marketing dollars into that market based on that attractiveness. And so what I am describing is a very clear formula for growth that frankly has been at work the last three years on our international markets. And I would encourage you and everybody to think about these Asian markets as just another play in the international playbook that we have been running for three years.

All right. That's great. Thank you.

Your next question comes from the line of Paul Vogel with Barclays. Your line is open.

Great. Thanks. I just have two questions. The first, just in terms of big picture macro, any impact at all that you guys are seeing right now on the business? And is there anything you are guiding that would imply any change to the macro? And then I guess to a more modeling question, just when we look at margins for the business, how much of a mismatch is there between where you recognize your revenue and where you recognize your cost? So obviously you talked about FX neutral revenue growth, but is there a negative impact to margins based on a mismatch between revenue and cost?

Hi Paul, it's Scott. I will take both. Look, on guidance, certainly one of the appeals of our business and financial model is that we do have quite a bit of predictability and visibility into growth. Look I think the biggest macro factor is, just what we are experiencing in currency. And if you think about the range that we just provided, I think movements in these dollar amounts which should have been pretty unpredictable is, more than anything else pushes towards one side of the range or the other. And again, relative to constant currency versus reported, we have got 200 to 300 basis points of impact happening now and that are going to show up in 2016. And so that's the macro factor. Frankly, the fundamentals of business of our market performance of our attachment, they are all doing great. So I think that's question number one. On two, bookings and EBITDA, we don't have a lot of costs that are actually sitting outside the United States. Again as Blake described, as we talked about international, we are in a scaled expansion model. And so we don't have a lot of cost that actually sit outside the U.S. and so our EBITDA performance and growth is actually reflective of a cost structure that largely, in terms of people, sits here in the United States.

Okay. Great. Thank you.

Your next question comes from the line of Sterling Auty with JPMorgan. Your line is open.

Thanks. Hi guys. So I have got one question and one follow-up. The first question is, the comments that you made on seasonality, I am really interested, is it that you think that just changing the marketing programs is going to help smooth out because to your point, March has been the seasonally strongest quarter for the naming business, since in fact for 15-year plus. I am wondering, is that going to be enough to smooth things out? Or is there anything else that you think will help change the seasonality?

Sterling, it's Scott. So first, it's a slight change. Again, we are a subscription business. We have a big amount of renewal business plus new business from existing customers. So from a quantum standpoint in the quarter, it's a relatively small amount, but it is a bit of a smoothing from Q1 into the quarters throughout the rest of the year. So truly it is not a huge change. It's a very moderate shift from Q1 into the other quarters. Does that make sense?

It does.

And to be clear, that's affecting bookings, right. Because bookings is the in-quarter billing. And so that slight taper and shift for 2016 is going to just be more reflected in bookings than GAAP revenue.

And then just as a follow-up. The commentary about, I think you said renewal rates actually improved. I am kind of curios, are you seeing that across the board? Or is it a pickup in renewal rates, other customers that have more than just domain names? Just maybe a little bit more either qualitative or quantitative color on the improving renewal side?

It's positive across frankly, our product categories. And again, I think it's slight change in improvements, not dramatic ones but again in a subscription business, renewal rates that are consistent and steady, particularly at our size and scale and what we are doing from expansion standpoints is fantastic within certainly even domains, but then around products and categories like productivity, we are seeing just nice metrics in renewal rates. But again I think if you are sitting there and thinking about models, put it into the category of light shift comfort in the business as we expand, but not a huge dramatic change that's going to show up next quarter.

Got it. Thank you.

Sterling, this is Blake, real quickly. I would like to expand on Scott's comments. Well, what we have found is, as we improve the product and we start seeing better activation and usage and folks really enjoying the products and using them, we see folks renew at a much greater rate.

That makes sense.

Your next question comes from the line of Brian Essex with Morgan Stanley. Your line is open.

Great. Thank you. Thank you for taking the question. Either Blake or Scott, I was wondering if you could maybe talk a little bit about, I know it's early days, but some of the dynamics of what you are seeing in the new Asian markets and maybe relate that to India and what you have seen there, both from a pricing mix and attach rate perspective? Are you seeing a similar profile of customer? I have to imagine that in some ways it's different but maybe a little bit of color in terms of your initial take on penetration in those markets?

