GoDaddy Inc. (GDDY) Q4 2017 Earnings Report, Transcript and Summary

Good evening. My name is Chris, and I’ll be your conference operator today. At this time, I would like to welcome everyone to the GoDaddy Q4 2017 Earnings 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. Christie Masoner, Senior Manager of Investor relations, you may begin the conference.

Good afternoon and thank you for joining us for GoDaddy’s fourth quarter and full year 2017 earnings call. With me today are Scott Wagner, Chief Executive Officer; and Ray Winborne, Chief Financial Officer. 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 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 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 and our proposed acquisition of Main Street Hub. 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, February 22, 2018, 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 and Main Street Hub. I’ll now turn the call over to Scott.

Thanks, Christi. And thanks to all of you for joining us today. We feel great about how we closed 2017 with another year of consistently good growth in the books. At year-end 2017, we'd grown to serve 17.3 million customers, an increase of 18% versus a year ago, driven by both strong organic growth and the addition of HEG in April of last year. Our average revenue per user or ARPU also rose over 7% to $139. We finished 2017 with revenue of $2.2 billion and bookings of 2.6 billion, both up 21%, and unleveraged free cash flow $496 million, up 39% year-over-year, demonstrating our ability to deliver growth at scale in both our top and bottom lines. 2018 is off to a strong start as well, which we'll see in our increased guidance for the year that Ray is going to discuss a bit later. We want GoDaddy to be known as the place where ideas start, grow and thrive online all around the world. And today, we're a global leader in helping individuals and businesses create an online presence with particularly strength in naming websites and branded e-mail. We have a distinctive value proposition that combines our products, technical platform and customer care to uniquely serve customers and grow with their ideas over time. In the coming year, we'll look to build on our solid foundation and invest in several ways to continue driving multi-year sustainable growth. Our priorities are to deepen engagement with existing customers, continue to expand our product portfolio, grow our international footprint, build and evolve on our exceptional brand awareness and enhance the speed, reliability and performance of our global infrastructure. Today I’d like to discuss two topics in a bit more detail to demonstrate our commitment to these priorities. First our expanding view of what it means for us to provide a truly differentiated online presence. And second the continuing evolution of our global go-to-market strategy. First, I’ll start with our view on providing a great online presence. Whether you’re a business, non-profit, sports team or politician, a dynamic, great looking, reliable and effective online presence is a must have. Our customers tell us that how they show up online is the most important and effective marketing they can do. The definition of what it means to have a great online presence continues to expand. Domain names and websites are in many ways the foundation of the Internet and their functionality and importance is evolving in a couple of meaningful ways. First, given the proliferation of social media platforms, online content needs to exist and to be managed across many more places. And second, product applications which used to be standalone point solutions such as booking engines, ASO services, blogs and email marketing are now increasingly being integrated into a singular online presence. At GoDaddy, we’ve made great progress innovating against both of these trends. First, to help us further extend and sink our customers’ website content to different social media platforms, we’ve recently launched new integrations to Facebook small business pages and Google My Business where customers can update and manage their content to both platforms directly from the GoCentral Editor. We’ve also recently announced we’re acquiring Main Street Hub, which manages branding and social media engagement for our customers and will ultimately allow GoDaddy to offer customers a complete suite of do-it-for-me capabilities to build complete suite of do it for me capabilities to build a powerful online presence across website design and maintenance, SCO and social