GoDaddy Inc. (GDDY) Q3 2017 Earnings Report, Transcript and Summary

Good afternoon. My name is Cheryl, and I will be your conference operator today. At this time, I would like to welcome everyone to the GoDaddy Q3 2017 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer session. [Operator Instructions] Thank you. Marta Nichols, VP of Investor Relations. You may begin your conference.

Good afternoon and thank you for joining us for GoDaddy's third quarter 2017 earnings call. With me today are Blake Irving, CEO; Scott Wagner, President and COO and incoming CEO; and Ray Winborne, CFO. We'll share some prepared remarks, and then we'll open the call up for your questions. On today's call, we'll be referencing both GAAP and non-GAAP financial results and operating metric 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 which will be filed with the SEC with today's earnings release. The matters we'll be discussing today include forward-looking statements, which include those related to our future financial results; new product introductions and innovations; our ability to integrate recent or potential future acquisitions and achieve desired synergies, including our recent acquisition of HEG. These forward-looking statements 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 6, 2017, and we undertake no obligation to update these statements as a result of new information or future events. Unless otherwise stated, when we refer to organic measures, we're referring to those measures excluding the impact of HEG. I'll now turn the call over to Blake.

Thanks, Marta, and thanks everyone for joining us today. We continued to deliver steady growth in the third quarter across all measures including bookings, revenue, customers, and ARPU. And we're making continued progress on our 2017 product and strategic initiatives including: one, growing penetration of GoCentral and continued rapid development of new futures; two, growing adoption of our new telephony offering, SmartLine; three, our HEG integration and international expansion; and four, the early release of our new Pro Managed WordPress offering. I'd like to share some quick details on our newest Pro WordPress offering for professional web developers and then Scott and Ray will update you on other initiatives and our results. Today over 50% of small business Websites globally are still built by professional web developers. WordPress is the most widely used content management system employed by professional web developers today. And we are the world's largest WordPress host with millions of WordPress sites around the world hosted by GoDaddy. The early release of our new word-processing platform bundles together high performance and highly reliable hosting with end-to-end security and the essential tools necessary to efficiently manage multiple clients and sites. It includes a new WordPress-centric 24/7 expert customer support service and was built on a modern OpenStack platform that employs a containerized isolated environment for every site using the latest technologies for enhanced performance, scalability and security. We've built in multiple layers of caching, containerized resource scaling, and built-in redundancy as well as SSL on every domain and security site monitoring, back up and firewall, all important features for Pro's. Now in a completely different thread, as you all know I'm retiring at the end of this year. So, I wanted to take a minute to say how proud I am of the GoDaddy team and all we've accomplished together over the last five years. We recruited an exceptional crew. Shifted the brand perception and evolved from a domain centric company to a full scale global technology partner for small businesses. We've been successful of providing best-in-class products and consultative empathetic care to help our customers and their ventures become successful across the globe. The CEO transition to Scott is going very smoothly and everyone here is fired up about our future. And look, I am thrilled and humbled to have been a part of GoDaddy's transformation and growth and I'm excited to watch the Company continue to thrive under Scott's leadership. And I also want to thank all of you, our analysts and investors for your engagement and support since our IPO several years ago. We've always appreciated and welcome your questions, your insight and your sponsorship. So, with that, I'm going to turn the call over to Scott. Scott?

