GoDaddy Inc. (GDDY) Q1 2018 Earnings Report, Transcript and Summary

Good afternoon. My name is Tim and I will be your conference operator today. At this time, I would like to welcome everyone to the GoDaddy First Quarter 2018 Earnings Conference Call. [Operator Instructions] Thank you. Ms. Christie Masoner, Senior Manager, Investor Relations, you may begin your conference.

Good afternoon and thank you for joining us for GoDaddy’s first quarter 2018 earnings call. With me today are Scott Wagner, Chief Executive Officer and Ray Winborne, Chief Financial Officer. We will share some prepared remarks and then we will open up the call for your questions. On today’s call, we will 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 maybe found in the presentation posted to our Investor Relations website at investors.godaddy.net or on our Form 8-K filed with the SEC with today’s earnings release. The matters we will 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 achieved 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, May 8, 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 are referring to those measures excluding the impact of HEG and Main Street Hub. I will now turn the call over to Scott.

Thanks, Christie and thanks to all of you for joining us today. We are pleased with our strong start to 2018, with first quarter revenue up 29% and un-levered free cash flow growing even faster, up 42%. As we discussed with many of you at our recent Investor Day, we are seeing consistently solid growth and executing on a strong road map in 2018 with particular focus on driving towards a best-in-class customer experience, increased product breadth, expanding our go-to-market approach and deepening the capabilities of our platform and our technology. Since we shared a detailed overview of our strategy and specifics on our plans and progress at our recent Investor Day, I’ll quickly touch on them here and otherwise keep my remarks brief. We want GoDaddy to be known as the place where ideas start, grow and thrive online all around the world. And we know that what we do for our customers really matters. And if we get that right, we can be a key catalyst in the success of our customers’ businesses, ventures and ideas. Our strategy is about fulfilling the promise of our customers’ ideas through great products, a seamless end-to-end experience and meeting our customers wherever they are in their life cycle through our go-to-market efforts. And the opportunity ahead of us remains enormous, whether it’s addressing the needs of new customers or in expanding what we do with our over 17.5 million existing customers. Each of the five individual elements of the strategy we shared at our Investor Day and the underlying roadmap are powerful alone, but the combination is what’s compelling. Our strategy wraps together in a way that we believe has the potential to deliver something great. Perhaps you can think about it as the how, what and where of our engagement with our customers. Let me flesh that out a bit. First, we have been talking this year about our intensified focus on customer experience. This is about investing in how our customers engage with us through all the different touch points they have with GoDaddy. Whether our customers experience GoDaddy through our marketing, our website, our individual products and dashboards, our customer care reps or any other channel, those experiences should be delightful and feel incredibly consistent. This investment in customer experience extends across everything we do. For example, we are looking at unique ways to engage with our customers, including vertical merchandising, subscription options and solutions that group individual products together based on segment and vertical. Ultimately, we want to create simple, elegant, seamless experiences for GoDaddy customers. And over the long-term, we believe the benefits will show up in product activation, customer engagement, success, renewal and ultimately, in ARPU. Turning from how we engage our customers to what we do for them, the second pillar of our strategy revolves around our product portfolio and we continue to innovate there, building on existing products and technology where and how we can extend our products to meet our customers’ needs. We are pleased with the momentum of GoCentral and we are also addressing the expanding needs of our customers in a world where having an owned website is really just the start. A truly complete online presence includes a consistent appearance across not just a website, but social media, listing services and more. Our recent acquisition of Main Street Hub is an example of how we intend to do more to help customers manage their brands across multiple online points of presence, including social media, ensuring that they’re showing up everywhere they need to be online. I mentioned the how of customer experience and the what of our products. The third block of our strategy is our go-to-market efforts. That is where both new and existing customers see GoDaddy. Over the last 5 years, we’ve proven that our product and go-to-market models work all around the world, and international expansion will absolutely remain a key component of our growth. We have an opportunity to expand our brand so that GoDaddy stands for online success globally. And we’ll add both spending and capability to have more conversations with our existing customer base, which we believe will also translate ultimately into ARPU. And all of this investment in customer experience, products and go-to-market is underpinned by our single technology platform. The fourth and fifth blocks of our strategy focus on the platform and technology that power everything we do for our customers. Our platform is built to allow all of our product applications and marketing tools to work better together and provide a highly performant, secure infrastructure and environment. We’d encourage everyone to spend some time with our Investor Day materials on our IR site for a deeper dive into our strategy and road map. As I wrap, I want to emphasize that while we are focused on delivering results in 2018, the majority of our efforts this year are about building a business that can deliver in 2019, 2020 and the years to come. We are proud of the consistency of our execution to-date, and our strategy in our investments, are intentionally longer term. We have got a good business and we are well positioned to grow it and evolve in meaningful ways and the numbers are showing up. And with that, I will hand it over to Ray.