media. Main Street Hub combines dedicated teams of branding experts with proprietary workflow technology to help their customers manage activity on popular social media platforms. Turning to the second trend I mentioned, the industry is shifting from point solutions to fully integrated applications. On that front, GoCentral is evolving rapidly, particularly as we do more to make vertical experiences come alive. Today, over 80% of our customers now have a tailored theme and application experience specifically relevant for their industry or vertical and we continue to add richness to this vertical capability. Over the last several months, we've added powerful features like online appointment scheduling including automated SMS and email notifications. Payment integration with Square and two-way calendar sync. Now again, this isn't about a website in the traditional sense, but about bringing a full range of capabilities to customers where they might previously have had to seek separate point solutions. We've done all this with GoCentral, while achieving high customer satisfaction scores, increasing numbers of published sites and the hundreds of thousands and continuing to drive free to paid conversion up in the mid-single digits. We believe we're well-positioned to drive the industry forward in delivering what a venture or an idea needs to start, grow and thrive. Our long-term vision is to provide a true platform, where anyone in need of an online presence have every – has everything they need in one place with applications working together seamlessly. So that's our view of the evolution of online presence. I'd also like to touch on the ongoing evolution of our go-to-market strategy. Over the last five years as we've expanded into dozens of international markets, we've proven our business and particularly our go-to-market model translates well globally. Going forward, we intend to build on the strong foundation in several ways. First, continuing our international expansion, bringing more localized versions of our products and services to customers around the world. Second, evolving our brand story. We intend to maintain our light-hearted edginess while also expanding and solidifying our position as the place to make your idea real online. For example, we have a number of local campaigns running around the world showcasing how GoDaddy easily powers an online presence including our union with Danica Patrick in the U.S., highlighting her life after racing as she begins to turn what were her side hustles into full time passions. You’ll see several of these geo-specific campaigns in our earning slides and they all tie to a common thread, that GoDaddy makes creating a complete and successful online presence really easy. Third, we’re also increasing our ability to do direct customer marketing, including introducing our ever-broader product portfolio to our existing base of 17 plus million customers through targeted and contextual marketing campaigns focused on deepening our customers engagement with us. Throughout our history, we’ve focused almost all of our marketing spend on new customer acquisition which is logical given our attractive unit economics where GoDaddy customers generate a lifetime value of roughly 10 times our cost to acquire those customers. However, with our expanded product portfolio, there’s far more we can do with and for our existing customers, so we’re ramping up our efforts there. Now this is still small on a relative scale, but as we leverage data and are constantly improving global platform we’re discovering that we can deploy additional spend into many micro campaigns at good incremental return. One more quick point before I wrap. In November we first talked with everyone about our opportunity to leverage the public cloud. We've run a detailed process looking at several partners certainly on their cloud capabilities, but also addressing other product and go-to-market opportunities. We hope to announce a partnership soon that will allow us to embark on a multi-year transition to the cloud. And as we reflect on all these things, whether it’d be our products or go-to-market or evolving technical platform, we hope that you can see that they all work in ladder into delivering truly great customer experiences all around the globe. Strategically our biggest asset is our 17-plus million paying customer base and our growth priorities remain focused on continuing to both expand that base and to do more with existing customers over time. With that, I'll turn the call over to Ray.

