GoDaddy Inc. (GDDY) Q2 2016 Earnings Report, Transcript and Summary

Good afternoon. My name is Kelly and I will be your conference operator today. At this time, I would like to welcome everyone to the GoDaddy Second Quarter 2016 Earnings Conference Call. [Operator Instructions]. Thank you, Marta Nichols, Vice President of Investor Relations. You may begin your conference.

Thank you, and good afternoon. Thank you for joining us for GoDaddy's second quarter 2016 earnings call. With me today are Blake Irving, Chief Executive Officer; Scott Wagner, Chief Operating Officer and current Chief Financial Officer, and Ray Winborne, who is joining the Company as our new CFO. Blake and Scott have some prepared remarks which we will 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, EBITDA excluding, equity based comps, adjusted EBITDA, un-levered 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 IR site at investors.godaddy.net or on our Form 8-K filed with the SEC with today's earnings release. The matters we'll discuss 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 3rd, and we undertake no obligation to update these statements as a result of new information or future events. I'll now turn the call over to Blake.

Thanks, Marta and thanks to all of you for joining us today. GoDaddy's second quarter was a very good one. Both our revenue and adjusted EBITDA exceeded the top end of our range as we shared with you last quarter. 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. In the second quarter we have grown to serve over 14.3 million customers, an increase of more than 1 million versus a year ago. Our average revenue per user or ARPU rose 6% to $125, despite currency headwinds. Strong customer and ARPU together drove an acceleration in our top line this quarter. Our second quarter revenue grew 18% on a constant currency basis or 16% on a reported basis to $456 million, and Q2 bookings grew 14% on a constant currency basis, or 13% reported to $539 million. Our adjusted EBITDA jumped 26% to $104 million in the second quarter and we generated strong unlevered free cash flow of $84 million. We feel about these results and what they say about the strength of our strategy and execution over the last several years, and more importantly where we're headed. In fact, several of us approached our three-year anniversary at GoDaddy this year and we took a step back to review of execution against the vision and long-term strategy we laid out when I joined the Company. Our strategy has gotten us to much more meaningful scale, doubling the size of the business over the last four years on both the top and bottom lines, and we're now building on the foundation we've created with an eye towards doubling the business again over the next four years. I want to touch on our key accomplishments over the last three years and then tell you how we'll be expanding on what we've done in 2016 and in the future. Simply put, the last three years were about first building the product portfolio, second expanding internationally, third evolving our brand, and fourth, proving the strength and consistency of the business model. Let me expand on each of those. First on products. We've executed well on our product portfolio, enhancing our capabilities, primarily in preexisting categories including domains, hosting, web presence, security, email and email marketing by making our product set deeper, broader and faster as well as more user friendly performance reliable and more mobile. We've also expanded into new categories to serve more of our customers needs and integrated our products to make them more valuable together than they were individually. You've seen us introduce new offerings like Managed WordPress, Email Marketing, Cloud Servers, Web Pro Tools, Office 365 for Microsoft, SiteLock and soon we'll add Telephony with our pending acquisition of FreedomVoice. And we've been shifting our merchandising to bring our products together in bundles and allow better in application product up sells, like backup and security products for our hosting customers and email marketing, integrated with a website builder product. The product and platform teams have seriously been cranking. Second on international, our engineering and product teams have deployed Go Daddy in all major international markets around the world. We now offer our products and services in 29 languages and 56 markets globally, including local language sites and software, local currency and payment types, local imaginary, local phone numbers for customer care and live local language support in Europe, Asia, India and the U.S. We now have over 4.5 million international customers and generate more than a quarter of our revenue outside the U.S. With our global product and service rollout largely complete, we've evolved our focus from introducing more new markets to establishing a larger footprint and lifting growth in the many markets we've now entered. We have concentrated our efforts here by introducing a new marketing and sales organization dedicated to international. Take it as an evolution from getting Go Daddy into every market that matters to now focusing on growing and winning in our priority markets. Third on brand, as we've expanded our product portfolio and our global reach, we've simultaneously and deliberately shifted the Go Daddy brand strategy from one focus to almost totaling on generating awareness to highlighting our small business customers and their experience, making it much clear what we do at Go Daddy and who we do it for. We've made meaningful progress, meaning moving from U.S. centric brand awareness to connecting our brand to positive product experience, and broadening our marketing reach around the world. We're now concentrating our efforts on top of funnel marketing and conversion in our priority markets globally. And first on our business model, following the IPO, we've consistently demonstrated our ability to generate growth of scale, significant free cash flow and business model consistency with five straight quarters at or above our guidance. Look, in short, we've built an engine that has demonstrated real success and we continue to tune and improve our ability to go after a large tam of small and evolving businesses and the go getters to stardom. Now this year we've made a very deliberate move in our products platform and marketing organizations to put proven leaders in place for the next phase of our growth, building on our already solid foundation. Today we're doing the same for our operations channels and marketing as well as our finance organization. To that end, we would be separating the Chief Operating Officer and Chief Financial Officer roles. I'm pleased to announce that Scott Wagner is being promoted to President and Chief Operating Officer where he will lead the Company's operations, channels and markets globally. I want to personally thank Scott for carrying the double load of both the COO and CFO roles for the last several years. He has done a killer establishing our financial function as a public Company and has set us on a great path for the future, all while all also running our Company's operations. Thanks a ton, Scott. I'm also pleased to introduce you all to Ray Winborne, who's joining GoDaddy as our Chief Financial Officer. Ray has great experience in finance leadership roles for global scale businesses, serving as CFO for First Data Corporation and Controller at Delta Air Lines and AT&T. Ray's technical and operational capability is proven and his leadership has made those on his teams and everyone to around him just better. I'm excited to have Ray join our team at GoDaddy. I know you are going to get some know him very well. While Ray won't be speaking to the second quarter on this call, I would like to introduce him. Ray?