Thanks, Scott. I will cover three points on the financials today. First, we are executing well, delivering consistent growth on the top line and solid growth in customers and ARPU. Second, we are getting solid margin expansion through operating leverage while continuing to invest in the business. And third, the highly cash generative nature of this business creates financial capacity that positions us well to pursue value-creating opportunities. On my first point about our top line, revenue grew 29% to $633 million, including a $69 million contribution from HEG. Excluding HEG, organic revenue was up 15% versus last year, reflecting a nice sequential lift from the Q4 growth rate. Roughly 1 to 2 points is incremental growth in aftermarket domain sales, with the remainder attributable to stronger performance across the board. There were three primary drivers of the sequential increase in HEG’s revenue, the seasonal boost from World Hosting Days, a series of events primarily held in Q1, a modest currency tailwind and the diminishing impact of purchase accounting as revenue normalizes to reflect the run-rate of net bookings. Looking at our two revenue drivers, customers grew 17% to $17.7 million and ARPU rose 6% year-over-year to $138. A straight ARPU calculation would yield an increase of 11% this quarter to $145. Remember, HEG closed immediately after Q1 in 2017, so we have adjusted our ARPU calculation for this quarter, so it includes both HEG’s revenue and customers for the entire annual period to more accurately reflect ARPU growth versus last year and the anticipated trend line going forward. Our total bookings were $783 million for the quarter, growing 25% year-over-year, benefiting from similar factors as revenue. On international, revenue came in at $227 million in Q1, growing 69% year-over-year including the contribution from HEG. Organic growth returned to the high-teens as anticipated as pressures have subsided from currency headwinds and geographic shifts in aftermarket sales. Our international business now represents over a third of total revenue at a more than $900 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. Turning to my second point on cash generation, un-levered free cash flow grew 42% in Q1 to $162 million. That’s over 200 basis points of year-over-year margin expansion, bringing our cash margin to over 25%. Our scale is driving operating leverage and producing strong flow-through on incremental top line growth. Organic un-levered free cash flow growth was solid as well growing in the 18% to 20% range year-over-year in line with our longer term expectations. On my third overall point about the balance sheet, we finished Q1 with approximately $730 million in cash and short-term investments. That put net debt at $1.75 billion or about 2.7x net leverage on a trailing 12-month basis. We have de-levered by over a full turn since acquiring HEG a year ago. Our long-term focus remains on driving strong and consistent cash flow. As we highlighted at the recent Investor Day, we expect to build significant financial flexibility in the coming years through growth in cash flow and borrowing capacity and we remain committed to being thoughtful stewards of capital, driving attractive growth in levered free cash flow per share for our investors via internal investment, acquisitions and share repurchases over time. So, let’s discuss our outlook for Q2 and the full year. Given the strong Q1 performance and outlook for the remainder of the year, we are raising our full year revenue guidance to $2.62 billion to $2.64 billion, representing approximately 18% growth at the midpoint versus 2017. This includes the anticipated contribution of roughly $10 million per quarter in the back half of the year from Main Street Hub. As a reminder, we have now lapped the acquisition of HEG this quarter, so growth for the remainder of 2018 will reflect the diminishing impacts of purchase accounting each quarter. Cutting through the impact of acquisitions, we expect organic growth for the full year 2018 of roughly 13%, which backs out the HEG contribution in Q1, the impact of purchase accounting last year and the expected contribution of Main Street Hub in the back half of the year. Turning to Q2, we expect revenue in the range of $640 million to $645 million, reflecting approximately 15% year-over-year growth at the midpoint. Q2 last year included an $11 million reduction to revenue from purchase accounting related to HEG, so the underlying growth this year is closer to the 13% full year organic growth I highlighted. Turning to cash flow, we are raising the midpoint of our un-levered free cash flow outlook by tightening the range to $615 million to $625 million. That implies 25% year-over-year growth. Note that our un-levered free cash flow expectation for 2018 absorbs the Main Street acquisition while also creating some capacity for investment in the customer experience and some of the new moves in branding and conversational marketing we discussed with you at Investor Day. Just a reminder that our cash flow guidance includes total cash tax-related payments in the $25 million to $30 million range comparable to 2017 and excludes a one-time tax payment of $24 million associated with the gain on the sale of PlusServer last year. Stepping back, we continue to create franchise distinction and competitive advantage with proven execution and a business capable of delivering double-digit top line and 18% to 20% growth in un-levered free cash flow. With that, I will turn the call back over to Scott.