Thanks Blake. And thank you for your leadership over the last five years. Your contributions to our culture, business and public standing made a lasting impact. I personally look forward to your continued engagement on our Board and I really appreciate our time and partnership together. Now I'd like to share a perspective on where GoDaddy is today and a couple of thoughts on our future opportunities. The GoDaddy of today has several compelling attributes. First, what we do for our customers as both valuable and important to them? GoDaddy enables our customers, small businesses, organizations, personal ventures to take an idea and to turn that idea into an effective online presence and beyond. GoDaddy remains the marketplace for domain names with approximately 73 million names under management. We've put a lot of effort into broadening our product portfolio beyond domains over the last five years, developing successful extensions into adjacent categories like Website building and productivity. With intriguing opportunities, we're pursuing now in security and voice. These extensions have created a broader value proposition for our customers and have enabled us to grow ARPU from $93 at the end of 2012 to $134 today with consistent mid single-digit ARPU growth during our time as a public company. Second, the customer need that we satisfy is a global one and we've proven in a fairly fragmented and competitive environment that we can build a large scale international business. Five years ago, at the end of 2012, we had 10 million customers about 2 million of which were international and just under $200 million of revenue outside the United States. Today, we have more than 7 million international customers and an annual run rate of nearly $800 million of international revenue, almost four times where we were just five years ago. That huge growth was accomplished by developing a scaled localization process for both our Website and our products and extending our go-to-market playbook of attractive LTV to CAC marketing and customer care around the world. Third, we've grown our product and geographic footprint while also investing and distinguishing capabilities like our tech platform and consultative care model. The single tech platform we build has accelerated our development process, letting us introduce products and features quickly and globally, while allowing these products to work better together. Our customer care is unique and allows us to deliver both support and customer oriented solutions that translate into loyalty, high retention, referrals and trade up into other services. Finally, for the investors and our audience, we have a predictable business model with attractive lifetime value to acquisition unit economics and a demonstrated track record of growing both revenue and margins. Since 2012 revenue has grown from about $900 million to what we expect will be over $2.2 billion this year with 2017 unlevered free cash flow expected to be about $485 million, again multiples of what the Company generated just five years ago. So just to summarize those four points, we proved what we do is valuable to customers and addresses a truly global need and we've developed a tech platform, care and other capabilities that are truly distinctive versus competitors all while delivering meaningful growth in topline and cash flow. Now this is great and we're all proud of it, but it's also history. It's particularly exciting for me to look forward to the opportunities ahead of us. There are some things we do in the next several years that build on our past successes while a couple other things will be new and our natural evolution of the Company and our strategy. First, product innovation and expansion will remain a critical block of our strategy both in anchor categories including naming, web presence, and productivity, and extending into additional categories like security, voice and others, where we think we can add distinctive value to our customers. GoCentral is a great example of our innovation here. We've continued rapidly iterate on features, while maintaining the core tenants of simplicity, ease of use, and mobility. Today we're seeing good adoption rates, increasing conversion from free to paid, positive customer feedback and rising net promoter score, all are continuing to rapidly add new features. We have a lot of new functionality coming to market very soon to light up a wide range of vertical solutions and to get deeper into the transactional relationships of our customers and their customers. Beyond GoCentral, our category extension efforts into security in voice continue to hold promise and we'll provide more color on those as we move into 2018, success for our product efforts will be measured by being best-in-class in key categories. Second, as I mentioned earlier, international markets continue to be a major opportunity for us. We're in a good position to grow the business outside the United States at attractive economics and believe international has the potential to be larger than our United States business over time. Our HEG acquisition is added to our breath in Europe and the combination is going really well. We're hitting our operational and financial milestones as you can see in the solid Q3 results. Looking forward, we'll build on these successes both, broadening and deepening our product portfolio and growing internationally, both organically and judiciously using our balance sheet and strong free cash flow over time. Now what will be newer for us going forward are a couple of key initiatives. First, we'll focus on developing a deeper engagement with our existing customers and second, evaluating the opportunity to make greater use of public cloud. First, our customers, our 17 million plus customers are the North Star GoDaddy and are almost precious asset and relationship. Our data clearly shows that when we get our engagement with customer's right, we not only help with an immediate need, but we also create loyalty and develop a deeper relationship. There are many opportunities for us to create great end to end experiences from our customers for merchandising and purchase flows to use of in product application, discovery, to wrapping our products together in bundled subscriptions and much more. This will be a big focus of mine and I expect it to mean both better results for our customers and ultimately continued ARPU growth for GoDaddy. Second, on our approach to the public cloud, GoDaddy today has a sophisticated global private infrastructure running a large chunk of the world's DNS and millions of active Websites and other cloud applications. Our customers value us for the experiences we provide, not necessarily for just the infrastructure itself. So, there's a conceptual opportunity here for us to invest in the public cloud to increase speed, performance of our global products, which our customers value and possibly provide better long-term economics for us. If I take a step back to GoDaddy today is a great business with a terrific team and many great opportunities ahead both to distinctively serve our customers in the marketplace and to consistently deliver results. I am looking forward to the next wave of GoDaddy's evolution and constructing a unique category creating cloud software company that enables ideas to start grow and thrive online all around the world. I am going to turn it over to Ray now to cover our financial picture. Ray?