Thanks Blake and hello to all of you. I'm thrilled to be joining such as great company and a really top notch team here. And deciding to join GoDaddy, I've been really impressed with the caliber and the depth of the technical and business talent we have throughout this Company. GoDaddy has clearly developed a great business and it was easy to get excited about the purpose here, which is helping small businesses be successful, and also about the massive global opportunity. But honestly it was the culture that brought me here. You can really see the spirit of GoDaddy's small business customers in everything we do. We're entrepreneurial, fast moving and intensely focused on customer service. The energy and the passion here is fantastic. So some quick background, as Blake said, I'm long time finance guy and I've spend my career with several large global subscription based businesses. Scott and I worked closely together when he was at KKR and I was at First Data. So we've got a lot of shared history and personal and professional respect for each other. I'm really looking forward to digging in here and helping go GoDaddy double in size yet again over the next four years. I'll keep it brief today, but I couldn’t be more excited to be here and look forward to spending more time with our investors and analysts over the coming weeks. With that quick intro, I'll turn it back over to Blake.

Thanks, Ray. We're super happy to hand you. The story I've shared with you all today is -- look, it happened. I just went into that accent. The story I've shared with you all today is one of strong execution over the past three years and continuous improvement on our strategy. We feel really good about the quarter, our continued progress and how our organization is now positioned to take us into the next phase of our growth. With that we'll turn it over to Scott for the financials.