Thanks, Ray. We look forward to continuing to deliver against our strategy, growing the business both this year and long term all around the world. Thanks everyone for your time and we are ready to open the call to your questions. Operator?

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

Great, thanks. Could you provide a little bit of an update of the AWS decision, the rollout plans of the cloud migration? And then maybe not just on the cost side, but maybe in terms of additional business opportunities that, that could create for you. And I know that’s only a month or two since you last talked about it, but any update on your thinking on that would be great? Thank you.

Yes. Sure, Mark. First and foremost, the rollout and the logic around it, is having a fantastic global, high-performant infrastructure that we can use for our applications and experience. Boy, we are in the early days and this is going to be a multiyear journey and so really no meaningful commentary to speak of in terms of the economic rollout. It’s super early and we are just starting that transition, both for us using the AWS infrastructure and for some of the GoDaddy products to hopefully get deployed into the Amazon experience as well.

Thank you, Scott.

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

Hey, guys. Thanks for taking my question. I was hoping to just get a little bit of an update on the international business and specifically around HEG. How has cross-sell been going into that customer base and what has retention been like there? And then also now that you have more feet on the street there how has the growth rates been in HEG’s core markets in Germany and the UK? Thanks.

Hi, Matt, it’s Ray. I will start and I will let Scott come over the top if he has got anything to add. We have been very pleased with the results that we have had out of HEG. And actually, it’s GoDaddy EMEA. We are running those together now. So, the merchandising and marketing and operations are all being run as one unit. The growth rates have been as expected there and we are continuing to make great progress on the integration. And then lastly, these synergies that we had projected are being delivered. So overall, very pleased with the results there. I don’t know if, Scott, you want to add anything around customers, but...

Growth is nice across EMEA. And again part of the opportunity for us is to take what’s a pretty large footprint in the UK and then build off HEG’s – niche brands in Germany and be able to accelerate really the GoDaddy footprint across Continental Europe. And so in addition to the cross-sell and retention efforts that you described really we are working on, first, a global product portfolio; second, a consistent care model into EMEA and then, third, what’s going to be more and more presence across the continent in terms of go-to-market that hopefully over time will show up and it’s going to be focused against the GoDaddy brand. We are happy with where we are.

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

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

Great. Thanks for taking the questions and congrats on a really small quarter. So Scott, at the Analyst Day, you made a pretty compelling case that GoDaddy has got a large opportunity to expand the product set they are able – that you are able to sell into your customer base and the different ways you can serve your customers. And then I am just – the one slide that’s coming to mind has got like several dozen different product ideas that you guys are going after. If you think about the remainder of 2018 and then the early 2019, can you just call out what you think are the kind of key products that you can address in the near-term? And then secondly any particular reason that the aftermarket has been strong in Q1?

