GoDaddy Inc. (GDDY) Q3 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 third 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] Marta Nichols, VP of Investor Relations, you may begin your conference.

Thank you and good afternoon. Thank you for joining us for GoDaddy's third quarter 2016 earnings call. With me today are Blake Irving, Chief Executive Officer, Scott Wagner, President and Chief Operating Officer, and Ray Winborne, Chief Financial Officer. Blake, Scott, and Ray have some prepared remarks which will follow with a question and answer session. On today's call, we'll be referencing both GAAP and non-GAAP financial results and operating metrics such as total bookings unlevered free cash flow, net debt and ARPU. A discussion of why we use non-GAAP financial measures and reconciliations of our non-GAAP financial measures to their GAAP equivalents may be found in the presentation posted to our Investor Relations website at investors.godaddy.net or on our Form 8-K filed with the SEC with today's earnings release. The matters we'll be discussing today include forward-looking statements, which are subject to risks and uncertainties that are discussed in detail in our documents filed with the SEC. Actual results may differ materially from those contained in the forward-looking statements. Any forward-looking statements that we make on this call are based on assumptions as of today November 2, 2016, and we undertake no obligation to update these statements as a result of new information or future events. With that, I will turn the call over to Blake.

Thanks, Marta. And thanks to all of you for joining us tonight. GoDaddy's third quarter was another very good one, with our results again exceeding the top end of the guidance ranges we shared with you last quarter. GoDaddy's distinctive, combination of easy-to-use products, speedy perform and technology and consultative customer care continue to differentiate what we do and how together yielded a large high growth business with strong cash flow. In the third quarter we've grown the server to 13.5 million customers, an increase of over 7% versus a year ago. Our average revenue per user or ARPU also rose nearly 7% to $127 despite continued currency headwinds. We feel great about the consistency of our results, what they say about the power of our strategy and execution over the last several years and more importantly, where we are headed. We've doubled the size of the business over the last four years on the both the top and bottom lines, and we're now building on the foundation we've created with an eye toward doubling the business again over the next four years. As we look to the future I'll share a bit about what we're doing to expand our product portfolio. Scott will give you some color on our go-to-market efforts, and then Ray will review our results and our outlook. On our product portfolio, I will highlight two key elements of what we're doing. First, expanding into new onramps, beyond domains, and second, extending our product portfolio into natural adjacencies to our total core offerings. First, on expanding onramps. As you know, historically most of our customers have started their relationship with GoDaddy by buying a domain, and then building a web presence or attaching a domain-specific e-mail.. Domains have been our primary customer onramp, one that has propelled us to over 14.5 million paying customers and over 63 million domains under management. And we believe domains as an onramp will continue to thrive in the future. Over the past year you've also seen us experiment with additional onramps. For example, offering free trials of our DIY website builder to customers in a couple of countries, enabling them to try our website builder tool for a short period and then purchase a domain and attach other products. We have been pleased with the results so far. We've extended free trial into a number of new markets and we will do more of that in 2017. Another potential onramp is voice service. We hope to close the Freedom Voice acquisition this quarter and will soon begin offering voice service for small businesses, allowing them to add a second and completely separate phone line to an existing cell phone. Our customers have told us they often use their personal cell number to support their business venture, and they don't like it. They are looking forward to the greater privacy and professionalism that a second line provides. With our new voice service, it's like getting another phone for just about $6.00 per month. Voice is a new potential on-ramp for us, giving GoDaddy yet another way to introduce a customer to our services for the first time. We are really optimistic about these efforts but they are very early. Voice, in particular, is an entirely new product line for us so 2017 will be a year of testing and iterating in the category. Look, we know that most people will still name their idea with us as the first step in the journey. That implies the domain names will be GoDaddy's primary customer onramp for a long time. With that said though, we absolutely believe our broader and deeper products that now gives us permission to introduce new customers to GoDaddy using new and different onramps, so that is where we're heading with offerings like site building and voice service. On my second point about where we are focusing new product adjacencies, we often get ask what's next? What new product or category is the next big opportunity for us to offer our customers. We listen closely to the needs of our customers in considering new categories and it's clear they have many needs we can address over time. Perhaps the most important factor in deciding what is next is that any new products that should be a close adjacency, our best opportunities are those that are very tightly aligned with our core products, our customers' value offering, and some real-life problems for them. Let me touch on two examples. Website design and security. First, we continue to see a big opportunity in website design and development across a range of products and services, and not just as a product onramp as I discussed a minute ago. From simple DIY offerings like GoDaddy's website builder tool to the most popular open source tools like WordPress, which can offer pixel perfect placement and greater flexibility. We recently launched WordPress websites by GoDaddy, which makes it much easier and more intuitive for small businesses with limited design experience to get started with WordPress with an easy startup wizard mobile-responsive beams, thousands of high-quality images and plug-ins and much more, all in over 30 languages and 50 markets globally. If you want to see an example of a great managed WordPress site, though, that we host, check out WeirdAl.com. And yes, it's that Weird Al. We're also investing in Do-It-For-Me services, or DIFM, where GoDaddy builds and manages a customer's online presence, not just the websites but also for search results, social engagement, and more. And while DIY site-building gets a lot of attention, half the websites in the world today are built and managed by someone other than the business owner. In fact, we are finding that many more of our overseas customers, especially in key markets like India and Mexico, ask for site building services instead of buying DIY tools. You can see examples of the website design services we're offering at jbgolf.net here in the US. And at [indiscernible] in Mexico for prices as low as $130 per year including hosting. Hopefully you are hearing a theme here. Rather than staking our claim in one area like domains as our only onramp or DIY as the only avenue to building an online presence, it's our goal to make use of our brand and our depth to meet customers wherever they are and whatever their needs. Whether they are ready to do everything on their own or want a handhold from start to finish and beyond. And what further distinguishes GoDaddy here is not just that we're offering a range of robust site building tools from DIY to WordPress to DIFM. It's that we've built a global and scalable common technology platform that allows us to offer every one of these options to all of our 14.5 million customers globally. Now another example of an obvious product adjacency for us is security. It is clear the need for security products has never really been greater. We hear about security challenges in the news constantly so we all know the quantity, breadth, and severity of breaches is growing for organizations of all kinds, large and small. GoDaddy has always been a leader in securing our customers' domains and in SSL certification. We also know that many small businesses lack the capability, understanding, or resources to fully secure their technology and online presence. We've developed some really differentiated offerings, like secure e-mail, which allows encryption and archiving for customers like medical practices which require HIPAA compliance. And we're testing several other complementary offerings, including site backups, secure storage, site scanning and malware removal, just to name a handful. The demand is absolutely there. So you will see us offer a broader range of security tools going forward. Website building and security are just a couple of examples of product adjacencies. We believe the combination of our breadth of products and our focus on what really matters to our customers will allow us to continue to meet their needs and grow with them with these and other products over time. So we're continuing to build on the product foundation and geographic breadth we've established in recent years. We feel great about our continued progress and how our organization is now positioned to take us into the next phase of our growth. And with that, I'm going to turn the call over to Scott. Scott?