Thanks, Blake. Let me add my warm welcome to Ray, who I'm thrilled to have in the team. Ray is a terrific executive, a great person who is going to add a ton of value to Go Daddy. Turning back to our results, Q2 was strong on all fronts. Both revenue and adjusted EBITDA came in above the high end of our guidance range with the acceleration in year-over-year growth. In Q2, our revenue grew approximately 18% on a constant currency basis, 16% on a reported to $456 million. We continue to see a nice balance between customer and ARPU increases with customers growing nearly 8% over the last year, $14.3 million and ARPU up over 6% to $125, even while absorbing the impact of the strong dollar. Total bookings grew 14% in constant currency or 13% reported. When we spoke to everyone after the first quarter, we discussed business trends and specific merchandising tactics to drive customer lifetime value and annualized revenue, and noted that some of these may impact bookings and revenue differently. These tactics continued in Q2, including, one, the ongoing mix shift in non-domain products, two, the rollout of free trial of our high value products like Office 365 and our DIY website builder, and three, reductions in multiyear discounts. These actions continue to show promise in terms of customer metrics, and you can see the positive impact in our strong top line performance and raised guidance. We'll focus on driving activation and usage of our anchor products because we know that when our customers try and use our products, they stay for long time and they spend more with us. Turning to our revenue lines, we saw a nice growth across all three of our product lines in the quarter. Domains revenue finished the quarter at $230 million up over 10% year-over-year. This above market performance continued to be fueled by international growth, strong renewals and expansion in the domains our aftermarket. Hosting and presence revenue was $168 million in the quarter, up more than 15% year-over-year. As mentioned, we've been experimenting with 30-day free trial of our website builder product and based on positive results, we're rolling this out across the Go Daddy geographies in Q3. Business applications revenue grew 45% year-over-year in Q2 to $59 million, driven by continued strong growth in both productivity and email marketing. Turning to International, our revenue outside the U.S. now represents 26% of total revenue, and grew 25% on a constant currency basis in Q2 versus reported growth of over 17%. We believe international will continue to be a strong growth driver in the years to come, given the horizontal need for our products and the strength of the Go Daddy brand and value proposition. Turing to profitability, we continue to deliver strong cash flow. Adjusted EBITDA grew 26% in Q2 to $104 million, also above the high end of guidance and producing a 22.7% margin, up a 180 basis points versus prior year. Levered free cash flow is up 9% in Q2 to $84 million. In Q2, we converted 81% of the adjusted EBITDA into free cash, in line with our long-term target range of 70% to 90%. As we've said in the past, on a quarterly basis, cash can be lumpy. With our first tax related payments beginning this year, we were in the middle of our target range for the quarter. For the full year 2016, we still expect a levered free cash flow to grow over 20% versus 2015. We finished Q2 with approximately $482 million in cash and short term investments, and net debt of $596 million, or about 1.6 times our adjusted EBITDA for the last 12 months. As everyone saw with our announcement of FreedomVoice, we're continuing to utilize the balance sheet to help expand our product portfolio and geographic footprint over time and generate long-term shareholder value. So let's discuss our outlook for Q3 and for the full year 2016. For Q3, we expect revenue in the range of $468 million to $471 million, and adjusted EBITDA in the range of $102 million to $105 million. For the full year 2016, we're raising our revenue range again, which is now $1.84 billion to $1.847 billion, implying approximately 14.5% growth at the midpoint, in line with the long term targets we've shared. We're also raising our full-year adjusted EBITDA guidance again to $410 million to $416 million. The midpoint our new range implies 22% growth year-over-year, also in line with our long term targets. Our third quarter and full year revenue guidance incorporate the expected impact of past currency movements. Switching gears for just a sec, the SEC has recently issues interpretations in the use of non-GAAP reporting and guidance measures. GoDaddy has historically guided during reported on a GAAP measure revenue and non-GAAP measure adjusted EBITDA. Our Board of Directors, management team and creditors rely on several GAAP and non-GAAP measures, including revenue and adjusted EBITDA to assess the operating and financial health of our business. As our proxy notes, our management teams compensated on the achievement of several target metrics including adjusted EBITDA and the investment community uses that measure along with other measures of cash flow to value the Company. At the same time, we're very committed to ensuring compliance with all the SEC's interpretations on non-GAAP measures. So in addition to the reconciliations we've always provided, we provided a new tables today that present the most significant components of our historical adjusted EBITDA measure, which are EBITDA excluding equity base compensation and changes in differed revenue and registry fees. Essentially, the main difference is we're moving acquisition and sponsor related costs which have been less than $1 million per quarter over the past four quarters following our IPO. We expect that any future presentations of the components of EBITDA will no longer adjust for these typically smallest acquisition and sponsor related costs. And following today's call we intend to gather feedback on this presentation of the major components of our historical adjusted EBITDA measure to help in former future presentation. Now getting back to our business. Q2 was a very strong one. We’re proud of our consistent delivery and our strategy and strong financial results. We will remain focused on delivering continued revenue and cash flow growth as we keep building and scaling our business this year and beyond. Thanks. And with that we're going to open up the line for questions.

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

Two questions please. One, any color on specific international markets that drove that 25% year-over-year growth and within that into what extent Asia is building out? In line with plans, ahead of plans, behind plans. And secondly small question on the gross margins. It looks like – should we assume that going forward you kind of reach the level and this is a kind of a flat lining level. Or are there any major drivers that remain to cause gross margins to continue to expand in the future? Thank you.

Hi, Mark. This is Blake. I'll kick it off and then hand over to Scott. But for most of the growth -- 50% of our growth in international markets comes from our top tier countries, U.S, India, UK, Australia, Mexico, Brazil. So, that's where most of our growth comes from. We don’t break it out by country. I think growth overall in our markets is strong and it's good. Some of those markets are new, very new for us, as you pointed out Asia. Asia is super new for us. We've only been there a few months. We're happy with the results that we're seeing there. And frankly we don’t think it's going to be super contributory in 2016. Asia is only about 4% of our total revenues, but we're happy with it and we feel good about it and think that Asia in 2017 and 2018 will be a contributor. I'll hand over to Scott for more detail.