Thanks, Sam. I am smiling with your question. I think that page in the market landscape has gotten a lot of attention from a lot of different parties. I think in any specifics, I’d actually like to go back and highlight really the things that are underway on a couple of levels. One is the combination of GoCentral and extending GoCentral, which is making a ton of great progress around a DIY website building platform, but then the promise of integrating it to social media both on a DIY basis and now in combination with Main Street Hub, just those two things coming together are something that I am incredibly excited about that and I think we will deliver differentiated value frankly in the world. And maybe a category that doesn’t get as much attention, but is something that we have talked about a bit in the past is security. Obviously, that’s a topic across technology broadly. And one of the nice things GoDaddy has always done is had some security services, primarily in SSL around protecting websites, well, over the last, really, 1.5 years, we have leaned into security both – not only site backup, restore, but also malware scans through our acquisition of Sucuri. And those products are doing really well against particularly our existing base. And I think the nice thing about that product is that, that’s a focus on doing more with our customers over time and again helping do more with customers that are already in our portfolio. Turning to your aftermarket question, why was the aftermarket strong in Q1, I will let Ray answer that one.

Hi, Sam, it’s Ray. Nothing in particular around the aftermarket, as we highlighted at the Investor Day, we are continuing to build on that product and seeing just good solid momentum, little bit of a softer comp for the first quarter. And as we have told you guys in the past, right, this is more of a transactional business in nature, so it can be a little bit lumpy. We don’t expect this site same contribution the rest of the year, but we do see domains continuing to grow at a double-digit rate in 2018 and back to our longer term guidance of 1x customer growth as we look longer term.

That’s right. I’d add on that nothing special, just again continued evolution of our strategy to help customers get great names, whether they are new names that are unclaimed or facilitating transactions around names that are already held.

Awesome. Thank you.

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

Thanks. You guys talked about your kind of de-levering and increased financial capacity. Can you give us an update on just your thoughts around use of capital between acquisition versus share repurchase versus further de-leverage? And I guess as a follow-up to that when we think about M&A, can you give us some thoughts on how you see opportunities between like larger buys like HEG versus more product acquisitions like Main Street Hub and what looks more likely in the near term? Thanks.

Hey, Lloyd, it’s Ray. I will take a shot at this and Scott can come over the top. But our focus right now was just continuing to finish the swing on bringing HEG all the way into the fold. And then obviously we have got Main Street Hub lined up for the back half of the year and when we look at M&A obviously, I think we have got the financial capacity there and we have also got the operational capacity. You saw an announcement today where we are bringing Betsy Rafael into the management team to help us on the scale there. So, it’s going to add another quiver. Operationally, we have got a business system that enables the integration. Our products are APIable. We have got a global tech platform that’s capable of scale. And with the leverage that you mentioned, we should be at a point by the end of this year where we can do either product tuck-ins or larger acquisitions like HEG. As far as use of capital, that’s going to be the primary strategy, but obviously, you have seen us do share repurchases. We did a 7 million share repurchase last year alongside a secondary and that is another option for us.

Okay, thank you.

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

Hello? Can you hear me?

Yes. We got you, Mark.

Okay. Sorry about that. Sorry if I missed this, but in terms of the international business, I know you disclosed the organic growth ex the acquisition, but wondered if you could give some color on what the international revenue growth looks like on an organic basis and maybe also on a currency neutral basis. And then also in terms of marketing and advertising expense, the ratio was up around 100 bps versus Q4, maybe kind of what’s your expectation going forward in terms of pushing the pedal on marketing and maybe being a little less efficient in the near-term, but for growth purposes? Thanks.

Hey, Mark, it’s Ray. I will start with the international and Scott will pickup the marketing question. Organic growth in international bounced back as we anticipated. It’s in the high-teens. FX was relatively neutral, very small positive impact there. So we have seen exactly what we were expecting as a return to growth there, because as I mentioned to you on the last call, that business has been growing in the mid-teens. So, we saw a little bit of a pickup, so happy about the progress we are making there.