Thanks, Scott. I will cover three points on the financials today. First, we are executing well, delivering strong growth on the topline with another solid quarter of growth in customers and ARPU. Second, we are getting margin expansion through operating leverage, even as we continue to invest in the product roadmap, and third, the highly cash generative nature of this business positions us well to pursue value creating opportunities in the future. My first point, consolidated revenue grew 23% to $582 million coming in at the top of our guidance this quarter. On an organic basis, revenue was up 12% year-over-year, while HEG contributed $53 million in the quarter in line with our guidance. Looking at our two revenue drivers, customers grew nearly 18% to 17.1 million customers, and ARPU came in at $134 up 5% year-over-year. On an organic basis, we've continued to see nice balanced growth with both customers and ARPU up mid-single digits compared to prior year. Finally, our total bookings were $668 million for the quarter growing 25% year-over-year. Let me touch briefly on our three product revenue lines. Domains revenue grew approximately 15% year-over-year in Q3. The majority of the growth was organic driven by international and strong renewals with the remainder attributable to the addition of HEG. We continue to look for organic revenue growth in our domains business to move toward our customer growth rate over the medium to long-term. Hosting and Presence revenue increased over 30% versus Q3 a year-ago with a majority of the incremental revenue coming from HEG. Our expected longer-term growth rate remains roughly one to two times our customer growth rate. Business applications revenue grew 38% in Q3 driven by our growing product suite and customer base along with a small contribution from the addition of HEG. Turning to international, revenue came in at nearly $200 million in Q3 growing 51% year-over-year. Beyond the addition of HEG, GoDaddy's organic business continued to grow at a double-digit clip. As Scott mentioned, we built a scaled international business that now represents over one-third of total revenue and approaching an $800 million annual run rate. We are in over 50 markets around the world with leading positions in many key markets positioning us well for continued strong growth in this business. Staying with international for a minute. It was almost a year-ago that we announced the acquisition of HEG, a highly complementary business that dramatically strengthened our position in Europe. We are now seven months post close and the opportunity for value creation is even stronger than we envisioned. Local leadership is running the day-to-day business of the combined operations in EMEA and making decisions to drive long-term growth. The integration teams are collaborating well and executing on our roadmaps. We continue to focus on optimizing pricing and returns on marketing dollars, enhancing the merchandising experience, and building an integrated European customer care operation. We've also introduced more GoDaddy products to HEG customers, continuing the execution against the roadmap that takes us through next year, and we are learning together. Despite the similarity of these businesses, we are finding lots of opportunity in the different ways we've reached to optimize the customer experience or business outcomes that will benefit our global business going forward. Turning to my second point on cash generation. Unlevered free cash flow grew 44% in Q3 to $137 million demonstrating the inherent leverage in the operating model with terrific flow through from the incremental revenue growth. Looking at the P&L. Gross margin ticked up sequentially and for modeling purposes, we'd recommend holding it in the 65% range going forward. A couple other items to note in the quarter, first, G&A includes $4 million associated with HEG integration cost. And second, we closed on the sale of PlusServer this quarter. This resulted in a net gain on disposal primarily due to FX movements and recognition of a loss on debt extinguishment related to the early retirement of the associated bridge loan. To my third overall point, we finished Q3 with approximately $553 million in cash and short-term investments and net debt of $1.9 billion or about 3.3 times leverage on a pro forma trailing 12-month basis. When we announced the HEG deal a year-ago, we expected to be at the middle of our targeted range of 2 to 4 times by the end of 2017 and we're clearly on track to get there. Our long-term focus remains on driving strong and consistent cash flow as our cash flow and balance sheet capacity expands, you'll continue to see us be thoughtful stewards of capital with the ultimate goal of prudently driving attractive growth and levered free cash flow per share for our investors. So, let's discuss our outlook for Q4 and the full-year. For revenue, we're tightening our full-year range and raising the midpoint. For Q4, we expect revenue in the range of $591 million to $596 million, implying full-year revenue growth of 20% at the midpoint. Given our strong performance, we are raising our expected unlevered free cash flow outlook for the year to approximately $485 million, implying 36% year-over-year growth. Looking forward into 2018, we expect revenue growth in the range of 13% to 15% for the full-year with low double-digit growth once we lap the HEG acquisition in Q2. And we remain confident we can generate unlevered free cash flow of over $600 million next year. Consistent with past practice, our cash flow outlook excludes expected acquisition and integration cost. So, to wrap up, we're continuing to deliver on our strategy and financial expectations and we see very big global opportunity to keep growing the business for many years to come. Now I'll turn the call back to Blake.

Thanks Ray. And not to get whistle on anybody, but I got to tell you it's been my privilege to be a part of GoDaddy's success over these past five years. Leading this incredible group of people and being part of this team has been the experience of a lifetime. And I thank all of you for it. To you investors, analysts, we thank you as always for your time and we're ready to open the call up to your questions. Operator?

[Operator Instructions] Our first question comes from the line of Sam Kemp of Piper Jaffray. Your line is open.

Great. Thanks guys and congrats on a solid quarter. So, congrats to you and the whole company. Scott, I've got two kind of strategic oriented questions, one is around acquisitions. When you look around the world and other geographies that you'd like to move into, do you see other HEG style acquisitions as being part of that core strategy? And then the second, as you talked about moving over the public cloud that's obviously a space that's seen a huge expansion of associated services most of which small businesses aren't really adapt and have to adopt on their own. Do you see this as also an opportunity to expand your product partnerships to bring some of those tools into a reasonable space for a small business? Thanks.