Thanks. So Mark, just to the international question, three points. One is, growth is being driven by the same markets we've talked you about. Its share gain and just continued good performance across all those geographies. And the second is Asia, still small and too small to really affect the P&L, but we're really happy with how it's looking at out of the gate. On gross margins, margins have flattened, I think in line with what we've told everybody, certainly last quarter and even the first quarter which is they've tapered particularly as we've lapped a couple of the big 365 incentives, but we're managing the business and gross margin dollars, not percentages and kind of are happy with the mix there, and I think for the forward couple of quarters, people should expect the gross margins to be in line with what they are right now. And again, the focus for us going forward is around adding products and continuing to add gross margin dollars per customer, not necessarily percentage.

Your next question comes from the line Sam Kemp of Piper Jaffray. Your line is open.

So in terms of the new product math that you guys looking at, does that include any e-commerce or channel integration functionality? i.e. e-commerce site being able to integrate directly into say Amazon or eBay? And then can you talk a little bit about where you're seeing India? Is that accelerating demand environment giving -- contributing less coming in terms of ECN and large internet investments? And are you seeing any deviations from the historical markets characteristics as being kind of a -- more of a do it for me type customer base? Thanks.

This is Blake. So in product on e-commerce, we have an online store product that does surface e-commerce capability on our own website. In other markets -- and you used India an example, where things like Flipkart and marketplaces are actually more important. There is some work going to integrate in those marketplaces today. We have not integrated with our market places in the U.S. whether it'd be eBay, Amazon, SC [ph], those types of things, but we have some integration that we've done on the back end for using things like PayPal et cetera. On India, it's an interesting market and it's actually quite similar to other markets at the same level of maturity. I use Mexico as an example as well. Each one of these markets has a DIY component and a DIFM component. They all have both, but DIFM, do-it-for-me marketplaces are much more impotent in India, Mexico, Brazil because folks tend to have I think less ability to do their own websites. So we have a web program that we've got a 100,000 developers in now and frankly quite a few of those developers are from India. And they are building websites for other folks in their marketplace. And frankly 50% of websites today are not built by the owner of the business, they're built by web pros, and we think that's a very large marketplace and an important marketplace for us.

And your next question from the line of Sameet Sinha of B. Riley. Your line is open.

A couple of questions here. Can you talk about the strategic importance of FreedomVoice and how we should think about that being integrated into the overall product suite that's sold? And secondly Ray mentioned he's looking forward to doubling revenues again in four years. Is that sort of a goal that we should also keep in mind while thinking about the Company or if it's more about looking historically?

Hey Sameet. This is Blake. I'll handle in a quick second. Scott will probably tag team on the doubling question. On FreedomVoice, we know that -- our customers have told us they have -- they're sole entrepreneurs in companies of only five people. They have what I guess I would call complicated lives where they are trying to manage their personal life and manage their business at the same time and many of them are trying to do it on a single phone. So what we intend to offer with the FreedomVoice acquisition as a second phone line that exists on your mobile phone. So you can tell that a phone call is coming in from a customer versus for instance, you are a junior high school kids' teacher, and be able to separate those two roles you've got of parent and business owner. From an integration perspective we end up with a really interesting signal strength, both in Website Builder and manage WordPress. So when somebody enters a phone number on their website, we have the ability to actually make an offer for them and say hey, we have a phone line that's available for you as well if you'd like to manage your business as a professional phone number. And then offer it for them. And if you think about philosophically about naming your business and actually searching for a good name, whether a domain name or just a trade mark business name, it's another opportunity for us to get in front of them with a phone number that is more relevant to their business than otherwise would be, and gives them a choice, that same kind choice you have in a domain name, where we can allow you to go into a local area code or have an 800 number to provide call trees and allow you to basically look bigger than you are, or be in a very specific location by having the right area code. I'm going to hand it to Scott on the doubling question.

I think in some way that was an acknowledgement that over the last four years we've doubled. And if we look at the business going forward, you think about our customers, which are now 14 million plus. We're on a pathway where we could see trajectory to $20 million over that next four or five–year period. And then ARPU, looking historically we went from the 90s-ish ARPU number to now 125 and believe with the product portfolio and the merchandizing approach we have that we're on a runway to 150 to 175. So -- and a really step back and high level math runway to 20 million customers, ARPU of 150 to 175, that's where you get the doubling. But don’t hang up on the precision of the four years.

Okay, and one final question if I can squeeze it in. I know that historically the way [Indiscernible] has worked is Q3 to Q4 we seen a drop off in margins. This year with the change impact against specially, most people go in Q1, do you think there is chance that -- the way to ask is are there any sort of -- anything stopping you, anything else apart from these marketing tactics for the gross margins?