And on marketing, I think for the next couple of quarters, you should think about marketing at a similar percent of revenue as the last quarter. But remember, everybody, we don’t look at marketing necessarily as a percent of revenue, we look at it as a return on a lifetime value. And at the Analyst Day, we showed the 5-year difference in our unit economics, where approximately 5 years ago, the average customer was worth about $500 and we were bringing customers into the franchise at $50. Well, flash forward to today when the average customer’s worth $700 and we are bringing people into the franchise at about $65 to $70. We have accreted a hell of a lot of value to our franchise on our unit economics. And from a marketing standpoint, we’re not only using marketing as a way of initiating conversations with new customers, but we’re also doing more, again, what we call more conversational marketing, which is ramping up both our spend against our base. Because with our richer product portfolio, more touch points in a logical way, there’s opportunity to do more with our existing customers as well. And that’s going to be an increasing focus of our marketing effort that we’re going to continue to measure, still look out on a highly perform and return basis, but it’s new activity that really builds on a lot of our successes over the last 5 years.

Thanks.

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

Yes, thanks. Hi, guys. I wanted to follow-up on the earlier question on the domain business. You mentioned the double-digit growth for the full year, but obviously you got the big tailwind from the growth in the first quarter. Just kind of curious how should we think about the trend line of that growth? Do we quickly tail off into single-digit? So blended it’s double-digit for the full year and then single-digit from here out or is there more seasonality to it than that?

Hey, Sterling, it’s Ray. No, I think you should think about that comment as second quarter through fourth quarter, right, taking out the noise of the first quarter. So we are seeing double-digit growth there. Just want to help you guys as far as the modeling.

No, that’s great. How much of that would be FX benefit?

There is not a significant amount of FX built into that. Again, stepping back with a fun fact, there is a significant piece of our international revenue in bookings that are U.S. dollar currency. And we also put in hedges on our bookings. So, it mutes the impact of FX pretty significantly.

Alright, great. And then one follow-up question on the business apps, strong results in the quarter, anything different in terms of the mix of business apps or anything you are doing differently from a pricing perspective?

I think the success continues to reflect our differentiated value proposition around productivity both Office 365 and GoDaddy’s Workspace product and boy that continues to be a big need in the world that we are satisfying. And although the numbers are getting really, really large, we are growing nicely, that’s still the big driver of our business applications growth.

Sterling, the only thing I’d tag on there is my point in the commentary that World Hosting Days is also in that line item. It’s a seasonal event that HEG holds.

Okay, great. Thank you.

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

Hi, good afternoon. Thank you for taking the question. I was maybe just – if I could touch real quick on total bookings and I apologize if I missed in the prepared remarks, but substantially stronger than we had over The Street as well. I was just wondering in terms of puts and takes, how am I to interpret that strength and expectations for the rest of the year, particularly as it translates into kind of that organic growth number, maybe a little bit lower than 1Q out for the remainder of the year?

Brian, so the trend is absolutely following exactly what you have been seeing, right. We have been pretty explicit on the revenue growth and we haven’t generally been guiding on bookings, but you should expect that growth rate on bookings to continue to be pretty strong there, but to tick lower than the revenue growth throughout the rest of 2018. Beyond the HEG purchasing accounting impact, there is really no one driver. I think if you look at a lot of the customer experience initiatives we are putting in place, they are having some potential short-term impact on bookings growth, but for the longer term growth health of the business, these are the right things to be putting in place, so continued strong growth right in that organic range that we were looking at.

Got it. Maybe if I could just follow-up on the leverage, incremental margins in the quarter were much better, particularly on operating leverage side for SG&A. How might we, I guess anticipate seasonality, I guess specifically into 2Q? I mean, is IndyCar going to be a substantial blip on the sales and marketing front maybe the rationale around – maybe, Scott, if you can just touch on the cost benefit analysis that went into that, because I know I am going to get asked?

No, Brian, but I don’t think there is anything to point out from a seasonality standpoint on operating leverage. We are continuing to get good leverage out of several line items in the P&L. And yes, as far as the marketing dollars, it’s insignificant in the size spend that we have got on an annual basis.