Thanks, Blake. Since Ray's arrival, I've been focusing my attention on our big go-to-market efforts, specifically our international growth, the evolution of our marketing strategy and execution, and how we can do more with our customers through care. Let me say a bit more about each of those three. On international, we've expanded tremendously over the past few years. We've entered dozens of global markets with localize products, payment types, and customer care in a very scaled way, with a centralized engineering platform augmented by in-country marketing spend. And this play book has worked. Our international customer base has more than doubled over the past four years to more than 4.5 million international customers. Our international revenue grew approximately 25% in constant currency over the last several quarters. It grew 27% in constant currency in Q3. New markets launched earlier this year in Asia, while still small are seeing accelerated growth. In our core tier 1 markets like India and the UK continue to scale. For example, in India, GoDaddy is now the largest registrar of both .in and .com. And in the UK, we've recently passed 1 million domains under management. And our .uk domain portfolio has grown over 50% in just the last 24 months. Going forward with the localized presence in over 50 markets around the world, the next phase of our international growth is emphasizing growing the markets that we're in versus simply adding new markets. This phase will further our organic growth efforts through a continued localization of both our product and marketing experiences. In addition, with over 4.5 million international customers in a scalable global platform and operating system, we're very well-positioned to add to our footprint to be in organic activity as well. Turning to marketing, we're focused on two things. The first is extending our brand to represent the full suite of online products and services that Blake was describing earlier. A brand is an experience. And our GoDaddy brand is about the full experience of bringing an idea to life online over time. We're extending our brand with a combination of creative messaging and highly efficient and effective marketing tactics across TV, sponsorships, and PR. Over the last several weeks, you're seeing GoDaddy show up in global markets with increasing presence across sporting events like the English Premier League Football and the baseball playoffs, as well as relevant sponsorships like Shark Tank in Mexico and Make Me a Millionaire Inventor in the US. As we look to 2017, we are exploring a number of interesting opportunities, both in the US and around the world that we believe will resonate and connect with our customers in terms of both creative messaging and tactics. Second, we're working on the lifecycle experience of our existing customers. We're working to increase engagement with our customers using our data to help trigger the right next step for each customer. Now in some cases, the right next step may be activating and using the product that they've just purchased. In other cases they are ready to move onto the next product or service. Here is a very specific example of that in action. When a customer is managing their GoDaddy account and we detect that there is a domain that is yet to be connected to a site or email, we provide them with a very simple flow to activate that domain, guiding them to our website builder product or office 365, right in the account management screen. We're also replicating the experience in our email and hosting control panels for critical add-on services like email archiving, encryption, and migration, all with one click. Ultimately, we believe success in these efforts will translate into improved value for our customers and better ARPU for us. Our third go-to-market pillar is customer care. We've always been knows for customer-centric consultative, empathetic inbound customer support. This is a special asset for us that in some ways is still quite underutilized. Even today, most of our customer interactions are reactive, responding only when our customers ask for assistance. In 2017, we'll do more to proactively engage with our customers in productive and intelligent ways. Here's a quick example. We identified a segment of our customer base which are naturals for our office 365 email solution. These are slightly larger organizations with 10 to 100 employees who typically have one generalist IT person. And they particularly value GoDaddy's product suite and our high touch service for installation and simple migration. Over this past year, we created a dedicated team within customer care to serve these slightly larger customers and proactively reach out to both existing customers and potential new customers outside of our base. This pilot has been successful, and we will be expanding this effort in 2017. Overall, we feel good about these go-to-market opportunities in front of us. How they will enable us to grow our customer base, increase customer engagement, and ultimately grow ARPU. With that, I'm going to turn it over to Ray, who will run through the Q3 results and our outlook.