There is -- you said -- that's right, that the seasonal profitability has a little bit of a slight downturn in the fourth quarter. Still think about that going forward and our guidance gives you the best range of where we think EBITDA is going to land. And again that's nice 20% plus growth year-over-year

And your next question comes from the line of Ron Josey of JMP Securities. Your line is open.

I think you mentioned in the investor deck that the domain business has seen increasing strong renewals, and I was wondering if you could provide some additional context here just around renewals rates, perhaps our churns trended over the year so? And then I think your commentary around bundles in that product upsells, any update just on the updated pricing and approach, and maybe that helped drive bundles and up sell in the quarter around going -- less discounting going forward? Thank you.

Thanks Ron, it's Scott. Domain renewals are -- rates are nice and strong. We don't show those specifically publicly but we're on a nice trajectory there. And really that's an offshoot of focusing on domain names that are attached to customers and even more so ideas, and brining those ideas to life. And when we get a customer a great name for their idea and help them bring it to online, as we've all seen, know and when that happens, customers stay for a long, long time. And so our domain approach has been particularly focusing the business on attaching a domain name, do an idea and then make it happen and when we do it, it shows up and great domain renewal rates and that's what we're seeing. In terms of the pricing approach and impact on renewals and churn, again mechanizing goal is to get our customers into the right set of products by name, presence, productivity that are involved around branding and naming your idea online, and getting those activated, and when those get activated, we see really strong impact on our renewal rate on a product basis.

And based on that, can you comment on just Flare? Is that I'm assuming directly related to what you're seeing?

This is Blake. On Flare, Flare is an interesting product. Flare's notion is to actually go upstream from the domain name. It's not something that we generate revenue with. We actually allow a user to put an idea out into a marketplace of folks that can comment on that idea and actually improve the idea, gets over 10 likes or what we call 10 loves, then they actually can go back forth with folks and build the idea up into something significant. Now what we get from that is a large corpus of data that we store in our backend that gives us signal strength on what that idea is and how well that might perform. And with that data, we also have an opportunity to know exactly what we can market to that person in the next instance when they are ready to take that step, whether it's domain, whether it's website, whether it's a professional email address that lets them take that next step. But we view that knot as – I wouldn't call it a money generator. It's more of a method for acquiring customers and getting them to take the first step -- that first spread step of saying, I'm going actually take a leap of faith and go and try this thing out and get enough feedback to take the first step.

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

Two questions. First one, a big picture question. You've mentioned that 50% of the market is still built by Web Pros for website building. On that topic, can you help us boss down the growth profile between hosting and site builder? Is the demand for website building, using platforms like WordPress and then using hosting products from Go Daddy still healthy, given that there is some strong propensity to use DIY tools recently?

Hey Deepak, this is Blake. We're actually -- yes, 50% of the sites that are built by individuals using DIY tools and 50% that are built by Pros. So those pros are even using what you would consider to be a DIY tool to build for folks. Managed WordPress and WordPress products have actually gotten simpler to use and frankly we've seen really good growth in our managed WordPress. In fact, it's some of the fastest growing -- one of the fastest growing products we've got. Managed WordPress is doing incredibly well. And frankly, I think the market is so darn big that companies can grow in the DIY space. Our DIY business can continue to grow. Our web-hosting business can continue to grow and we just get better it both of them. The opportunity is not just in the DIY space. It's an opportunity for websites that have been out there for a while, to get them refurbished, to get them a newer updated, more responsive code basis, so they look great on a mobile device, they look great on a tablet, they look good on a PC. So that demand continues. And frankly we do something at GoDaddy that's interesting where folks say I'm going to go build this thing myself. We actually will help them when they don’t want to build it anymore. And so we have a professional web services group will take that almost as a continuer if you will, where I start as a DIY customer, I might get to a point where I'm doing opt to Do-it-with-me or DIWM customer, and then say look, I'm going to hand this off to you and allow you to do it for me. So that continuum really reflects the need states of customers where they say I'm going to try it on myself, and then I'm going to basically hand it off to somebody else. And we're the only Company that is really doing that today, and more over, and I think most importantly, we don’t have an opinion that is like it's DIY, and there's a proprietary way of doing DIY. We actually believe there's DIY and people are going to do it themselves, and we also believe that the hosting business and professional business is very important. And there are different tools that people use to do both. And we are the only company at scale that offers both of those things. So we offer a great website building experience at scale, and we offer a great web professional experience at scale, and things like managed WordPress [Indiscernible] Durpal, Ruby, and cloud servers that offer you pretty much any type of tool you want to use to build the site for somebody. So we're not taking sides or placing bets on either side. We’re offering both, the DIY and DIFM to small companies and the developers.