Yes, and you gave the throwaway on IndyCar. I mean, actually, relative to our totality of go-to-market spend, the dollars are not big. And I think what we are happy about is, here in the U.S., Danica Patrick is going off and pursuing her next act on several of her ideas, and we have been able to help her and help message that and it totally fits on brand with an entrepreneur and a terrific businesswoman going off to do something, her next wave of ideas and we are helping her do that.

Got it. Thanks a lot. Thanks for clarification.

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

Two questions. So, U.S. revenue growth was accelerating on attach rate and product suite, when you think about into 2019, how sustainable in the U.S. do you think kind of call it that growth is? Can you maintain mid-teens next year in the U.S. or could you get there? And then the second just given the acquisition of Weebly and what it looked like, it was purchased for not a very high number, can you talk about what you are seeing as far as rationalization in the present sector, which should benefit you through lower amounts of competition spend?

Hey, Jase. Yes, it’s Scott. So first, on the U.S. accelerating growth and sustainability into 2019, we’re happy with the momentum of the business right now. Boy, if you asked us to look ahead, I think our guidance around low double-digit rates on an organic basis is still the way to think about it. But obviously, the momentum of the business is ticking along nicely. But I think, if you were asking about 2019, the growth rates that we laid out at Investor Day are kind of the goalposts that we’d still put out there for everybody. Related to Weebly, I think I’d answer that as we’re really happy with how GoCentral and the capabilities have evolved, particularly over the last 18 months. And when we think about a website connecting both to social media and to other applications, which is really what online success is all about, I’d say that, that’s something that we are happy with our value proposition today. And even more importantly, we are leaning in to building a truly differentiated position on those levels going forward. And so regardless of other options, it’s a fragmented space. Many people can win and we are just focused on doing things that are highly valued to customers and distinctive for them. And if it does it will workout well for us over time.

Thanks.

Your next question comes from the line of Mark Grant with Goldman Sachs. Your line is open.

Great. Thank you and congrats on a great quarter here. Just a couple of quick ones. On GoCentral and on the customer acquisitions you saw in the quarter obviously, it was a strong quarter for net-adds. And with GoCentral, are you seeing those customers coming in, are those net new to GoDaddy or are you seeing more of a mix within the customer base using GoCentral coming over from maybe domains or hosting and presence? And then can you give us a sense of how GoCentral did in terms of its contribution to the outperformance we saw in the quarter?

Hey, Mark, it’s Scott. In terms of net adds I think the big conclusion for everybody is that our messaging and product capability around presence and online success is continuing to capture our leadership position in just a pure domains on-ramp and we are both finding some amount of new customers that again in the totality of the millions of new customers we get every year is still a small percentage of our customer base, but it’s a contribution. And so again the nice thing is the product is complementary to our core domains business, which kind of makes sense, because presence and names are inextricably linked. In terms of the contribution to the business and the trajectory, it was a whole bunch of drivers of strength and really it wouldn’t be appropriate to highlight any one particular thing. It’s market footprint and attachment around a couple of different products, of which GoCentral is one, but it’s really the totality of the business system.

Great. Thank you.

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

Thanks. Scott, on the ARPU double-digit growth ex-HEG, I think we had to go back into our model to like 2014 to find that type of growth. How sustainable is this? Can you just maybe walk through what you are seeing that’s driving that ARPU strength? And I have a quick follow-up.

Yes. Hey, Brent, boy, remember – and I think we called this out in the release, the 11% doesn’t have the HEG customers in it and when you normalize for the HEG end customers, which is sort of the pure ARPU number, it’s 6%. So, the 6% number on ARPU is really the true apples-to-apples one, which we are happy with, but is really kind of the trend level and trajectory that we have been running at for a long time.

Okay, that’s great. And then just as it relates to some of the packaging and bundling around a broader suite, can you bring us up to speed on that how you think about that rollout this year?