Thanks Sam. So first other acquisitions like HEG around the world. There are other opportunities that conceptually would look like HEG, but our focus right now is continuing to execute against that or making great progress right now both operationally and financially and that's our priority over the next couple quarters. Assuming we keep ticking along and it goes well. Yes, I think there's more opportunities for us around the world, particularly if you have a three-year to five-year outlook. To your second question on public cloud, over the last five years as we all know there's just been an enormous expansion of capability in the public cloud. You have three companies who poured billions of dollars into capital to build the global infrastructure around it. And we're a global SaaS application company and certainly for us, we think there's an opportunity and the primary opportunity is to use public cloud for speed of deployment and application performance of our products particularly internationally and drive consistency on our operating model and I think what that actually translates into is further help to SMBs, because really were their gateway towards cloud software products and being able to do that around the world with great and consistent performance.

Okay, thanks.

Your next question comes from the line of Matt Pfau of William Blair. Your line is open.

Hey, guys. Thanks for taking my questions. One to touch on GoCentral and the success you're seeing there, just interested to hear, are the customers that you're seeing new to the GoDaddy franchise and as such GoCentral sort of acting as a non-RAM or is it more of a cross-selling to some of your existing customer base? And then I guess in terms of the improved conversion, what has been the primary driver of that?

Hey, Matt. It's Scott. So first, we're seeing GoCentral customers both coming from the existing base and new. So, the answer is both, and that's probably the best answer for everybody on the phone, which is people who have been with us for a while are adopting GoCentral, love it, their publishing metrics are great as our the NPS and we're bringing new people into the franchise. In terms of conversion metrics, it's good solid free to paid conversion metrics. I think we had highlighted some of those in the last call and we're just seeing good performance out of them and it's a combination of just product quality and better merchandising outreach and just getting people from sign up through the flows faster. We're going to keep working at it as we go.

Got it. And then in terms of the ARPU increase that that you saw in the quarter, did cross-selling the HEG customers contribute to that or with that just more of penetrating I guess the core GoDaddy customers and then in terms of products that that's driving that increased ARPU. Anything in particular that sort of stood out in the quarter in terms of improving ARPU?

Not really, Matt. If you look at ARPU, it's just the aggregate level. You see that it was up 5% in change on a year-over-year basis in terms of growth rate and that's really what we've been doing consistently as a public company. For the last two years plus and really, it's a combination sort of the product expansion within our base and evolution of the product portfolio and attach and there's really no one single thing to highlight, but just to a consistent execution of our strategy.

Got it. Thanks for taking my questions guys.

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

Great, thanks for taking the question. Just a real quick follow-up Scott, on this public cloud transition. Can you talk about just ultimately how you vision this transition using the public cloud provider and specifically the operating expense associated with it, just because the cost were coming on the income statement, but you should benefit CapEx, so any insights there would be helpful around timing and impacts the model? And then I heard a few times talking about enhancing the merchandise experience, which clearly talks about e-commerce in the store solution potentially around GoCentral. So, any other insights here maybe around timing would be helpful? Thank you.

Yes, thanks Ron. So first on public cloud, as you know and everybody else on the phone does to, these are multi-year journey and other people who are scale global and internet SaaS providers, who are either in the middle of or towards the end or even beginning, see this is a five-year evolution. And so, we're in the early stages of engaging with you know the big three cloud providers and are looking not only the engineering and technical capabilities, but also the strategic relationships we either have or could have with each one of these providers and - at the very early stages of figuring out what the right path for us is. Now you asked a bunch of questions around the economics and had a couple statements in there about OpEx and CapEx and how that transition could play out. And we'll give you the highlights in that really more and as we get into 2018 and really firm up what exactly we're doing. The punch line and takeaways, I think for everybody is we're looking at this hard and the main goal and effort is to continue to facilitate global expansion of our product portfolio with one platform and as we get more insight into this pacific economics, we'll give you some insight.

Hi Ron, it's Ray. The only thing I tack onto that is the guidance that we put out through on number of free cash flow, obviously contemplates what we will do in the short-term with respect to cloud. And then your second question was on e-commerce capabilities. GoCentral will continue to evolve feature and functionality set within GoCentral to get deeper into not just a couple of verticals, but really the hundreds of verticals that are indicative of the small business economy around the world. And if you look at small businesses and organizations, the vast majority of them are service businesses. And so, what that means is your time is particularly critical and your time is driven for the most part by your bookings appointment and calendarization. And so, for us, when we think about the next step for GoCentral and e-commerce it's really driving towards service commerce and all the capabilities to be terrific at deep service commerce for hundreds of verticals, not only here in the U.S., but around the world.

Great. Thank you.

Your next question comes from the line of Lloyd Walmsley of Deutsche Bank. Your line is open.