Thanks, Scott. As you've heard, Q3 was strong on all fronts with our results again exceeding the top end of the guidance ranges we shared with you last quarter. Our total revenue grew 15% to $472 million year over year and bookings grew more than 12% to $534 million. Currency translation this quarter was an approximately 100 basis point headwind to both revenue and bookings. As you heard earlier, we continue to see a nice balance between customer and ARPU increases, with both growing roughly 7% versus last year. Turning to our revenue lines, we saw attractive growth across all three of the product lines this quarter. Domains revenue finished the quarter at $237 million, up 10% year over year. This above-market performance continued to be fueled by international growth, strong renewals, and higher aftermarket domain sales. Our hosting and presence revenue was $174 million in the third quarter, up more than 15% versus Q3 a year ago. As Blake mentioned, we rolled out free trial of our website builder product more broadly and we've seen some good uptake in security products as well. Business applications revenue grew 36% in Q3 at $61 million, driven by continued strong growth in both productivity and email marketing. Looking at our international results, our revenue outside the US now represents over 27% of total revenue. It also grew 27% on a constant currency basis in Q3, ahead of reported growth of over 21%. We continue to believe international will be a key growth driver in the years to come given the horizontal need of our products and the strength of the GoDaddy brand and value proposition. Turning to profitability. We continue to deliver solid topline growth and demonstrate good operating leverage across the expense base. As we discussed with you on last quarter's earnings call, you will see in our release that we don't refer to our historical measure of adjusted EBITDA. We've instead provided you with the three components of that measure on the third page of the release and slide 15 in our presentation to allow you to sum them and see that it yields a total above the high end of the Q3 range we provided to you in August. As an aside, we won't provide of adjusted EBITDA guidance going forward but because that measure is a key operating metric for us internally, we will continue to report these three components so you can compare our future performance to past results. Briefly on cost lines, gross margins were down slightly versus prior year as expected, as license fees to Microsoft for Office 365 had begun to normalize. Going forward, we expect gross margins to stay close to the current range. We've gotten some leverage in technology and development spending as we expected. G&A a little, the usual amount due to onetime stop comp expense spending on a workday ERP implementation in recent acquisitions, as well as a tough comp against a year ago quarter. On a normalized basis, we remain within the range of the last couple of years. Most notably, growth in our marketing spend was a little lighter in Q3, but you'll see growth pick back up again in the fourth quarter. Turning to cash generation, unlevered free cash flow grew to 20% in Q3 to $96 million, continuing to demonstrate strong cash conversion. Over the last 12 months, unlevered free cash flow was about 16% of revenue. We finished Q3 with approximately $566 million in cash and short-term investments and net debt of $510 million. As you all know, this business generates a lot of cash, and we remain mindful of the opportunity we have to use our cash flow and balance sheet to effectively enhance equity returns through M&A and potentially share repurchases as well. So let's discuss our outlook for Q4 and the full year. For Q4, we expect revenue in the range of $483 million to $487 million, which for the full-year 2016 implies a range of $1.845 billion to $1.849 billion, an approximately 15% growth at the midpoint. Our fourth-quarter and full-year revenue guidance incorporate the expected impact of past currency movements. As I said earlier, we came in above the high-end of our Q3 guidance range for adjusted EBITDA, and while we will no longer guide on this measure, I'd note that nothing has changed fundamentally since we last provided you with full-year guidance on this measure in early August. Looking instead at cash flow for the full year 2016, we expect unlevered free cash flow of approximately $350 million representing roughly 20% growth versus the $294 million in unlevered free cash flow we generated in n 2015. In summary, our outlook for the remainder of 2016 remains strong and very consistent with what we've shared previously. Solid teams, topline growth, and faster growth and profitability in cash flow. That's a quick look at the financials. Blake?