Thanks Scott. As Scott mentioned we finished the year strong and carry that momentum into the new year, driving an increase in our 2018 guidance. We're executing well, driving consistent growth in customers and ARPU combining to deliver a solid top line. Both revenue and cash flow for Q4 came in ahead of our expectations with straight across the board. For the full year, we posted exceptional bookings and revenue growth with both up 21%. But just as important we deliver better than expected organic growth, north of 12%. HEG contributed $56 million in the fourth quarter revenue. Let me touch briefly on our three product revenue lines. First, domains revenues were 16% year-over-year in Q4, fueled by international growth, strong renewals, aftermarket domain sales and the addition of HEG. We've continually invested in our platform to make domains easy to find buy and use as a result our domains under management of $75 million has grown by $20 million names over the last five years, clearly demonstrating that domains matter and owning your brand online matters. Domains is now over a $1 billion annual business for us and we expect solid growth to continue through 2018. Longer term, we continue to expect domains to grow in line with our customer growth. Our hosting and presence revenue increased 29% in the quarter with the majority of the incremental revenue again coming from HEG. Exiting 2017 with nearly $850 million in revenue, we still see plenty of room to grow in this category, targeting one to two times our customer growth rate over the long-term. Business applications revenue rose 38% driven by continued strong growth in our – in both productivity and email marketing, as well as a growing product suite and the addition of HEG. At over $325 million of revenue in 2017, we continue to believe we have ample opportunity to grow this revenue stream at three times to four times our customer growth rate longer term. Turning to international, Q4 revenue came in at $207 million. It’s 53% year-over-year growth. Beyond the addition of HEG, GoDaddy's organic international business grew a double-digit clip as we continue to push localization and extend our go-to-market playbook and customer care globally. Finally, after a couple of years of headwind, currency is now providing a slight tailwind to our international growth. Looking at cash flow, the combination of solid bookings growth and strong operating leverage continues to generate terrific growth. Another free cash flow jumped 43% in Q4 to $109 million and 39 % for the full year to $496 million, resulting in a nearly 300 basis point year-over-year expansion in our cash margin to 22% margin expansion has been driven both by our continued organic operating leverage and by HEG’s contribution. On that topic, we’re executing well against our HEG integration plan and we’re on track to deliver $20 million synergy target by the end of this year. Let me touch on a few housekeeping items with respect to the P&L this quarter. First, the implementation of ASC 606, the new revenue recognition accounting standard, will now result in any changes to our current method of revenue recognition or reporting. Second, as you know, the recent tax reform act resulted in significant changes to the corporate tax code. While we have a somewhat unique tax structure, many of the provisions impact us in similar ways to a traditional C-Corp, the lower corporate tax rate being the most meaningful. In the fourth quarter, we recorded a non-cash benefit of $86 million to reflect the impact of the lower corporate rate on our existing TRA liability. Based on our assessment, we don’t currently expect other provisions of the act to have a material impact on our financials, but we’ll continue to monitor interpretive guidance as it’s issued. And third, G&A expense this quarter includes a couple of items worth noting. $6 million in acquisition and integration costs associated with HEG and Main Street Hub and a $12 million reserve for exposure related to our obligation to collect and remit pass through taxes on behalf of government entities. We provided a table near the end of the earnings release highlighting these and other items which may be helpful to those of you building models. On the balance sheet, we finished the year with $595 million in cash in short-term investments and net debt of $1.9 billion. This put our leverage at 3.1 times on a pro forma trailing 12 basis, right in the middle of our target range of two to four times. During the quarter, we took advantage of market conditions and refinanced our term loans, lowering our interest rate to LIBOR plus 2.25%. This new rate implies cash interest payments in 2018 of $90 million to $95 million. Turning to the rest of our outlook for 2018. In the first quarter, we expect revenue of $620 million to $625 million including a $65 million to $70 million contribution from HEG, implying year-on-year organic growth about 13% at the midpoint. For the full year 2018, we expect revenue of $2.58 billion to $2.61 billion, representing approximately 16% growth at the midpoint versus 2017. This includes one incremental quarter from HEG and the anticipated contribution of roughly $10 million per quarter in the back half of the year from our planned acquisition of Main Street Hub. Cutting through the math, here's your take away. The full year guide implies 11% to 13% year-on-year organic growth, on par with what we delivered in 2017 on a much bigger base of revenue. Moving to cash flow, we expect 2018 unlevered free cash flow of $605 million to $625 million, implying 24% year-over-year growth at the midpoint and continued margin expansion. Three quick notes on that cash flow guidance. First, it includes total cash tax related payments in the $25 million to $30 million range comparable to 2017. Second, it also includes any costs related to our expected public cloud transition in 2018. And third, it excludes an anticipated one-time tax payment associated with the gain on the plus server sale last year. For quarterly modeling purposes, we suggest you assume that our unlevered free cash flow will be evenly split across the four quarters of 2018. Stepping back, we continue to create franchise distinction and competitive advantage with a business capable of delivering double-digit top-line and high teens growth in unlevered free cash flow. As our cash flow and balance sheet capacity expands, you will continue to see us be thoughtful stewards of capital with the ultimate goal of prudently driving attractive growth in levered free cash flow per share for our shareholders. With that, I'll turn the call back over to Scott.