Yes. I think we are continuing to maximize the – what we have called the attachment model, which kind of you see today, if you go on to GoDaddy and look in or experience us, it will be one product leading to another. I think the promise of what we are starting to build-out our solution-based experiences that will bring in name, presence, e-mail together in one solution deployed against a vertical. Those are things that we are – we have engineering and product people working on those experiences, but you are really not going to see things certainly show up in the business results or the P&L in 2018, but we have teams working on those kinds of experiences that again are all focused around solutions not for independent products, but really a totality of a bundle that will get people either up and running online or gosh, if you have had an online presence that’s 10 years old and you need to make it over in a mobile social world, doing so in one clear value proposition. So, punch line is we got teams working on it, you might see elements of it over the next several quarters, but again those won’t be things that are going to totally show up in the P&L this year.

And if I could squeeze one last one and given I am the last one in line. One of the questions we have been getting is just around payments now that Square has taken approach. Are you committed to just continuing the independence and being open, even working with Square despite their change in direction, what they are doing with, with that acquisition?

Yes, absolutely. We have got a growing and mutually beneficial partnership with Square. We will absolutely work with Square. We are partnered with them. We are partnered with Stripe. All around the world, we work with other merchant processors. Back to the value proposition, we think a lot of our customers are early in their lifecycle are 17.5 million customers that we are focused on having applications around online presence. Boy, if you are a payment provider, we are a hell of a platform and ecosystem in which to operate. And so people like Square who are downstream from us we will continue to work with them and over time keep adding value to our service and work with Square and a whole bunch of other people who are in categories like payments that connect to our platform and ecosystem.

Great. Thank you.

[Operator Instructions] Your next question comes from the line of Sameet Sinha with B. Riley. Your line is open.

Yes, thank you very much and I apologize if this question has been asked, but can you speak about Main Street Hub, last time, you had elaborated on kind of a strategy once the acquisition closes, a strategy around productizing some of their offerings. Has that process already started and if you could provide us some insight there? And secondly, wanted to touch on SmartLine, it’s been a few quarters since you launched that and what are your thoughts in terms of that becoming an on-ramp for the company and how is that scaling? Thank you.

Hey, Sameet, thanks. So on Main Street Hub, the promise and the strategy is to wrap their capability around social media listings management, reputation management and combine it with GoDaddy’s capabilities around websites and really deliver this promise and value proposition of a complete online presence, but we are in the very early days of putting teams together and integrating operations. And so we are excited about the promise. We think the Main Street Hub team is terrific. And we are thrilled and excited going forward, but its super early days. So there is nothing really of substance to share with everybody. It’s more focused on, boy, hit the ground running once we close on July 1.

Hey, Sameet, it’s Ray. On SmartLine, the value prop for that product is still there, right. Our customers want something to solve that pain point they have got in their businesses and ventures. Is it where we want it to be? No. The customers that are using it today are using it more and more, but we have still got work to do as far as the customer on-boarding experience as well as the performance of the app to get it to a place where we are really happy with a full launch. It’s still basically a beta launch scenario at this point, but still had a lot of optimism about the product and where it fits into the product suite.

Excellent. Thank you very much.

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

Great. Thanks for taking the questions. So I just want to follow-up on maybe Brent’s question earlier and Scott, your point on selling more solution experiences. Coming out of the Analyst Day, I thought one of the key takeaways was just your ability – increasing ability to target the existing, call it, 17.7 million users with all the products you offer, but one of the questions we often get is sort of what’s giving you the ability to really figure out and target those digital signals of those 17.7 million users, so that you can you go after those specific experiences so you can up-sell? Is it the new tech platform, like what is it that enables better targeting of consumers and up-selling? Thank you.

Yes. Thanks, Ron. Yes, it’s several elements that we use the platform, which is certainly a broad and encompassing word. But first and foremost, it’s both our data infrastructure, piping and then analytic ability, both from sophisticated machine learning models around behavior and connectivity of what customers are experiencing. And again, remember, 17.5 million customers, right, all over the world, that’s a fairly sophisticated data infrastructure. And then you start to get to just the interconnectivity of both our touch points like our website or communication modalities, whether it be e-mail or text or care, which is really our martech stack and our individual product applications and really the connectivity of those via APIs and operating as a system. And so if you think about the data layer, not only from an engineering standpoint, but also the analytics on top of it, we have built real capability there, not just to have data but turning into actually actionable insights. And then products that have APIs connected together with a whole martech stack that works together allows you to actually say, boy, one single purpose of an event that is a recommendation for a customer is what we are capable of doing today and that’s one of the things, like you said it excites me and it excites us to be able to do that.