Hi guys. This is actually Matt Diamond on Lloyd's behalf. Congrats again on the solid print. I'm just curious about the spending outlook for 2018; we talked about the revenue growth and the free cash flow growth, but any preliminary color you could give on OpEx for next year? Should it more or less approximate revenue growth or is there some dynamic that I maybe not appreciating there?

No Matt. No change. It's Ray. No change in the growth algorithm. Obviously, we don't communicate with the street on an adjusted EBITDA basis since last year, but we still run the business that way and so that 18% to 20% growth on that operating standpoint is still where we're targeting, and I think that fits nicely into the model.

Okay, great. And housekeeping one for me, we raised HEG guidance last quarter and I can appreciate that it's tough to parse out organic revenues against HEG revenues, but any sort of rough ballpark guidance you could give us for HEGs contribution this quarter?

Yes. I think same guidance I gave you guys last quarter, Matt which is if you take a rough cut of the HEG revenue it's 30% domain, 60% hosting and presence, and 10% biz apps. If you apply that against the $52 million through $53 million of revenue you can get a good sense of how it hit the revenue line items and what it contributed.

Okay, great. Thanks so much.

Your next question comes from the line of Sterling Auty of JPMorgan. Please go ahead. Your line is open.

Hi, guys. Thanks for taking my question. This is Ugam Kamat on for Sterling Auty. You have mentioned about prioritizing GoCentral, but just wanted to understand how are you prioritizing the allocation of resources to Website Builder 7 versus GoCentral? And are you incentivizing customers to convert from the Website Builder 7 to GoCentral? And then I have a follow-up.

Thanks, Ugam. GoCentral is the go forward platform for us on a DIY from a DIY perspective, and so our resources attention and effort is going against continuing to develop GoCentral. In terms of the conversion of customers, we're creating ways through our care center that our customers can move and we're interacting with them to help customers get to the right solution. But it's a bit of a balance between - if somebody has a great site in presence that they love - they can stay and obviously we're going to work towards helping our customers get to a great solution and one that works for them, but in terms of going forward new builds, new efforts, GoCentral absolutely is that definitive platform for us.

All right. Thanks. And on the retention rate, can you provide us any particular trend on how we just trended following your completion of acquisition with HEG?

When you're saying retention rate, I am assuming you're asking about customer retention rate?

Yes.

Our customer retention continues to be strong terrific same trajectory as it's been for honestly the last five and 10 plus years. No change whatsoever in the fundamentals of our customer retention both us and HEG.

Yes. Ugam with HEG, as we highlighted before, their retention metrics were actually a little better than ourselves.

All right. That was helpful. Thank you so much.

Your next question comes from the line of Deepak Mathivanan of Barclays. Please go ahead. Your line is open.

Hey, guys. Two questions for me. So first, from a product standpoint in 2017, the new Website territory and the security offerings are kind of the key launches during this year. What should we expect for 2018? If you don't want to be more specific perhaps you can talk about what areas you're likely to explore to drive ARPU growth higher? And then the color on international was helpful, but then it's been a couple years since you expanded into new markets in Asia Pacific, can you talk about the recent trends there perhaps in terms of the size of the region from a customer or booking standpoint? What are some of the products that you're seeing continued success there? Thanks guys.

Thanks Deepak. So, first products in 2018, as you know certainly for the last two years, but even really the last five, our continued ARPU success in the mid-single digits has been a combination of several product categories not specifically one in particular. You brought up two really important things that we've been talking about in 2017, one GoCentral and Presence, and two, Security. In terms of the milestones going forward and GoCentral, I would highlight two we just mentioned service commerce and all the capabilities around service commerce. And then second wrapping GoCentral and do a deep vertical execution across hundreds of verticals. And so, you're going to continue to see feature set evolution across both of those areas. And what it will mean is it will just be increased depth of capability not just on a Website, but also extending that Website and other functionality that will make an idea relevant whether you're a tax attorney or a non-profit or an organization and just satisfying those needs. So, a couple of product capabilities are going to be coming really in the next couple of quarters that again should translate into retention, resonance, activation just all the goodness of activity that translates into good business. And on security, security is a terrific add-on that you're seeing both successes on a standalone basis, but also us wrapping security capabilities whether it's CDN or WAF or malware, backup and scanning into our other products. And we're having some toehold success there and that's really one of the things that we're going to be rolling out throughout all next year. So those are maybe two things. And then your trends in APAC, we continue to have good growth. I think we feel good in APAC both customer growth and the trajectory of some of our products and our focus going into next year is going to be around localized marketing and a broader footprint across APAC just continuing to lean into countries that we're seeing good growth in. Because we do see that the core business model and go-to-market that we have is also working in Asia.