Okay, that's helpful. And then second question. Historically domains used to be a key new customer on ramp channel for you. Now the initiatives are around bundling for the website builder products et cetera. Can you explain what the mix is like for the new growth of customers that you bring in for different products?

Deepak, we're still, for new customers coming into the franchise a large, large, large portion of them, all certainly still start and have a domain, but they are also attaching that domain to some form of presence and 0365. But domains is still a big tinker to the on ramp, but again it's being anchored with one or two or in some cases all three of our other products. Now looking ahead two, three years down the road we're encouraged and we're excited by the possibility and the potential for a category like what we've done for FreedomVoice, and through voice to serve as a distinctive on ramp for additional customers and to continue to go add certain segments of the market, whether they would be pros, who are big influences of downstream customers to provide experiences for those segments. So we think that there is a couple of different ways both products and channel go to market for certain segments of the customer base that are going to add different on-ramps for customers into the franchise.

Your next question from Mark May of Citi. Your line is open.

Maybe Scott, just coming back to the gross margin question, I'm guessing one of the reasons why it keeps coming out is we're counter intuitive because we're still seeing hosting presence in business [indiscernible] business growing and becoming a bigger portion of the mix, you're guiding to kind of expect for stable growth. I guess we're always under the impression that the domains gross margins is quite a bit lower than the non-domains margin. So maybe if you could walk us through why that in fact is not translating into higher gross margins or your commentary on that as just sort of in the very near term that over the next year or two plus, you have a different expectation? And then on FreedomVoice, I got your sort of game plan going forward and the strategic fit. But can you confirm, the deal hasn't closed yet. Is that right? And if that's right, I'm assuming it's not in any of the numbers that you either provided or guided to? And if that's the case, I have a couple of other follow-up on FreedomVoice if I could.

So first point on gross margin. The gross margin to the anniversary of a series of incentives with our partner in productivity, that enables us to provide special bundles around a productivity suite presence and a domain name for the first year. And we're lapping those first year frankly incentives that are getting to a normalized rate in terms of licensing payments for our partner, and that's normalizing gross margin at the percentage that we're at. And sorry if that hasn't been clear. We've tried to be explicit about that for the last several quarters, but that’s the reason for the tapering. I think it's important to point that our EBITDA margins continue to grow nicely, all the way down through cash flow as well, because it's leveraging the model. So we've tapered the gross margin percentages now, but are seeing nice scale through our OpEx lines, particularly Tech & Dev and G&A and even over the last quarter Care as we continue to build out the business. So these things are working together and we're intentionally working them together to continue to show nice growth on top and bottom line. So hopefully that both provides context on the gross margin and on EBITDA. Specifically, on FreedomVoice, it's not closed yet. We expect it to close later this year. There's a whole host of FCC licensing requirements when you get into the voice business that makes the close longer than expected. And so that's still TBD in terms of the close. In terms of guidance, we have tiny bit, you could call it expected in the fourth quarter. We do expect FreedomVoice to close before the end of this year and sort of therefore implicitly you could say that we have it included in guidance a little bit in the fourth quarter.

And can you comment, I think there are some reports out there that the business is doing about $30 million in revenues. Is that roughly correct and is relative growth -- relative to GoDaddy business, relative margins et cetera.

So that's way high. I think we had said before that it's per quarter a couple million dollars per quarter in terms of what we're going to be inheriting on a size basis. So that's the quantum of the business what we we're getting today.

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

So, can you talk a bit more about marketing, regarding that -- you generally think about relative to net bookings, but it does seem like there is some consistency to revenue and kind of how you are thinking about that. So obviously this quarter we saw a deleverage on the net bookings but a stable leverage on revenue. So just kind of how guys are thinking that. And then secondly, any update on the cloud product, because I guess it's now what, two full quarters since that's been in the market. Thanks.

It's Scott. Jason, on marketing; for our marketing dollars, through this year, our spending is going to be probably a lot more proportional on a quantum basis as you go quarter-to-quarter-to-quarter from just a raw dollar standpoint. And so part of that was having a consistent level of spend and mix between the U.S. and these different international growth markets that were put on our shoulder behind and seeing nice results. And that's really how to think about marketing for Q3 and Q4. More importantly into 2017 and beyond is about taking our go to market dollars in not only the markets that we're in and growing nicely, but adding more geographies. And we think that there's several nice probable possibilities for us, as well as building up and putting our shoulder behind some of these either new product customer categories or products themselves. And you will see again our marketing just go to support these different products and different geographies. Blake you want to talk?