Thanks, Ray. We look forward to continuing to deliver against our strategy with differentiated customer experiences. We're excited for 2018 and see a big opportunity to continue to grow the GoDaddy business both this year and for the long-term. We hope to share more details with you, demo some products and hear your questions at our Investor Day in the afternoon at March 28 in Tampa, Arizona. Thanks, everyone for your time, and we’re ready to open up the call to questions. Operator?

[Operator Instructions] Your first question is from Sam Kemp with Piper Jaffray. Your line is open.

Great. Thanks for taking my questions. First one on Main Street Hub, so this is a higher touch model then you’ve historically gone after. Can you just talk about how you’re planning on incorporating it into the product adoption funnel for users? And is there any sort of level of automation that you plan on bringing to Main Street Hub that potentially wasn’t there before? And then the second is just on SmartLine. You didn't provide an update during the quarter, I don’t know if those intentional or not but can you just talked about your evolved thoughts on the go-to-market strategy there and adoption?

Yeah, thanks Sam. It’s Scott. So, on Main Street Hub, Main Street Hub's model it is higher touch and it's helping customers fully set up and particularly manage the communication process through all the different touch points of social media. And as of right now, our focus is going to be on introducing this proposition to what we think is about two million high potential customers within our base, during diligence we screen their value proposition for their highest and best performing customers and finally we had about a two million overall TAM within our base and so our first focus is setting ourselves up to introduce the services that exist today into the GoDaddy base. Second and this is where it really gets interesting is taking workflow technology to manage content and actually helping to syndicate that through everybody's different points of presence, whether it be a website or social media or even email and communication plans that customers would have with their own customers. That's going to be down the road. But that's really where we're headed with Main Street Hub. To your second question on SmartLine, SmartLine today has tens of thousands of customers who are continuing to evolve with the feature set nicely. Over the last quarter or two, we've added things like texting, call forwarding, some toll-free number capabilities and particularly texting is having really great customer resonance. We're happy with the product and with that feature evolution and we're just continuing to build it up. I mean, the big focus now is, boy, just continue to build a use case around tens of thousands of bases of customers that they're going to work with. I think the point for people listening and thinking about 2018 is obviously it's at a scale where it's not going to affect our financials this year, but it's a product and a value proposition that we are continuing to work on and are attracted by.

Got it. Thanks for taking the questions and nice quarter. Thank you.

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

Yeah. Thanks. Hi guys. So, the domain revenue was really strong in the quarter and based on the commentary for 2018, it sounds like the trend line of that growth going down to the customer growth is not quite happening as fast as we originally thought. It sounds like it's going to stay above that rate through 2018 before it starts to tail off. I’m just kind of curious, what is the main drivers behind domain revenue growth being better for longer than maybe we first expected.

Hey, Sterling. It’s Ray. Obviously, we gave you guys that guide last year. It was a longer-term look. So, we are seeing continued solid growth in there, a lot of that is coming from continued improvements in our domain purchase path, just how you come on the side and how do you acquire domain, how are we packaging it with other products. And then the other impact you saw this quarter, little lighter than that was just the diminishing impact of purchase accounting on the HEG component of domains.

Got it. Thank you.

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

Yeah. Thanks for taking the question. Two if I can. First on HEG, can you give us a sense if there are any other big upcoming milestones you guys are looking to hit in terms of operationally to unlock more synergy on the revenue side. And then kind of related second one, you mentioned a focus on a more localized marketing effort going forward, can you just talk about how far – how close you are in some of your international markets in terms of the go-to-market there relative to kind of your best-in-class U.S., localized go-to-market and kind of how you see that improving over the timeframe over which you can really localize in those markets like you do in the U.S.?

Hey, Lloyd, it’s Scott. So, on the synergy, we’re feeling really good about reaching and exceeding our $20 million target that we’ve communicated to everybody which is a combination of both revenue and cost. And so, operationally, you can think about what we’re working on, on two fronts. The first is product and platform and the second is just our go-to-market effort. On product and platform, we’re putting our products together into a single global product portfolio. So, for example, SSL, all of the aftermarket services in our – we’re very close on domains to having those all basically running in the same place, productivity is shortly to follow and hosting a little further beyond that. And so, there’s no one single milestone, but those are tracking really nicely. On the second operational category, which is merchandising and go-to-market, we’re building a single care organization in Europe that’s ticking along nicely and we’re continuing to put marketing dollars into the countries in Europe based on our footprint and our relative opportunity. And I think that’s probably the relevant takeaway for you which is we’re running EMEA together, both HEG and the GoDaddy brands and our scale and our scale in half there is allowing us to continue to message and expand our position and are certainly markets where we have a big footprint like the UK, but also to invest more into some of the continental markets where we have a smaller presence, but think we can ramp. And the tactics really aren’t different; it’s the same marketing playbook of brand awareness combined with some super sharp performance marketing underneath that that’s got really nice return. The overall focus on messaging is around who we are, who we stand for, and what we do which is get ideas, a great online presence and help them grow over time.

Lloyd, it’s Ray. The only thing I tack on to that is that the integration roadmap we’re well along that path and feel good about the promised $20 million in synergies by the end of the year.

Great. And then any just broader color on increased localization beyond HEG, and how to think about that going forward?

I think Lloyd, you can think about it on two fronts. Localization is our global product portfolio, which again it’s hallmark of what we do and we continue to localize products whether they’re naming or certainly our presence. So, for example, GoCentral, the localization capabilities of that continues to evolve. And then on the go-to-market side, I think in some of the -- on the IR slides, we flashed a couple of campaigns that are running around the world and what you see is an overall brand position of GoDaddy being a place for ideas to become real and to thrive online, but with local execution. And so, if people want to have fun, go check out both what we’re running in the U.K., what we’re doing in Australia to come maybe what’s coming in Germany, and you’re going to see kind of locally relevant campaign execution, but with the same overall message.