Thanks, Ray. You can see that we're continuing to deliver on our strategy and financial expectations. And we see a big global opportunity to continue to grow the business long-term. So thanks for your time, folks. And we are ready to open the call to your questions.

[Operator Instructions] Your first question comes from the line of Naved Khan from Cantor Fitzgerald. Your line is open.

Thanks for taking the question. Just a couple. I think Blake or maybe Scott, you spoke about the opportunity in the 10 to 100 employee segment which is kind of new. Just curious to know how you plan to go about addressing that in terms of having a dedicated sales force? Or are you thinking about some other channels?

-: And we ran a pilot this year with exactly what you described, which is not only a dedicated sales force, but the installation and migration team; and we liked what we saw. So we're going to be adding a couple dozen more people both to contact and serve this population and audience. And frankly, we're excited about what it could be for us. And this is just going to be about expanding that and growing it as we succeed. -: And we ran a pilot this year with exactly what you described, which is not only a dedicated sales force, but the installation and migration team; and we liked what we saw. So we're going to be adding a couple dozen more people both to contact and serve this population and audience. And frankly, we're excited about what it could be for us. And this is just going to be about expanding that and growing it as we succeed.

Got it. And then, since you changed your branding method a little bit, kind of moving away from the high-impact messaging, can you talk about any kind of impact that you have recently seen on the ROI for these marketing dollars?

Well, on messaging, to be clear, you always want high-impact marketing messaging. And from a brand standpoint, we're at this point where we as GoDaddy have 80%-plus awareness certainly in the United States, but it's frankly been fascinating to see how quickly we can ramp our awareness numbers around the world as well. So in our core, tier 1 markets, whether it's India or the UK, we have very solid awareness numbers relative to the time that we've actually been spending marketing dollars. -:

Great, thank you.

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

Hi guys, thanks, two questions for me. First on the business app, it decelerated a little bit this quarter. Can you talk about the growth inside the line in terms of different products? And I know you have been experimenting a lot with the different merchandising between different line items. Perhaps maybe you can give some color on that with respect to bookings growth or maybe customer growth for that. And then second, you called out the DIFM opportunity. What is the go-to-market strategy for DIFM services? And how should we think about the economics versus the current products that you offer? Thank you.

Yes, the biz apps item, I think we did about $60 million this year, in this quarter. You look at the growth on that, we're in the 36% range. A little slower than what we'd seen in the trend. But it's on a much bigger base. If you just go back two years ago in the same quarter, we were at $30 million in that line item. So we are very happy with that growth rate, even though it's decelerated slightly. It's just continued to grow off a nice base. It's a victim of our own success there.

And Deepak, it's Scott. I will talk about the second. On DIFM, or really assisted services, our go-to-market right now consists largely of ways to serve our base, through care and frankly a little bit more targeted email interactions that we're finding. And again it has nice return and we're seeing nice pick-up to it. What we are not only experimenting with but moving towards is obviously a more mass articulation of those kinds of services. Again, not only to provide that kind of activity for our existing base, which is quite large, but possibly as a way of serving new customers as well.

Thanks, Scott. Thanks, Ray.

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

Thanks, guys. On the topic of DIFM, historically you've rolled out Go Daddy Pro as one way to address this market. Now I'm hearing more about, kind of, the internal DIFM opportunity. I guess, if you had to force rank your preference between the two of them, whether it be economics or scalability, which would come first? And then, last two calls you've discussed about growing the size of the business over the next four years. I guess are we supposed to take that as a rough form of long-term guidance?

Yes, Sam, hey, this is Blake. So on the Pro versus the Do It For Me service, the good news is we don't have a Tour-Dejour issue here. Where we can actually do both, we build products for Pros, so when we do a new WordPress feature that allows immediate updating of multiple sites all at once, that's a feature for a Pro. When we do a good job with our Manage WordPress offering, which the Weird Owl was a great example, that is built by a Pro, using our services and using the GoDaddy Pro offerings today. DIFM are a lot of our small business customers today that don't have a Pro nearby or don't understand what that marketplace looks like around their neighborhood or even in a city. So what we do is offer an integrated service that once somebody has contacted us, once they've got a domain, they simply call our Care organization; and we put them in touch, basically a hot transfer over to somebody that can take an analysis of what they are trying to accomplish with their website, and then really just get artwork from them, get some creative iteration going with them, and for a very low-cost be able to build it for them. Now we don't offer a lot of complexity on those sites, like a web Pro does, but we have a great opportunity for a low cost to offer a super high-quality website that will help one of our customers acquire customers for themselves and retain customers, including getting the [indiscernible] and the NCO service or even managing their social presence. So we don't have to fight that Tour-Dejour issue.