And would you say that these – can you just give us some timing as to when you are able to, I mean, obviously, you have always had the data infrastructure, but bringing it all together, is this a new capability over the last call it, 18 months, 12 months, 36 months, and now you are able to sort of step foot on the gas? Thank you.

Yes, this is – I think it’s capabilities that have been built particularly over the last, I would say 18 months. And at Investor Day, we shared some of the logic around, gosh, how are we actually then going to talk to existing customers and it’s starting to show up. And marketing spend, it’s still a small percentage of both marketing dollars and spend. But like everything, we are going to test, return, we have return thresholds around activity or spending levels and those are happening real time. And we will continue to go into the roadmaps for 2019 and beyond.

You have heard Andrew say this, Ron, at the Investor Day. This is something that’s very difficult, right. You are taking a move that we have been using for a long time to broadcast at all customers and really trying just to get this down to customers in smaller, smaller groups in the hundreds instead of millions.

And from a quantum of marketing dollars, if you think about that this is still small, right, single-digit percentages of our marketing spend, but like everything we do, we are going to start – we will start small, get a value proposition and build from there and ramp.

Thanks, Ray. Thanks, Scott.

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

Yes, two questions. So, I think on the Main Street Hub, I think you are expecting roughly $10 million a quarter run-rate contribution on the top line. How should we be thinking about the cost side of the equation and its impact on the free cash flow earning guides for 2018? And in terms of the international performance, it seems like as a whole, it’s performing better and I think HEG certainly is – I think is starting to do better. How does the rest of international look like outside of HEG?

I will take the first question, it’s Ray, on Main Street. Yes, $10 million a quarter is what we have baked in for revenue. And as we mentioned when we announced the acquisition, it’s slightly dilutive to cash flow and that’s all built into the guidance that we gave you guys. I don’t think you should be expecting any dramatic synergies, either on the top or the bottom line for Main Street Hub in ‘18. This is going to be something Scott talked about putting together a more wholesome offering for presence with this product set from Main Street over the next year, 1.5 years.

I will add on international outside of HEG. International continues to grow nicely. I mean, I think Ray mentioned it earlier it’s the high-teens. On organic growth rate, we are looking at high-teens annual growth rate percentages and it’s broad-based across geographies.

Thank you, Scott. Thank you, Ray.

Thanks, Naved.

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

Yes, hi, guys. Sorry if I missed it. Just on COGS, it was a little higher than expected. Was that just mix or how should we think about maybe COGS going forward like cost of revenues? And then stock-based comp just any thoughts there, how we should think about stock-based comps for the rest of the year? Thank you.

Hi, Aaron, it’s Ray. I will take that. The gross margin ticked up a bit this quarter. HEG is a big piece of it, where it’s just a historically higher margin business. They contributed a large portion of the incremental revenue lift this quarter. And then beyond that, it’s just a continued shift in product mix away from domains in the core business. And as I have mentioned on previous calls, I would continue you guys – continue to encourage you to model that in the mid-60s range plus or minus just to give us that flexibility around gross margin from a product perspective and whether we build by partner or whether we do different pricing strategies, what we are trying to drive are gross margin dollars. We are not as focused on percentage and we want to drive the most out of the business that we can get there. On stock-based comp, we manage equity issuance based on annual grant value and we have been targeting a relatively modest burn of 2% to 3% of dilution. Over the past few years, obviously, we have been adding to the workforce. You have seen those grant values go up. And you have also seen dilution remain very low relative to the growth in the market capital, so happy with where that is. The expense is just an outcome of the growth of the grants that we have been making.

Got it. Great. Thank you.

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

Alright. Hey, thanks everybody. Thanks for joining us today and we will see and talk to everybody next quarter.

This concludes today’s conference call. Thank you for your participation. You may now disconnect.