GoDaddy Inc. (GDDY) Q2 2018 Earnings Report, Transcript and Summary

Good afternoon. My name is Christine, and I'll be your conference operator today. At this time, I would like to welcome everyone to the GoDaddy Q2 2018 Earnings Call. All lines will 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, you may begin your conference.

Good afternoon, and thank you for joining us for GoDaddy's second quarter 2018 earnings call. With me today are Scott Wagner, Chief Executive Officer; Ray Winborne, Chief Financial Officer; and we're welcoming Sam Kemp, VP of Investor Relations and Strategy. We'll share some prepared remarks, and then we'll open up the call 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 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 acquisition of HEG and our recent 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, August 2, 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, Christie, and thanks to all of you for joining us today to discuss our second quarter results. At quarter end, we've grown to serve 18 million customers, and we're pleased with the consistent execution this quarter while we continue to make progress against our long-term strategy to make GoDaddy the place where ideas start, grow and thrive online. We have a distinctive value proposition, and we're continuing to execute 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. Today, we'll spend time on three particular topics: First, the continuing evolution of presence and how we're extending our products to meet our customers' needs, including our Main Street Hub acquisition and progress in our GoCentral website builder. Second, our go-to-market strategy, namely our progress in conversational marketing and end-to-end customer experience. And finally, Ray will cover our continued financial execution. To my first point, I'd like to start by extending a warm welcome to the Main Street Hub team, which officially joined the GoDaddy family in early July. 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 stand-alone point solutions such as social media and reputation management, bookings engines, SEO services, blogs and e-mail marketing are all increasingly being integrated together into a singular online presence and offering. Main Street Hub accelerates our ability to offer customers a do-it-for-me branding and social media engagement tool which combines dedicated teams of branding experts with proprietary workflow technology to help customers manage activity across all sorts of popular social media platforms. Turning to our GoCentral website builder, we continue to accelerate our pace of innovation and go-to-market strategy. We've recently launched a range of new features designed for customer success, including Square inventory management, robust class scheduling tools, Facebook integrations for sharing products via social media in addition to our customers' websites, as well as dynamic recommendations to help customers drive more traffic and bookings to their site. We've done all this with GoCentral while achieving high customer satisfaction scores and increasing the number of published sites in the hundreds of thousands. And we continue to drive higher free-to-paid conversion and improved cohort retention. We're seeing strong momentum with increasing service and product commerce adoption, increasing mobile end-to-end editing and publishing and customers upgrading to premium packages. I also want to touch on the ongoing evolution of our go-to-market strategy that we began sharing at our Investor Day earlier this year. Over the last several years, as we've expanded around the world, we've proven that our business, and particularly our go-to-market model, translates well globally. In addition to continuing to acquire new customers, we're increasingly focused on leveraging our expanding portfolio of products to reengage existing customers through conversational marketing, that is talking to and reaching our existing customers and the early signs are encouraging. We're discovering that we can deploy additional marketing spend into many micro campaigns at strong incremental returns. One simple example was designed around the upcoming changes to Google's Chrome browser that will indicate those sites without SSL protection. Our campaign was centered around awareness of this change and the increasing importance of attaching an SSL certificate. The return was fantastic, driving a double-digit percentage lift in bookings per targeted customer, and we're in the process of scaling these campaigns. Now this effort is small enough in totality that it's not going to inflect our aggregate P&L this quarter or probably next, but we have sufficient proof points that this can and will become a meaningful component to our marketing mix and to our business model for years to come. We also continue to intensify our focus on customer experience. Whether our customers interact with GoDaddy through our marketing messages, our website, our individual products and dashboards or our customer care reps, those experiences should be delightful and feel incredibly consistent. 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, renewals and, ultimately, in ARPU. And as I wrap my comments today, we continue to execute our strategy, enabling GoDaddy to be the place where ideas can start, grow and thrive online. We've been focused on innovating across our product portfolio, our end-to-end experience and how we engage with customers. And these efforts are showing up in our numbers. We're seeing consistent growth in the business, and we're building a franchise for the years to come. With that, I'll hand it over to Ray.