Hi Sam, it's Ray. Regarding that comment about doubling the business over the next four years, yes, that is our vision; and that is a long-term guidance, if you want to say it that way. We did that over the past four years with the first turn of the crank, with expanding around the world, and now we're going to continue that second crank both on product, going deeper in geographies, and more on-ramps as you've heard us talk about earlier.

Great. Congrats on the quarter.

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

-:

Hey Jason, I will take the first part around biz apps. We are really happy with that growth. It's 36% year-over-year. It's just growing off a much larger base now, $60 million of the current quarter. If you look back just two years ago, that was up $30 million number. So doubling the business is in two years is pretty impressive. So that growth rate is still a very solid growth rate and we're really happy with it.

And I think from the leverage standpoint -- it's Scott, Jason. Thanks for pointing it out. Yes, it is nice to see that kind of operating leverage flowing through the business. And it's nice frankly to see that also frankly build for several quarters in a row. And that maybe not -- that won't happen nor are we promising that every single quarter, but we have ability to scale through our technical platforms, certainly through the G&A infrastructure of the company. And, but, and, and we are still investing through marketing and care in what we think are really productive ways. All of which wrap up to the ability to drive faster flow-through and faster growth to the bottom line. In terms of acquisitions, like we're not going to comment on any specific acquisitions. We’ve to date made a couple of, frankly, quite small ones, in terms of product adjacencies, but the business is in a position, scale platform, operating rhythm-wise where we certainly feel like we're in the position to do something much larger, frankly productively and accretively.

Thank you.

Your next question comes from the line of Sterling Auty from J.P. Morgan. Your line is open.

Thanks. Hi, guys. I wanted to start with I think it was either last quarter or the quarter before, you talked about taking away some of the multi-year packages and having an impact on the bookings in the quarter. Any impacts from that that you can quantify this quarter?

No. Really nothing there, Sterling, to speak of as far as extending or pulling back in on the years. I think really the only thing I might highlight for you this quarter from a bookings perspective is free trial. You heard Blake mention that we've rolled that out and continue to expand in other geographies, so that's obviously having a little bit of impact on bookings right now, because we don't count those customers until they are on subscription.

Okay. Makes sense. On some of these new programs specifically security, can you talk us through what the economic model for GoDaddy looks like, in other words are you in a revenue share arrangement with technology partners? Are you paying a fixed fee? What is the margin profile on some of these new solutions they've got especially in security?

Hey, Sterling, it's Blake. We have a variety, basically, it's either build it or partner or it could even be an acquisition, when we're rolling out our products. The market that we've got products in today, whether it's an SSL, which is completely our own -- with SiteLock that is something that we have a partnership with. We don't really disclose the terms on that. There's a lot of other opportunities for us for a backup, for storage, for the HIPAA compliance, with archiving, and archiving of mail. Those kind of things are in different business models for each one, and frankly the way that we package them and integrate them together to make it incredibly simple makes it kind of a no-brainer for a customer to go acquire it from us. Frankly it doesn't matter whether it's partnered or created by us or it's part of another package. And the business model and the margin profile, each one of those is a little bit different, but aggregating up into a hell of a good business.

But would you characterize it as being on par with the rest of the corporate gross margins?

Oh, for sure. Absolutely. Yes, it's a great business that fits very nicely within the marginal profile with the rest of the businesses we are running.

All right, perfect. Last question -- and I'm jumping in between calls as well, so if you touched on it, I apologize. Digital marketing I think it is an area that you've looked at in terms of adjacency. Where do you feel like you are in terms of the evolution of GoDaddy strategy on that digital marketing front and what might we expect here in the near term?

Hey, Sterling, so it's Blake again. From a product perspective, I tell you, I think we are probably in the third inning of the game; and I'm not sure if the game goes into overtime or not, which I hope tonight it doesn't, but the general notion is -- like we're doing email marketing today. We do a pretty good job with that. We know there's a lot that we can do in the SMS area. We know there's a lot we can do in helping customers acquire customers on mobile devices. And frankly, nobody does it all together as a package. And nobody has a super well for this little customer. So the products that we are offering -- and I got to stress this really importantly -- our LTV/CAC is such that we can acquire customers at a very low cost. And we can offer email marketing products for such a low cost and integrate it into a website building product or email that just makes it, again, just a no-brainer to do that next thing to attach customers. And if we get them really early in their cycle, like I have an idea, I want to build a site. I've got now 50 customers who have signed up on my website. I'm going to offer them the free use of an email marketing product and eventually they will buy it from us. It's really early for us. It's, I'd say, third inning, probably. Maybe even that's deeper in the game than we are.

That's great. I agree. I hope it doesn't go to extra innings either.

Your next question comes from the line of Jonathan Kees from Summit Redstone.