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

Thanks. Can you elaborate a bit more on the comment about greater engagement with customers? Is it kind of manual engagement to the call centers, getting in front of the customers more often with emails and product announcements features et cetera? So just elaborate a bit more? And then is there a way to think about from a deferred revenues jumped up in the quarter, how much was that due to HEG and they're kind of a perhaps timing issues and how do we think about deferred revenues over the next few quarters until we lap the acquisition? Thanks.

Yes. Thanks, Jason. So, on customer engagement - thanks for the question by the way. Again, today we have 17 million plus customers, many of whom have a life span longer than a decade with us and I know you appreciate and probably many on the phone do too. Perhaps our biggest strategic opportunity as a company is to do more with our base of customers. And over the last five years, we've thrown our shoulder against our product portfolio, adding capabilities to individual applications that we can do for our customers. Today and really over the last year, we found that a lot of the gaps in adoption of these new products our customers actually aren't either a) discovering them or b) just aren't even aware of the capability we have. And so, what that means is we are at a nice stage in our evolution where there's an opportunity to put time and investment into how our customers engage with us across all our touch points meaning our Website both logged in and non-logged in state, care, help, chat all those different touch points and wrapping them in and end experience that if we do it right are going to be ways that our customers discover try and use more of our products. Now I realize I'm answering this at a pretty high level, but it's something where each of these touch points over the last five years have been kind of spread throughout the company and we've been operating them all many in the same in really the same way that we have for a long, long time. And if we take a step back and look at how our customers engage with us? They don't care as much about a) specific product application as much as their idea and how it evolves and if we think about that experience backwards, there's ways that hopefully we can create good engagement with people and ultimately it will drive more product adoption better satisfaction, usage and success of their idea over time. And I'm going to hand Ray's going to takes the second question on deferred.

Hey, Jason. It's Ray. So generally, we have counseled folks to model this from a bookings perspective, percentage of bookings in revenue, as you've seen over the past few quarters. Obviously HEG is creating a little bit of noise in those growth rates, but I'd glad to take it offline with you and help you with the model.

And just Scott, let me follow up - let me back on the first question, I mean are you thinking about this in context of potentially slower customer growth at some points or not - next year, but at some point, customer go slow, and the point is that you think that there is more meaningful upside on the upsell?

No Jason, that's not the signal. The takeaway is we're going to really think about and created a great end and experience across the 17 million customers. So, it's not a substitution hub, it's an end.

Okay, thank you.

Yes.

Your next question comes from the line of Jonathan Kees of Summit Redstone. Please go ahead. Your line is open.

Great, thanks for taking my questions. I wanted to just focus on the integration in progress with the HEG integration. Last quarter you had mentioned at the bookings with HEG was a little bit below the company as a whole and you were working on customer care in improving and improving the bookings order rate there? Just curious how that's doing and also in terms of the take rate with the business applications and even the attach rate with domains obviously they're heavy on the Hosting and Presence, and you talked about selling them pushing the other products within to increase ARPU. So, I wonder how ARPU is doing relative to company whole. And then anything else like with the backend offices system infrastructure, if that's already been consolidated and are we running on a more optimized network? Thank you.

Hey, Jonathan, it's Scott. When we think about the HEG integration, we're really happy with where we are, and I think I'd go back to three points that we're working on. The first is creating a global product portfolio and layering that across Europe both underneath the GoDaddy brand in the couple of heritage brands within HEG. The second is creating a single both infrastructure and platform that goes from our tech infrastructure to our platform capabilities to customer care. We're well underway across all those three things. And finally, what we are now able to do is increase our go-to-market effort across Europe primarily into the GoDaddy brand and we're seeing good traction operationally across each of those three things and if you're looking at the financial results, we're right on track with where we want to be.

Okay, great. Thanks for that color. Good luck.

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

Hi, good afternoon, and thank you for taking the question. Congrats on a quarter. Maybe Scott, a question for you just on that last comment that you had around, how you're approaching Europe under the GoDaddy brand. What about the legacy HEG brands, 123 Reg, how do you - I know you're going to kind of lean on some of the brand equity that that HEG had in Europe. But has it changed at all and maybe how do we think about Europe and the rest of the emerging markets you had pretty good international growth this quarter?

Yes. Thanks Brian. We're happy again with Europe overall both GoDaddy and HEG, specifically in Europe. GoDaddy is and will be our primary brand in terms of incremental marketing spend and effort. Now HEG has a portfolio of brands and there are a couple - and you mentioned one, two, three reg in the UK and domain factory in Germany which have terrific execution and a nice position in the market. And what we'll do is use those as complimentary brands maybe with a little extra emphasis on a product or two or a go-to-market effort or two, but won't be incremental. And so, we're happy with the position and the thinking around how we can use those heritage brands in a complimentary way again around GoDaddy to have a nice position in the UK and Germany for the next several years ahead. And when we think about expanding into other markets, our primary effort will be under the GoDaddy brand.