Got it. Thanks a lot.

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

Hey, guys. Thanks for taking my questions. Scott, wanted to dig into a comment you made relative to the Main Street Hub acquisition? And maybe I'm reading too much into it, but it sounded like there was potentially opportunity to start offering more do-it-for-me services down the road. So, is this true, is this sort of an area that you're potentially evaluating additional do-it-for-me services, that you offer to your customer base? And then relative to that, you do have relationships with a lot of web pros that in a way offer do-it-for-me services themselves? So, how do you sort of toe that line in terms of not stepping on some of the web pros that you have relationships with?

Yeah. Thanks, Matt. That's a great -- it’s sort of a great question. I think two things are, they're complimentary, not contradictory and that's the most important point. And if you follow customers around the line between DIY and DIFM is also not a hard one and there's a real spectrum between those different activities. So, that’s a super important point to communicate and understand. With Main Street Hub, also when you think about activities that our customers are doing online, their website, both design, maintenance, updating, social media presence, some marketing and communication campaigns, SCO optimization. Five years ago, those were all discreet activities and we’re trying to bring those together both productizing them and for those customers, who want a little bit of a boost or help to create the capability to help them to do that. And look, that’s the part of the core value proposition that we’re able to offer at GoDaddy which is combining truly distinctive products at a global level wrapped with a personal interaction. Now when it comes to pros, pros are a big part of that and pros are these independent, largely independent or small groups of designers that might be doing these services also for people. This is complimentary and we can help pros both get customers and for those who have maintenance requirements maybe do some of the same stuff on behalf of pros, but we see this as complementary not contradictory.

Great. That’s it for me guys. Thanks a lot.

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

Great. Thanks for taking the question. And I wanted to ask maybe about total bookings that came in on our numbers at least you know 3% or so above our projections and that’s despite ending customers being relatively in line. And so, I’m wondering Scott, if we’re starting to see maybe the beginning of the benefits around improved merchandizing and bundling as the new customer care team rolls out? And if so, can you talk about just the timeline as we see this customer care team and the benefits of -- as merchandizing bundling throughout the year? Thank you.

Hey Ron. Yeah, I wouldn’t attribute it to anyone, it meaning good bookings performance, relative ARPU to any one specific thing. But I would say it’s a combination of our marketing message and footprint, which is what we say and how we reach customers both new and existing. As you said, our merchandizing flows and how we’re bringing our products together in a clean way and you know how our care team is helping to steward that process and it really is a combination of all those things that’s I think helping propel the business.

Got it. Maybe if I could just follow-up on GoCentral, I think you said also hundreds of thousands of sites have been created with mid-single-digit conversion rates which have been maintained, can you just talk about how many of your, call it 17 million users have been exposed to GoCentral and is that an opportunity as you go on? Thank you.

Thanks, Ron. I think, it’s interesting where a lot of our base of customers is 17 million, they have an idea that’s in some form of development and by that development meaning an idea that’s connected to some form of an active presence. And when we look at not only our base, but frankly the base of sites and ideas in the world, this net opportunity of taking a side and actually expanding it into a mobile social world is a big opportunity and it’s taking in some ways sites that have kind of largely stayed the same for the last 8 years to 10 years and really bring in new capability. And I think your specific question then which was exposure hits on that possibility and theme and the answer is we’re sort of trying to both figure out how to not only just create exposure, but also the right mechanism by which you can grab somebody who may have a version one side and actually connected into the mobile social world. We think it’s a big opportunity, we think we’re in some ways uniquely positioned to be able to do it, but we got some work to do actually turn that into a major system at the level that we could actually go talk to you guys about and put hard numbers behind it.

Got it. Thanks a lot. Great quarter.

Thank you.

Your next question comes from Sameet Sinha with B Riley FBR. You line is open.

Yes. Thank you very much. Couple of questions regarding your acquisitions. So, starting with HEG, you kind of indicating Q1 $65 million to $70 million, you know versus the $56 million that they did in the fourth quarter. So, it seems like you know when you had acquired the company you had indicated it's currently growing at low single-digits. We aim to get it to high single-digits. So are we at that inflection point with HEG because the growth seems to be fairly significant from four to first quarter. And secondly, somewhat picking up on your comments on Main Street Hub, so if you indicate 2 million potential customers for this product, if you look at media reports they indicate about a $300 ARPU, monthly ARPU. So is that I mean are we talking about an opportunity which goes into billions of dollars or I'm going to leave it there for you to answer.