Great. Thanks for taking my questions and congrats on the quarter. I just had a couple of questions. First one is more of a clarification, more of a confirmation. And second one is more of a general question. The first one being, you mentioned you're doing a lot of in-country sponsorship, local marketing. You mentioned some TV shows, but you also mentioned the English football league and also the baseball playoffs; that's here. You're not going to -- the marketing costs are going to be still more spread, right? You're not going to have the Super Bowl Spike or the NASCAR Spike like in the past, correct?

Jonathan, it's Scott. I think you should see a pretty stable level of marketing spend, put the tactics aside. This strategy is around a pretty consistent marketing spend and voice. Across our markets.

Just wanted to confirm. It sounded like it too. You have plenty of things you are spending on. And second, for your international expansion you touched on like the package that you're offering in Mexico, and it includes hosting, and it was at a very competitive price. I guess the ARPU, from my calculations here for the international customer, is a little bit lower. You talked about price sensitivity and the kind of margins you get there for the international customers, especially for the non-Western Europe, tier 1, like Mexico, India, China.

Thanks. It's Scott. So in the emerging markets, we're seeing very nice customer pickup, and again just from a relative return, what's great about the margin profile of these markers are they're incremental. Remember our in-country execution is pretty wide. Most of the spend we have is frankly go-to-market dollars and that's how we manage the geography. Now when you ask if the unit customer level -- what's the level of price-sensitivity -- it's not surprising that those customers are more price-sensitive. And that's frankly what we're working towards and these markets are having fantastic solutions for these customers, still at a really attractive and valuable price point. But that makes money for us. So all of these examples that we are describing have good economics for us to deliver and our hitting affordability and value positions for customers that makes it really valuable for them.

Okay. Great. Thanks for that explanation. Good luck, guys.

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

Hi, thanks. It's JMP Securities. This is [indiscernible] for Ron. I have a couple of questions. On WordPress websites, could you talk about any early earnings and where you all are in rebuilding GoDaddy's website builders. And have you taken some earnings from there to implement on the GoDaddy website builder? And how about the domain marketplace. How are you increasing liquidity with millions of websites and about $0.5 million, if I'm right, traded each year? So how do you think about it? How is the traction there? If you could give more color there, thanks.

This is Blake, [indiscernible]. Thanks for the question. Our website builder products, which is a simple DIY tool, is good today. Frankly it's not as good as it can be. And I think what you will see over the next couple of quarters is some pretty innovative technology from us that I think is going to be a pretty big sea change in our DIY website tool. I would also say -- and I would say that is the simple DIY one. We have another product that we just announced and released in the past month which is GoDaddy WordPress offering, which provides a super simple, easy to use WordPress offering with thousands of themes, lots of flexibility. More flexibility than any DIY tool today, so if somebody has got a little bit more technical capability, they can have a much richer, much richer, tons of plug-ins available for them to do something that is very, very flexible. So we've actually got those two products that kind of bracket this very simple and the more technically complex, trying to make sure that we are targeting folks that are more technically capable than those that are really just learning and want to treat website building as a PowerPoint tool. And doing it with really good intelligence and frankly machine-learning capability, it makes it super simple for people to build a site for them. And the domain business we have -- we run the largest aftermarket service in the world today. And the number of offerings that we've got in that aftermarket allows us to have a whole heck of a lot of liquidity. We've been making sure that that's available to every registrar so they can put aftermarket products up in that marketplace as well. And we're seeing really good aftermarket traction. So we’re happy with that. It's not just GoDaddy-owned domain names. It is domain names that are owned by anybody who wants to participate as a seller in that aftermarket, or buyer. And we've done some really interesting tools, both on mobile devices and frankly on a PC that allow you to manage an auction professionally, capably and for the domain investor, it's a really good set of tools for them and a great way to go reach their potential customers, in our aftermarket marketplace.

Thank you.

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

Good afternoon. Thank you for taking the question. I was wondering if I -- we could maybe put a finer point on a subject that Sterling had touched on. When you guys talk about offering free trials, I'm going to go out a limb and guess it's maybe why net subscriber ads are sequentially a little bit softer. Can you quantify the impact there? And then can you offer, I guess, I little bit of insight in terms of how that's going to impact the platform longer term when they renew at a higher price. I think it makes all the sense in the world. And I'm sure they're very strong LTV/CAC. I just want to understand conceptually how to wrap our heads around that model going forward.