Sure, Brian. We have been in Asia, we have got customers in Asia for quite some time. So we have been doing analysis and modeling, the way that they look. The dynamics in Asia are quite similar to what we what we see in India. The mix of product is quite similar. Pricing in local currency is quite similar. And the customer profile generally is pretty homogenous in what they are trying to accomplish is the same. They are trying to get a digital presence, starting with the name and trying to attach a website to it and many a times an email address as well. So the dynamics for Asia are quite similar to other markets that we have entered in the last few years.

Okay. And is there anything about the experience that you have built penetrating other geographies that might make you do this more efficiently? What are some of the major things that you have learned whether it's India or Brazil or other geos that have been stumbling blocks upfront that maybe you solved that equation going into Asia?

Look, we certainly have gotten better. I think at entering just helps we have the experience in other countries. We have certainly learned about product deployment and product performance and how we do regional data centers that serve up speed and availability in the local markets. And then also how we spend into those markets in the top-of-funnel and mid-funnel. So we have spent time learning quite a bit on conversions and on how to really build products that our customers feel are local. They feel local.

Brian, it's Scott. I would add two things. One is, the marketing spend and the activation into a market is similar. So we have done this now in a half-dozen plus big Tier 1 markets plus later and more direct spend in others and we are dilating our formula for how much and the tactics around how we enter the market and then grow it over time. And so that's been a big learning over the last three years and frankly it's just giving us confidence in our ability to enter additional markets and grow share and do so in a really scalable way.

Okay. Anything you would highlight as the biggest risk for you? What are the key things that you would have to get right as you penetrate that market?

This is Blake. The approach that we have taken in doing primarily software driven and spending into the market is very low risk for us. We learned quite a bit. We grew our way into that over time. And you will see us take the same approach. As Scott had said earlier, there is not a whole lot of dollars at work that are outside of the country. The engineering team that actually builds these capabilities are here in the U.S. and we see good leverage from the work that we have done in the U.S. and these markets truly take a lot of the risk out of the equation.

And what really helps has been frankly just a very clear name centered offering translation and doing that with the local ccTLDs and price points and payments that allows people to get the name and start to build their online presence, which has been the foundation of the business has been the key to entering these geographies. So frankly more than anything else that's a thing I think has given us confidence in entering these categories because it's really anchored name and then connecting that name to a digital identity on a long-term approach.

Great. Thank you.

Your next question comes from the line of James Cakmak with Monness, Crespi, Hardt. Your line is open.

Hi. Thanks. Just too please. So the first one on the gross margin. Obviously you guys been able to expand that every quarter now with the growth in high-margin categories. But no with the bundling that we saw last quarter, perhaps you should have expected somewhat of a slowdown in the rate of the gross margin expansion because of that bundling, but it was par with 3Q. So just how should we think about the potential of slowing of the leverage there as we look into 2016? And then secondly on the macro comments that you made, largely ForEx related. What we are seeing is a weakening SMB environment, at least domestically. Can you just talk a little bit about what you are seeing from small businesses in general at a high level? Thank you.

James, it's Scott. I will take the gross margin one and then Blake can talk about the SMB environment. So on gross margin, you said it well and it's right, which is we have put up large gross margin expansion over the last six to seven quarters and we expect that to pretty much flatten .You have seen it taper at flattening out both as we bundle and merchandise and frankly think about some of the new categories that we are going to add and what that might mean from just a gross margin percentage profile. But again, the incremental products that we are adding and the merchandising approach, from a dollar basis and a gross margin dollar basis, are really attractive. So to your point on tapered gross margin as we look into 2016 is exactly right and that's the way to think about it. Blake, if you want to talk about the SMB macro environment.

James, this is Blake. Our business isn't cyclical but we see pretty meaningful resilience from small businesses. And if you look back in time of the company between 2006 and 2010 had double-digit growth. And it think what it speaks to is that it's not just an established small business. It's people that have new ideas, trying to take that idea online. And frankly, that optimism, that folks rely on themselves. when time get tough, they get a new idea and they are going to do something with it, it usually starts with a name and a digital presence after that and we see pretty resilience market compared to some of the reports on the SMB environment. But it's a positive trend.