Hey Sameet its Ray. On the HEG that business is growing nicely. We've gotten some uptick in the top line growth there, but as you look at that guide or that sequential stuff up in the revenue some of that sum it's a mix right of Q1 seasonality you get a little bit a lift there and then the other piece of it is diminishing impact of purchase accounting as that revenue normalizes to reflect the run rate of net bookings. So, I would say if you want to look at it that way it's probably a third where we're getting some inflection on growth on the top line. The other two-thirds is seasonal and, and purchase accounting. And on Main Street Hub, Sameet, yeah, again I said that two million TAM, so total addressable market and boy you know you, you did the simple math and you know your eyes can get big, big on that. But here is, here is what that two million correlates to when you take Main Street Hub’s customers who have been with them through Main Street Hub’s customers who have been with them through not only a renewable cycle but also their highest NPS customers. We took that customer base and did a screen on industry vertical, website position and their social media development and kind of match those customers to our customers and said wow there's about 10 million – excuse me 2 million customers in our base that have similar characteristics. All right now what's our ability to actually deliver the service build it up to them it's – it realistically is smaller than that. I think the takeaway is to say that there's certainly a customer need when we think about this net of proposition of taking site content and connecting it to social media and providing some sort of productize to assist that we're excited about and that's the fundamental logic behind Main Street Hub. Obviously, there's work to do to grow from where they are to capture that that kind of opportunity.

Yes. I mean it's very I think attack on that right. When you look at that 2 million customers it is a smaller subset because of that ARPU. That's a dramatically higher ARPU than our average customer.

So, it's about a 300 monthly ARPU business.

That's correct. Again, in Ray's comments, yeah, Ray said at 10 million per quarter it's a $40 billion top line business today.

Thank you very much.

Your next question comes from Naved Khan with SunTrust. Your line is open.

Yeah. Thanks very much. So pretty nice subscriber growth and I guess if I look at the commentary you talk about also sort of improving the renewals. So just wanted some additional color on how much of the growth is really been driven by improving retention versus just higher gross additions?

Hey Naved, it’s Ray. I would tag more of that improvement to retention. You know Scott alluded to in the last couple of calls with the customer experience that is part of it, right. How our customers are experiencing the product that flows through the site, the interactions with the customer care center. All of those things are helping with improving retention, particularly with our longer life customers.

Okay. And then a little bit of housekeeping. So, CapEx was kind of a spike in the fourth quarter, how should we think about it for 2018?

Yeah. I think as you look forward Naved, it’s the timing from a quarter-to-quarter spikes at times, but continue to look at 3% to 4% of our GAAP revenues your target for modeling purposes.

Perfect. Thank you.

Your next question comes from Deepak Mathivanan from Barclays. Your line is open.

Hey guys. Thanks for taking the questions, two questions. Sorry if you’ve discussed this in detail before, just been jumping between multiple calls here. The new tax reform creates some constraints on tax deductibility from interest expense at certain scale; does that in any way change how you think about capital allocation with respect to leverage levels and potential M&As? And then the second question is with the scale of the domains business you have already and given that domains is an important on ramp channel for you, do you think there is still a lot of runway left to drive customer growth in mid-single digit over the next few years or should we expect to see you know customer growth driven by other products increasingly? Thanks.

Hey Deepak, it’s Ray. I’ll take the first one on the new tax reform. From an interest expense deductibility, longer term it could affect our capital allocation, but certainly for the short and medium, just not a big impact on us, given our - both our structure and our tax position. Rate was really the biggest impact on us. And relative to your question on customer ads and in the role of Domains, Deepak, I mean I think the first point is the domains is still a strong onramp and we continue to bring in millions of customers, new customers every year into the franchise with Domains as a foundation. And as we add product capability hopefully these other onramps are also starting to contribute. In some ways, GoCentral and Domains are inextricably linked in a lot of ways and so that's certainly helping. And as you point out other product categories, certainly offer potential and that's part of the strategy over time is to add a couple of complementary product categories that might be able to bring in new customers into the franchise as well.

Right. That makes sense. Thanks guys.

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

Thanks. Again, apologize if you covered, this jumping around. But is there any impact for a full year free cash flow for Main Street Hub, I saw you gave the revenue impact, but is there any – any free cash flow impact?