Brian, Scott. Thanks. Look, it's a good question and thank you for it. On pretrial, since it is free upfront and we're not counting a customer until it's paid, there is certainly some impact but it's not something that frankly we should quantify and communicate to everybody. It's one of those precise without accurate, probably, measures. I think when you bring up customer ads, I'd actually highlight two things just specifically in the quarter that probably have a bigger impact than just a free trial. One of which was in our international markets, we actually made a shift in a couple of these emerging markets to focus more on monetization than just gross customer ads. And the second thing I would point out is if you look at our marketing spend in the quarter, it was lighter on a year-over-year basis. And it certainly made a bit of an impact. I think the broad point is we don't manage to the quarter-over-quarter net or gross ads, and are focused on good customers who are going to stay with us for a long time and that's the purpose and goal of what we think about customers. Period, point, stop. Obviously we, you, everybody in the phone, wants that number to be as high as possible. But quarter to quarter, we're staying pure to the goal which is add good customers, have them grow and evolve over time. And the ideas of new organic product on-ramps plus geographic scope are going to be the levers that are going to allow us to continue to grow that customer base over a long period of time.

Look, I think it makes a lot of sense and certainly your performance in the quarter is a testament to that philosophy. And I guess as a tangent to that too, I think we've talked about before, Scott, your net refund rate is improving and you've shown a second quarter of sustained improvement. Is that something that you believe is sustainable, and what is primarily driving that improvement net refunding?

Yes, this is Ray. We are continuing to see some improvement there. It's really coming off the improvement in the products and the customer experience. And I would anticipate as we start to continue to see those improvements, obviously there is some type of natural pull there, because as these customers grow, they are going to have -- need changes over time. So you'll always have some level of refunds. But we've pretty pleased with where that number is going.

It's Scott. Yeah. We, at GoDaddy, know -- we've always had friendly and very customer friendly, refund policies and that's not going to change. Meaning if somebody is it in the wrong thing, we want to make sure we get them to the right thing. And relative to the industry, I think that is quite a favorable policy that puts us in good light relative to everybody else. I think Ray hit the relevant point on the why for the drop, which is when the quality of everything we do gets better, and the merchandising continues to improve, then you just end up with people just in the right thing, right at the right point in time.

Makes sense. Thank you. Operator Your next question comes from the line of Brent Thill from UBS. Your line is open.

Thanks. Good afternoon. The international growth ticked up this quarter versus the first half of the year. I'm just curious what you saw there, where that contribution came from. And then the flipside of that is the US has slowed a little bit. Is there anything you are seeing in the US market that leaves you somewhat concerned? I had a quick follow-up.

Scott, Brent. So international growth being slight uptick, that's nice, but honestly relative to our pacing it is rounding. So I guess it's nice. Feel good about it, but also don't celebrate. Really, it's just kind of business mix, relative monetization focus, but it's not a sustainable thing that we're going to say is a different pacing. It sort of was what it was, but frankly relative to the pacing of the last three, four, five quarters, it is kind of dead on where we are. When you look at the US, that is our business apps conversation applied to the US. Where there is nothing different in our market performance, it merely is lapping this really big base and growth. So it's terrific growth. It's just our Office 365 revenue and implementation has a slightly higher mix towards the US than elsewhere. So that's our business applications year-over-year lapping of what is just a really big number.

Okay. And I know Ray had mentioned you were happy with the business apps. But when you look at 4% sequential growth, to effectively two years of straight 10% sequential growth, we all look at that metric and say there is more than a slowdown there going on. When you look at that, is that just an anomaly this quarter and you expect it to pick back up or is this sequential ramp the right way to think of it going forward?

So Brent, business apps right now is productivity, as we've described for the most part. And the trajectory is one that frankly is still a really nice year-over-year. You're talking about sequential, but year-over-year it's still a nice one. Ultimately adding other legs to that biz apps tool will be what in flex it over the current trajectory. But to say that business apps could continue, we're not going to come here and say, boy, you are going to get 10% sequential growth in business apps right now. But again thinking about it over time, this is all about what products we can add to that container and what kind of success we can achieve.

This is Blake, Brent. Just adding to that a little bit. Remember that the voice service, which again, is something that is new for us, so it's a new product line, that does get added to that line next year.

Thanks for the color.

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

Hello. Can you hear me?

Yes, got you.

Thank you, I appreciate it. Question on marketing. I just wanted get an update. When you are marketing for customer acquisition, are you mostly advertising against the general means business as sort of a customer acquisition tool? Or how are you thinking about kind of leading with some of your non-domain offerings from a marketing perspective? And a question in terms of some of the WordPress website offerings. It looks like you've got some promotional pricing there right now that's -- I think even at a fairly nice discount to your web builder product. Can you talk a little bit about how those two offerings kind of fit together and sort of what your strategy is around the website building offerings? Thanks.

Mark, it's Scott. I'll do the first, and Blake will do the second. In thinking about the marketing strategy and execution, and how it relates to domains and non-domains, think about our marketing in two categories. One is top of funnel, which is TV sponsorship, brand-related activity and then direct, which is very specific spend, whether it be SEM display advertising, social advertising, etcetera. Over the past year, we’ve expanded our direct spend across the product portfolio in presurgical ways, around supporting our product portfolio and that's been a very effective way of building up these services tactically, particularly to our existing base, and ultimately that translates into ARPU. On the top-of-funnel basis, that is really the work to come, to be frank, which is having our external messaging connect very directly to, not a specific product per se, but to the broad range of experiences of our customers. And that's the work from a messaging standpoint to come.