Yes, hey Jason, it's Blake. The cloud product, we announced in March. So we've got basically four to five months of time in market. We're happy with the results that we've seen in cloud. It is resonating with developers and the folks that are building websites for other people which was our assumption. Frankly we feel like it's -- I wouldn’t call it a significant contributor, but we're happy with where it's growing and how it's pleasing the customers that are using it. And it's a great mix for the Web Pro product line with that adding a ton of languages on top of cloud infrastructure that we weren’t able to offer before. So we're happy with.

Your next question comes from Aaron Kessler of Raymond James. Your line is open.

I have a couple of questions. First, any update on the number of domains into the quarter as well as your market share, and just any idea of the amortization intangibles for core ARPU that might be in the queue and also do you have potentially the dilutive shares with options as well. That would be helpful. Thank you.

Aaron, its Scott. So in terms of number of domains, we have approximately 63 million domains in the portfolio, give or take right, which is again at the -- the important number there is that that's 20% of the world's domains in the portfolio. And important note is we're focused on adding domains that have customers attached. So our focus around the domain business is the names that lead to other things versus just the names themselves. So that's I think domain point number one. In terms of the amortization question, it's going to be in the 10-Q which you're going to see tomorrow, tomorrow AM. So maybe we can't pick that up either after the call or you can just find it in the Q tomorrow. And on a fully diluted basis, shares are -- if you use approximately 176, that's the number.

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

I was wondering if you could just touch on -- I got the 14% constant currency bookings growth, but could you give a little bit of color, on the last quarter it was a little bit -- there was a little bit confusion around duration and how much the reduction in discounts impacted the duration and therefore, the duration if you will, the duration of adjusted growth of that number. Maybe just a little bit of detail there?

Brian, the exact same stuff last quarter that we talked about, so free trial of the Office 365 in website builder, some of the shorter duration which is just mix related and the reduction of discounts has continued. So all of the language and discussion that we had around bookings last quarter, we have not only continued into this quarter merchandising wise but ramped they up in the case of free trial and the bookings number accelerated on a year-over-year basis.

And then if I could -- can't help but notice you're building a little bit of cash on the balance sheet, as rates transitions then and you build that path [ph] down, just kind of wondering what your priorities might be and how you might think about return on capital going forward?

So we certainly think that there's opportunities to add to the franchise, both products that are valuable on the lifecycle of our customers that probably are great standalone businesses, but maybe really good products that we could attach to our customers and technical platform and care model and add value to our customers and obviously make that economic and geographies as well. So obviously that translates into -- we think that there is good ways to use the balance sheet to grow the franchise strategically, but we'll keep in -- FreedomVoice as a perfect example for that, right, which was tiny in terms of dollars outlay, but is a good example of what we're talking about doing. And we like having the flexibility to do it and we're a shareholder and economically minded people and we're going to do that intelligently and it's going to have to be we think accretive relative to what we're doing organically. Now if we love the flexibility of having the cash both for growth and for what it can do in terms of our share count and in terms of just the economic returns of the balance sheet overtime and so it's just nice to have the flexibility to be able to do that.

And how might you manage debt in the process? I know it has picked up a little bit. So just kind of wondering how you kind of balance between the two?

I think at this point, like you said, we have cash and relative to our leverage position where we have a lot of flexibility, I think that's the way to look at it. As we've shared before, the business, if you're looking at it truly from the just operational cash generation of the business, two to four times as a really nice leverage ratio given the cash characteristics and the stability of the business. Obviously we're below that. But we're not going to attach to that ratio but I think that should give everybody an indication of where certainly comfort wise and where we are relative to those -- to that ratio.

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

Hey, Scott, congrats on your new role but with removing CFO side, where do you expect to be spending most of your time? Where do you think you are going to have the biggest impact now with that time freed up?

Thanks Brent. Really this is about the go to market, international marketing, using our care organization around the world to both deliver great experience and to help enable the business. And so if you think about those three areas, we're really putting our foot down on the gas across all three. And if you add any corporate development and the flexibility we have in the balance sheet that Brian so nicely articulated and pointed out, those are sort of the four different avenues that you can think about just growth. It will be where I'm spending my time. And it's great to have Ray here, because the size of the Company now as a global public company with a financial scale around it, it just makes perfect sense to have frankly a full-time strong fantastic executive on the finance function day-to-day, and it's going let me spend my time thinking about those different areas of growth.