Hey Jason, its Ray. Yeah, the $40 million in annual run rate on the revenue, they were a negative cash flow business. That's a combination of scale and customer acquisition cost. That dilution is built into the guide on unlevered free cash flow that we gave.

So, I mean, can you help us understand what that drag is? So, excluding that would you have actually taken up free cash flow guidance for the year?

Yeah, that absolutely would have been a higher guide. But I'm not going to get into the specifics because you know we haven’t closed the acquisition yet, it'll be back half of the year.

Right. And then just if I look at the, the kind of the operating segments, it was a very kind of clean and consistent quarter kind of very consistent with last quarter. I'll be at a slight acceleration in domains you know. Is there anything you'd call out is, is, is driving that in domain?

Yes, yeah Jason as, as I mentioned in the call comments there’s a pretty broad strength across the board. With domain specifically, there was a slight step up there, but you know that was the diminishing impact of purchase accounting that I mentioned to an earlier question.

And then just last for me. Do you have any impact on ASC, the, the new the ASC rule change?

Yeah, so no impact on us for our need neither our recognition or our reporting, the other two big potential impacts for us would have been domains. We differ currently and we'll defer under the new standard as well and then our relationship with Microsoft on O365 we are a principal to that customer relationship today and we will be under the new standard as well so fewer changes expected with the new standard.

Okay. Thank.

Your next question comes from Brent Thill with Jefferies. Your line is open.

Good afternoon. I had a question just relating to the organic versus international growth. And I just, I want to make sure these numbers are correct. I think the implied organic was 12% in, in the fourth quarter and I believe you said ex HEG that the international business was drawing low double-digits. And I'm just curious you know why the international business may not be growing faster, we do think given the base that, that could grow at a much quicker rate than the over – overall organics. So, I just wanted to make sure, I heard that correct?

Yeah, Brent, you’re – you heard it correct. And that’s the second quarter in a row we've seen a little slower growth there on a constant currency basis in the organic business. But again, when you look under the covers, it was a tougher comp against 2016. We've moved through that now. So, as you look out into 2018, you're going to see that growth kind of bounce back to what we were at prior to the last couple of quarters. So, underlying nothing to be concerned about there. If you look at the overall results, we're ahead of our expectations. So, some of the revenue coming in across the business, it will ebb and flow on geo’s and we expect that to bounce back in this year.

Okay. And a question for Scott. When you look at the business apps, you have a long list of strong portfolio of solutions, but I think the one thing that many have noted is just that the absence of bundling similar to what Microsoft did with Office or others. Is there a planned initiative that you feel like you can take in 2018 around stronger bundling solution that can potentially ease the adoption for many of these businesses?

Hey, Brent, well, so on business apps, I think the priority, if you're thinking about productivity is to make sure that in a really clean and easy way, we can introduce in a branded e-mail and productivity solutions to our customers. And if you're new, you can see that in our purchase flow and the linkage between a name and getting branded e-mail and us, we you done a I think a very good job of that and its actually putting attachment in a pretty elegant way now. Now bundling is a merchandising offer, but if we move towards subscription, then it gets pretty interesting. Where today these are still discrete products, but for certain segments of customers, you can absolutely see a world where you have site email and a domain name tied together for a certain price point. Now we're working on that and there is some underlying platform technology to do it, but that's a focus. And you could take what I just described on those big three and extend it to a whole bunch of other products as well. That is a 2018 effort to be able to not just merchandise them together but at pure customer, activate, manage and have all of those three products really operate as one. And that's kind of what's coming next.

Great. Thank you.

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

Hi. Good afternoon. Thanks for taking the question. I think you may have talked about the impact on revenue, but as we look at bookings understanding we're not the last kind of annualized HEG acquisition, how do we think about sequential growth in bookings through the year as current bookings may include obviously some - some renewals of bookings have written off at the acquisition?

Hi, Brian. It’s Ray. I'm not sure where you're coming from, from bookings being written off. That was more associated with revenue. Your bookings are what stayed relatively steady. So again, if you're looking at the business from an organic standpoint, even with HEG that bookings number is more pure.

Yeah. I was getting it deferred that may – that may be look a little bit skewed when you add deferred revenue written off in the prior year, and now you're renewing that. So, look I guess it may look new. And then on the – on the migration to the cloud, I mean how do you anticipate obviously you haven’t kind of linked that agreement yet, but how do you anticipate that might impact your margins near-term and long-term as you kind of enter into that agreement, integration expenses notwithstanding?