Yes, on the second question, Mark, your question was about DIY, our website builder product and WordPress. The interesting thing about a customer who comes to our site, when somebody comes looking for a website builder, they have been told that they should be using WordPress. So the really interesting thing is they don't trade-off of an easy to use, DIY website builder or WordPress by price. They do it by recommendation. And web influences -- as technology influencers that are usually professionals that somebody might know recommends that they use WordPress and then they start looking for it online. We happen to be one of the largest, or the largest, WordPress provider in the world today commercially. And we've made that a very simple product. So many smart business folks who actually want to build a website, have been told Go use WordPress. And so they go to GoDaddy. They click on websites and WordPress shows up. They click on it and they go down that funnel and then we're just trying to build a very attractive price for them to get into the product, try the product, use it and have a great experience. On the DIY website builder products -- I kind of characterize these things as ones a little bit more technical and pixel perfect than the other. On a DIY website builder product, if somebody who says, I just want to build a website, and this one says I can do it myself, therefore let me go ahead and click, what's the value proposition and how is that price. If they went to WordPress and they tried to use the product, even as simple as we can make it, it may not be simple enough. So the DIY product that we have built, that you will see us evolve pretty substantially of the next couple of quarters, will be incredibly easy to use, will not have that perfect -- that pixel perfect ability, as customers can get themselves in trouble, actually, when they have that much freedom. So we put up, what I will call, really good guardrails, really good intelligence, good machine learning, great library of photos and templates that will make it really easy for customers to build something they want. Our goal is to get them into a product that allows them to have a great outcome, right? To meet customers on their site. To acquire customers. To retain customers, to market to them, and frankly whatever they want to choose. Whether they've been told to go get WordPress or Pro, or they say, I want to build a website, make it easy for me. We are doing both of those things.

Great. Thanks a lot. Thanks for the color.

Your next question comes from the line of Mark Mahoney with RBC Capital Markets. Your line is open.

Hey, guys, this is Dylan Haber on behalf of Mark. Just as a follow-up on [indiscernible] earlier question, can you provide some more color on how big of a potential revenue catalyst the domains aftermarket is? And what sort of contribution it is making now? And then also based on what you discussed early in the call about creating new customer on-ramps, can you provide examples of which products you see becoming potential feeders for the overall business? Thank you.

It's Scott, Dylan, on the aftermarket. If you look at domains, our revenue performance has been 10%. We're putting up 9%, 10% growth over the last several quarters. If you think about unit growth in the industry, unit growth is anywhere from 3% to 5%. And really, our above market performance is both our international share gain in markets outside of the US, which is part of it. And then the other part is the success of stimulating the aftermarket and trying to get more names that are already bought to change hands. So without giving you a specific number, it's certainly a contributor, and a decent sized one to that, above industry growth performance.

And one other thing that I would just add on the domain side, Dylan, is that we have entered roughly 56 markets over the course of the last couple of years. And as we enter markets, we've been starting to offer country, top-level domains, like .MX for Mexico, .BR for Brazil, etcetera. Those are brand-new for us. And in many countries, CCTLVs actually take precedence over a .com and actually have more meaning than a .com. Certainly in Germany, Brazil, Mexico, as examples. India's .IN is very important. For the on-ramp question, we talked about two view on ramps. One is, hey, I want to build a website and then I'm going to go attach a domain to it, and I want you to think about that as, I want to try the tool. I want to see how beautiful I can make this thing. And then I'm going to commit. And that's about it. We're frankly moving the payroll from in front to behind it, allowing somebody to try a website builder, and then attach a domain. And that is happening today. So we like the results we've seen there. The other on-ramp that you will see us endeavor on in 2017 is voice, where we think that somebody is going to say, Man, I've been using my private phone number, my cell phone number, for my business. I put it up on my website. It's there for everybody to see. I feel like I might be in danger of having either my identity ripped off or maybe being encroached. So providing them a number on their cell phone that rings through to either a business voice mail that can transcript into a text that shows up in your inbox. Those things are super powerful features that a small business or somebody with an idea can use. And frankly they may do that without getting a domain name or without getting a website from us. We're going to package them up in ways that make it look like it's absolutely perfect to get all three of these things, at a really attractive price. But it's an on-ramp all by itself. We think it could be a really interesting way for people to get a service relationship with GoDaddy.

Great. Thank you very much.

There are no further questions in queue. I'll turn the call back over to the presenters.

Great, thanks, everybody, for our third quarter results call. We look forward to talking with you in one more quarter. Thanks and enjoy the game tonight.