Got it. And maybe to follow-up with Ray. I mean, I think you initially indicated that I think the $20 million synergy target with the combination of HEG. Where do we stand with regard to your synergy targets? Have you uncovered additional maybe asset rationalization and what can we expect going forward incremental to any kind of margin accretion from the combination of the business?

Hey, Brian. It's Ray. We are well on track to achieve the $20 million plus synergies by the end of next year. We have uncovered new synergies as we've gone through particularly infrastructure, but still on track to deliver at our commitment or better by the end of next year.

All right. Super helpful. Thanks guys.

Your next question comes from the line of Brent Thill of Jefferies. Please go ahead. Your line is open.

Thanks. Just a question on the organic growth at 12%, I think for the last couple years you've been between a pretty tight range of 12% to 15% realize, you had a tough comp last 3Q. But anything organically that you're seeing that that maybe different than you've seen historically or pretty much in line?

No, Brent. It's Ray. Haven't seen anything that would change the trajectory there. It's been solid all year. We continually updated the guidance to reflect that so nothing to point out there.

Okay. And for Scott, there's been a lot of focus on the online store. I don't know if you have a sense of kind of penetration of where you could be and why is this constrained to just the services commerce versus a broader commerce opportunity for the customer you're serving?

Yes. Thanks Brent. Well I think you got to do some first and our first effort is around having a fantastic execution of service commerce. Now we do have as part of GoCentral, an online - again store for the sales of physical goods and inventory. That is a great entry level service that is terrific and works well. I think our primary focus right now is wrapping service commerce around that footprint and focused on being able to do that around the world now. When you ask about commerce and particularly physical inventory, it's such a local execution country-by-country and that has a whole set of capabilities required to do that locally around the world. Again, we do think GoCentral - one of its advantages is the global nature of our execution. Over half of our sign ups - incremental sign-ups are coming from outside the United States and GoCentral. But again, you're getting our first step or next step in the evolution around service commerce, integration service commerce possibly with product capabilities, but make sure that that solution works great not only here in the United States, but also more around the world.

Thank you.

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

Thanks for taking my questions. Hopefully they haven't been addressed. Can you talk - can you shed some light on what the main driver of - hit some nice gross margin improvement in the quarter with the main driver of that was. And then I think that you helped us with the HEG revenue contribution in the quarter, but can you comment on what HEGs organic growth rate was in the quarter? Thanks.

Hey, Mark, it's Ray. So as far gross margin, you've seen a tick-up in the last few quarters, nothing unusual to highlight this quarter. I think as you continue to see the shift from domains to the higher margin software products, you'll see that float up. But as I noted in my remarks, we're still recommending folks to guide or to model at that 65% range. Again, we just don't want to box ourselves in there. We want the flexibility to be able to invest there and not to affect our build-by-partner on products or pricing actions we may take or even to Scott's point about cloud, how infrastructure deployment might affect their gross margin. As far as HEG organic growth, that business is continuing to perform well. Again, you could see our overall margins and revenue growth rate was at the top of our guidance. So, we're managing those businesses together so that the customers are going to whichever brand that they're being driven to by the marketing.

My recollection is HEG generally has a little bit slower growth profile than the legacy GoDaddy business. If that's true, it looks like GoDaddy organic grew about 12% this quarter and you're guiding to - as you anniversary the HEG deal to be growing in the low double-digits next year. Am I reading into your assumption there is that you'll either see an improvement in the HEG revenue growth or are you expecting an improvement in the kind of more the legacy business?

We're guiding those together, Mark. So, it's 12% was the GoDaddy rough justice in Q3. When you look at the double-digit that we're projecting or targeting for next year, that's the combined growth rate. So, we're not looking at these separately.

Okay. Thanks.

Your next question comes from the line of Aaron Kessler of Raymond James. Please go ahead.

Hey, guys. Thanks for the question. Just a couple things. First on the premium solutions, the growth drivers. How would you kind of rank order key growth driver there between kind of Office 365, some of your marketing solutions and other? And then maybe just on the GoCentral, I know it's kind of still early, how would you potentially rank kind of what's in development here? And then we think of vertical solutions, how many do you think you can launch per year? Thank you.

Well, in terms of premium solutions, I think you're looking at business applications or at least I'm interpreting, Aaron. And the vast majority of our revenues still in that business applications category is productivity both Office 365 and GoDaddy's proprietary email solution of workspace and that's a nice balance between the two. Those both continue to grow nicely. Now to your second question, on GoCentral, how many verticals can we expect per year? Well, what's nice about GoCentral is the on boarding process for GoCentral is really AI and initiative-driven or idea-driven where the very first thing you do is type in what the idea for the site is about and that already has the capability for hundreds of verticals. Now when I say put a little more effort into it, there's 20 verticals that are the first wave that are verticals you would expect in some ways you could just follow the small business economy for those 20 verticals that will be rolling out early next year with a much deeper set of both content and features. And after those roll, they'll be again 10 dozens of verticals to roll beyond that, but it's not a specific. We're not going one or two verticals. It's a horizontal capability merchandised vertically.