Okay, thanks for that. And Blake, I know understand the bundling concept better than most, given your time at Microsoft. And when you think of the bundling opportunity going forward, it just seems like there is a lot more or that you could do. Con you just talk a little bit about the strategy and what you're seeing? I know you've had domain, website, emails as one of the high fields on your website. It just seems like there's a lot more you could do there. What's your vision in terms of where you think you can go with this?

Brent, this is Blake. So the bundling strategy has been working well for us. We have deployed as you described, domain, website, email. Not just bundling but in application selling, which is something that Microsoft really didn’t have the capability of doing back in the days of Office, because it was packaged product, where we believe that not only can you bundle products effectively and create a powerful merchandizing moment for a customer, but there are other opportunities for us to sell not just the bundle but actually sell them the thing that makes the most sense for them at a point in their product life cycle -- in the customer life cycle. And if you use the voice capability and FreedomVoice as an example, there is an opportunity for us to offer a voice capability when somebody pushes a number, which is a phone number into a website is an example. Or to offer email marketing, while it wasn’t in the initial bundle, to offer email marketing when they've got a sufficient number of folks that have entered their email address into a website. That incremental capability which we'll offer on a free trial basis so they can try it out and see how it works and then use it and then get a response allows them to take that next step and grow their business further. If you think about the hosting business, it's exactly the same for protecting somebody's website, whether it's offering site walk to them or offering a backup capability. Doing that in the product when you're in the control panel and you're actually using it. So it's doesn't necessarily have to be at the point of merchandising which we've been quite successful at, but even taking the next step and using the cloud capability and cloud functionality that all of our products exist on to offer the next best thing based on the data we have on that customer. And at a macro level the vision for us is to have enough big data on customers and enough big data on customer lifecycle and product lifecycle to know what exactly when to offer the right product at the right time to a customer's perfect situation. And you're seeing us starting to roll that capability out and I think it's pretty differentiated from what we've done before and differentiated from what other folks are doing in our business today, just a very different approach.

[Operator Instructions] Your next question comes from James Cakmak of Monness, Crespi, Hardt & Company. Your line is open.

Two please. One on bookings and one on EBITDA. So Scott appreciate the color bookings, but the adjustments that you're making there seems to be working well. Do you think that conceivably based off of the learnings that you had, that we could potentially see some further adjustments down the road, or you feel comfortable that things are working, this is the new normal for bookings? And then secondly on EBITDA, if I understood correctly on the international, you are where you want to be right now and you're going to be scaling that business. Long term and EBITDA growth is holding at 20% plus. You're outperforming that. So as those, should we think of that as a base case and a measure, with also a need for a pretty decent upside from there or how to think about the long-term versus kind of the international lessons and scaling that business?

So on booking, let's think about the pacing that we're on as being a good one. And I think that that's probably the best thing or the appropriate thing to say publicly. And given the size and scale that we're at, that's a big quantum of incremental growth. So we think that that’s hit a pretty nice pacing for where we are right now. It is in line with those long-term targets that we shared with everybody, what's now well over a year and half ago in terms of low double, low to mid-teens, top line growth and we're squarely in that zone. In terms of EBITDA, as you pointed out, we've been 20% plus for a while. Just thinking about the growth of scale and the balance of reinvestment which is what we've been doing and quite focused on, the 20% number is a good one. The nice thing about this business and where we are is we're able to invest in geographies and products and capabilities like the in-application purchasing that's Blake describing, that are great for the long-term health of the business, but we're still able to drive a hell a lot of EBITDA and hell a lot of flow through the P&L in the short-term. And I think that's what everybody -- that we've been doing it, and I think that's the best way to think about it going forward. And those are financial metrics and performance, but hopefully people appreciate that that's a competitive advantage of the size and scale, and to be able to invest in either marketing dollars or engineers or markets at the size that we have and still produce these results is advantageous relative to other people in the market, who are doing what we're doing.

Just to pile on James, one of the things, what I'll call scale advantage as well, we're the only Company that services a small business that has built a platform that is scalable at a global level that allows us to add products in market all at once. And if I use the cloud server launch as an example, four months ago when we launched cloud server, we launched it in every one of the markets what we are in simultaneously. And that type of advantage of the platform we've built differentiates us substantially from other folks that offer the same type of service we do.

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

Hey everybody here. This is Blake. Again thanks to Scott for all he's been doing. Welcome Ray to GoDaddy. Super glad to have you. Congratulations Scott and we hope to speak to all of you one quarter for now. Thanks everyone.

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