Yeah. So just take the one-time aside for a second, Brian, which we are accounting for in that guide we gave you. From a margin perspective, obviously, you'll see a degradation there, because it's going to come from capital up into operating expense, but you should see an offsetting reduction in our capital. And so, over a longer period of time, we’d expect this to be accretive to margins as we move there.

Yeah. So, Brian, the punchline remember it’s uFCF kind of if that mix just boards itself out through uFCF, and our guidance this year includes all of our planned work already go into the cloud. So, what we're talking about it, but for modeling purposes our guide includes everything that we think we're going to be doing this year related to our infrastructure.

Understood. Thank you very much.

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

Hi. Thanks. Just one high level question. When you guys kind of frame yourselves as the one-stop shop solution for businesses, now you added the social marketing component to it. I guess where do you guys kind of draw the line on what much beyond is too being a one-stop shop. I guess where is line on what being a one-stop-shop. Like what -- I guess where is the line on you know what services you wouldn’t enter and because just thinking about it as in terms of deals and potential additional services that you could add. So I mean you know where does it – where is the line, just wanted to understand that?

I think the relevant -- James, maybe I’d answer with a different cut which is if you look at what our customers are trying to do in the variety of products or services that they’re paying other people thousands of dollars to provide, our product roadmap is about logical extension from our strengths and our strength is right now online presence. 17 million plus customers around the world work with us, we have the honor of serving them today focused on presence which is your name, your site and branded email. And you can think about a category like security for example or email marketing or what we’re doing in social media as natural adjacencies from those three points in the online presence triangle and our strategy has been super purposeful around the great in a way and what we do today which is online presence and then continue to expand from there in ways that are distinctive and meaningful for our customers. And that has been the way we’ve been thinking about it and certainly will be for the future.

Okay. I guess naturally putting it was more around you know where do you know that you’re not diluting the focus of the business, but that’s helpful. Thank you very much.

Your next question comes from Mark Mahaney with RBC Capital Markets. Your line is open.

I guess two questions. First, when you think about HEG and the potential revenue synergies, just draw out and where do you think you are in terms of generating those? Is that whiteboard beyond whiteboard already in numbers multi-year and multi-quarter, just help us think about that going both ways. And then just a little more color on international, I know you talked about the growth there. That seems relatively positive but are there particular international markets you would call out in the past I think you've talked about we've seen really nice momentum in Asia. Could you just update us on that? Thank you.

Hey Mark, on HEG, revenue synergy, I would characterize the revenue synergies in two different buckets. The first is product and merchandising where we're building a global product portfolio and then we're merchandising it together. And I would say that those are far along. This is a scale of 1:10, we're kind of a 7.5 right now and it's driving that confidence and saying we're add or going to exceed our revenue synergy or the targeted synergies that we put out. More broadly, EMEA in general, Europe's an attractive market, we've got a pretty big business there overall, but when you get into individual countries, there's still room to grow and the fundamental premise behind the HEG combination was to get us more heft and scale and a couple of other geographies and allow us to maybe up our presence in a few more markets. And really, we're -- I'd say we're on the 1:10 scale there, we're at a 2 maybe a 2.5, which is in a draw on the strengths where HEG is and we're going to work it in the same manner that we've worked global expansion and hopefully continue to evolve from there. And on your second question on Asia, could I just ask you to give me a quick repeat, I’m not sure I totally got the full context of it.

Hey. Sorry, Scott. It was a real imply question, just as an update on traction in Asian markets? I know you spend a lot of time, a year ago kind of localizing for those markets a lot of effort into that so just an update on how you’re faring? Thank you.

Yeah. Thanks. Yes. Well, so same we localized everything in 2016 and sort of 2017, we then started to spend some amount of dollars into the market, and I think we had said Asia was low-single-digit percentage of our revenue. And a couple other markets in Southeast Asia where we’ve started to put our shoulder against where we’re seeing nice growth that kind of looks like India in the very early days which is great but we’re big enough now that that level of growth isn’t necessarily showing up in the P&L per se but it’s just about continued to grow our footprint. So anyway, but the punch line is that we’re happy with kind of where and how Asia is evolving.

Okay. Thank you, Scott.

Yeah. Thanks, Mark.

At this time this concludes the Q&A session for the conference. I’ll now like to turn it back to Scott Wagner.

Hey, everybody. Thanks a lot. Thanks for your questions and being with us and for those of you who are coming to our Investor Day in late March we’ll see you then.