Maybe just quickly if you can comment on how acquisitive you look to be in the business apps going forward and what you're seeing in terms of evaluations there?

Well, the nice thing about our business and where we are is first and foremost back to the customer comment or Jason's - customer comment, we've got 17 million customers who have ideas, businesses, at some stage of development and looking to develop those ideas online. And our opportunity as a consistent platform and with a great delivery model is as those ideas develop, we can add more and more things over time. We've taken a nice couple of steps over the last few years and we've had some success and I think that's reflective of the customer permission we have to develop more things with and for our customers over time. In terms of specific categories, we will continue to go through the build by partner analysis and discipline with the goal of having a great distinctive solution if we're going into a category. Our bar for ourselves is higher than just doing something if we do anything in a category, we should be good if not great, and so that will drive with a focus on great and that'll drive the build by partner decision to be distinctive in the categories in which we compete.

Great. Thank you.

Your next question comes from the line of Sameet Sinha of B. Riley FBR. Your line is open. Please go ahead.

Yes. Thank you very much. A couple of questions here and I apologize if these have been asked before, but the free cash flow growth - long-term growth that you've always highlighted above 15% to 20%, what sort of ARPU and customer growth does that imply? And the second question is on the GoCentral and the legacy platform. You balancing both of them, can you talk about the incremental cost of managing both of them? And I mean is that a risk that potentially in the future as GoCentral picks up you would have diverted more resources, which could have an impact on your existing customer base was on the legacy platform? And that's kind of derivative question is, is there an easy way to put old sites into the new ones maybe an automated solution that might make it worthwhile? Thank you.

It's Scott. In terms of free cash flow growth algorithm, customers and ARPU, I think hitting that free cash flow target is a consistent execution of what we've been doing, so no real change in terms of customer and ARPU growth. In terms of your cost to manage GoCentral, we really address - I think we addressed that earlier and the big point is don't worry about it. We've got a - GoCentral is absolutely skilled international platform and the adoption and focus of everything we're doing from a DIY, CMS is going to be around GoCentral.

Great. Thank you.

Your next question comes from the line of Naved Khan of SunTrust. Please go ahead. Your line is open.

Thank you very much. I just wanted to go back to your previous comment about maybe the opportunity to do more with existing base of $17 million, if I look at the or if you were to look at your product offering, do you see some obvious holes there? Do you see any opportunity for maybe filling those through M&A, any color would be helpful?

Well as of right now, Naved we've leaned into several categories. Presence would GoCentral, certainly security and voice and we're focused on building those up and are obviously evaluating some new categories as we have been doing for the last five years. And I don't have anything specific to tell you other than we're looking at other categories where we can have an awesome solution that is great and distinctive for our customers and can be good economics for us.

Okay, thanks. And then quick follow-up. I think previously you have talked about bringing WordPress, GoCentral, Office 365 for the HEG brands, is that 2018 target or is that currently happening in the current year as well?

It's happening as we speak and as part of underlying when both Ray and I say we're hitting our operational and financial targets, all of those products that are rolling out to those brands are part of it.

Okay. Thank you.

Your next question comes from the line of Mark Mahaney of RBC Capital Markets. Please go ahead. Your line is open.

Hey. It's Zachary Schwartzman on for Mark. Thanks for taking the question. This is related to some of the business app questions you've had. How do you see that shifting over time in terms of revenue mix? How much do you feel that business applications can grow to as a percentage of the total revenue over the next couple years? And another question on the debt ratio, can you remind us your target leverage ratio and how do you think about using free cash flow to paydown debt versus keeping us dry powder for potential acquisition and/or other investments? Thanks.

Hey, Mark, it's Ray. I'll start with your second question around free cash flow. Our targeted range for leverage is still two to four times. As I said in call, comment, remarks, we expect to be there by the end of the year. As far as paying down debt, a very attractive debt structure today with effectively a 3% effective rate that's 50/50 floating versus fix, so I think what we would tend to do is hold the cash for now, so that we've got excess capacity in flexibility there.

Yes, Zach, it's Scott. On business apps, obviously the growth has been terrific over the last several years and we've told everybody to think about that growth rate as being three to four times the rate of our customers and I think that that target range still applies.

Great, thank you.

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

Oh, great. Hey everybody. Thanks so much for joining us. Appreciate it. And we'll talk to everybody in a quarter. Take care, bye.

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