Your next question comes from the line of Brent Thill with UBS. Your line is open.

Thank you. Blake, just on international. Was the business application uptake, I just wanted to be clear that you are seeing similar uptake that you had seen in international as you are seeing in the U.S.? Or is there any differences as you see the first-time customers coming in as they look at maybe just going with one product or they starting with bundles is similar to what you are seeing in U.S.?

Hi Brent, this is Blake. So look, we see the subscription business, so it starts out with the first purchase and then builds over time. And as we enter a market, we see attach rates that start to model the other countries that we entered into. So as O365 was rolled out, as email applications rolled out, we see those things been attached similar to the markets that are more mature internationally today which start to look a lot like the U.S. over time. So we will see, I think, increasing penetration of O365, as an example. And we offer that, frankly, in every language and markets that we entered next 53 markets and 26 languages. So we expect to see a good penetration there.

Okay. Great. And Scott just on ARPU, you have been running double-digit for last couple of quarters. It's been mid single-digits and I think you have been clear to not expect a double-digit pace. Can you remind us going forward your expectations for ARPU? Is it mid single-digit number? A number that we should think about it for modeling purposes?

Yes. And Brent, ARPU over the last several quarters has been mid single digits. So just the pacing from the fourth quarter has actually been pretty consistent with how we have been running our product and honestly that's the way to think about it going forward too. I think we are running the business with a nice balance between customer adds and ARPU growth and frankly what we have seeing in the fourth quarter is a good way to think about it going forward.

Great. Thanks.

Your next question comes from the line of Mark Mahaney with RBC. Your line is open.

Great. Thanks. I think most of my questions have been asked and I hope this isn't a repeat. Can you comment on the net adds? They came in a little light versus what we expected this quarters? Did those come in largely in line with your expectations? And any color around them with the net adds? Is the source geographically vertically similar to what you have seen in the past? Any trends in terms of retention or in terms of the gross adds, the churn?. Thank you very much.

Hi Mark, it's Scott. In terms of the quarter on net adds, the total customer won is the right way to think about it, just given the size of the base and the dynamics across markets and the total customer growth was 9%. It's steady as she goes. Frankly, I wouldn't look too much about the immediate quarter-over-quarter like just the translation of both year-over-year and what happens in the market as it might make a quarter-to-quarter comparison a little lumpy. But look, if you take a look at the customer adds, you are looking at million plus net new ads every single year and that's the way to think about the business going forward. And we are positioned in a trajectory to absolutely deliver that.

Thank you, Scott.

Your next question comes from the line of Gene Munster with Piper Jaffray. Your line is open.

Great. Thanks guys and congrats on a solid quarter. First on GoDaddy Pro. Can you give a quick update on what the progress on that initiative is? And then second, can you talk more broadly about India? How has the investments from VCs and big tech firms impacted the Internet adoption in that country? Thanks.

Sure. Hi Gene, it's Blake. Look, we continue to thousand of pros through that program. A lot of pros are entering the GoDaddy franchises which is great. When you think that 50%of websites are not built by individuals, they are built by professionals for small businesses or large businesses for that matter. We have added the ability for our pros to start including showcase in their portfolio work and previous. We have added the ability for customers to actually find a pro in our system and in our program and I think that we are frankly quite optimistic about it. Half the pros that are entering the program today are coming from outside of United States which is, if you take India as an example, many and most websites of India are developed by a web professional, not by an individual. So we think internationally, the Web Pro program will have a pretty big impact for us. On India, Internet adoption correlates with market growth and we are seeing very fast Internet adoption in India and it's helping fuel the market there. So we are seeing a very nice growth profile there and we see similar things in other countries as they start to model that same type of penetration growth. So it's a positive thing.

Great. Thanks guys.

There are no further questions at this time. I will turn the call back over to the company for closing remarks.

Hi. This is Blake everyone. I want to thank all of you for joining us today and most importantly, I want to you take a lesson from Jeb Bush and jebbush.com and go buy your name and own your identity before somebody else does. I think I will end it on a cheery note like that. Anyway, have a good day and we will talk to you next quarter. Bye now.

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