Thank, Scott. I'll touch on the financial results for the quarter and the outlook for the rest of the year. Revenue was $652 million in the quarter, and while we lapped the acquisition of HEG, we still posted a very strong 17% year-over-year growth. Roughly two points of growth were attributable to purchase accounting impacts in the prior year, and we also benefited from about one point of currency tailwind this quarter. We drove double-digit growth across all product lines and feel great about the trajectory of the business, with Domains continuing to outperform our expectations. International revenue came in at $233 million in Q2, growing 24% year-over-year on a reported basis or 15% excluding the favorable impacts from purchase accounting and currency. Our international business now represents over one-third of total revenue and is approaching $1 billion annual run rate. Bookings for the quarter were $754 million, representing 13% growth, more in line with the underlying revenue growth, as purchase accounting doesn't affect bookings. Moving to our key metrics. Customer growth was solid at 6.5%, bringing our global customer base to 18 million. We added 1.1 million net new customers in the past 12 months, continuing a longer-term trend. ARPU is now $142, an increase of 10% year-over-year, with growth favorably impacted by the effects of purchase accounting. ARPU grew in the mid-single digits on a more normalized basis, in line with our expected trend line going forward. Unlevered free cash flow for the quarter was $155 million, an increase of 15% versus last year. Through the first 6 months of 2018, we've generated $317 million in unlevered free cash flow, a nearly $70 million or 27% year-over-year increase, putting us on pace to deliver full year growth of 25%. Unlevered free cash flow margin was 24% in the quarter, reflecting solid flow-through and top line growth. With respect to the balance sheet, we finished Q2 with $829 million and cash and short-term investments, and net debt at $1.64 billion or about 2.5 times net leverage on a trailing 12-month basis. The highly cash-generative nature of this business creates financial capacity that positions us well to pursue value-creating opportunities, whether through continued internal investment, acquisitions or share repurchases over time. We delivered a really solid first half, driving great top line growth, investing for our customers and future growth and executing to deliver bottom line performance. With that, let me turn to the outlook for Q3 and the rest of the year. For the third quarter, we expect revenue in the range of $670 million to $675 million, reflecting 16% growth at the midpoint. This includes about two points of growth from the addition of the Main Street Hub business that we closed in July. Given the strong Q2 performance and outlook for the remainder of the year, we're raising our full year revenue guidance to a range of $2.645 billion to $2.655 billion, representing 19% growth at the midpoint. This includes $10 million per quarter in the back half of the year from Main Street Hub. Underneath that headline growth, we expect organic growth for the full year 2018 to be north of 13%, which adjusts for the HEG contribution in Q1, the impact of purchase accounting last year and the contribution from Main Street Hub in the second half of this year. We continue to expect 2018 unlevered free cash flow in the range of $615 million to $625 million, which implies 25% year-over-year growth at the midpoint. That reflects absorbing the cash burn associated with Main Street Hub while also creating capacity for investments in the customer experience, expanded business capabilities and an acceleration of branding and conversational marketing spend. As a reminder, our cash flow guidance includes total cash tax-related payments in the $25 million to $30 million range, which is comparable to 2017, and excludes a onetime tax payment of $24 million associated with the gain on the PlusServer sale last year, of which $21 million was paid this quarter. Stepping back, we feel great about the consistency of our results, which reflect the power of our strategy and execution and, importantly, our opportunity to drive sustainable, double-digit topline growth and 18% to 20% growth in unlevered free cash flow. With that, I'll turn the call back over to Scott.

Thanks, Ray. We're excited to have Main Street Hub on Board and look forward to continuing to deliver against our strategy, growing the business this year and long-term all around the world. Thanks, everyone, for your time, and we're ready to open the call to your questions. Operator?

Thank you. [Operator Instructions] Your first question comes from the line of Sterling Auty from JPMorgan.

This is actually Ugam Kamat on for Sterling. Regarding the revenue beat in the quarter, most of the upside seems to be driven by the Domains line of the revenue. How much of the Domains strength actually came from aftermarket sale? And what percentage of your current Domains business does your aftermarket represent?

Hi, Ugam. It's Ray. Obviously, the aftermarket strength has continued into the quarter. We highlighted our change in merchandising that we put in place in the first quarter. So we've been very happy with that growth. But there's also upside in there from good renewal performance. We continue to see upticks on a basis points basis there. And our unit growth in international is also contributing to that growth. So it's a mix of factors across the board. And as far as the size of aftermarket in context of total, it's still high single digits as a percentage of total revenue. So it has grown nicely, but it's still relatively small in the grand scheme.

All right. And as a follow-up, you're increasing your guidance revenue for the full year, but you are keeping your guidance on free cash flow that. Is it because you are expecting a higher contribution from Domains, which is a lower-margin business that's come back to hosting and business applications?

Less about the contribution from the top line, more about reinvesting back into the business. It's easier to invest, obviously, when you got wind at your back, and that's what we're doing now. We're accelerating some investments. You heard Scott mention it earlier his call comments around conversational marketing. We're also putting money into product expansion, platform enablement as well as some back-office capabilities for future growth.

Yes. Ugam, it's Scott. I'll just reiterate that comment of, yes, if you look at the unlevered free cash flow growth for the year, it's mid-20%s, right, which is a nice healthy flow-through from topline growth to bottom line. And what we're seeing on both our product portfolio, the customer experience, efforts like conversational marketing is proof points that there are things that are totally working here. And we want to create the capacity to be able to feed them for the next several quarters.

Perfect. Thank you, guys.

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

Thanks. So just first, we noticed deferred revenue was down about 300 basis points relative to the ratio last year. And so could you just talk about like what dynamics hit deferred revenue in the quarter? Also, I don't think I heard any impact to currency, if you could share that. And then, I guess, the last - did you spend less on marketing in this quarter than you expected? And then last one, if you do not announce a large acquisition in the second half, should we assume you'll repurchase stock then?

Hey, Jason. It's Ray. I'll take the first couple and let Scott touch on the marketing. With respect to the deferred balance, I think the noise you're probably seeing is in the prior year with purchase accounting, in the way the acquisition of HEG impacted that balance. Be glad to take it up in detail with you offline. Currency impact, I highlighted in my comments. It was about a point of tailwind on revenue and a similar impact on bookings. So we're seeing a little bit of tailwind now, but that has actually turned in the third quarter. It's looking more neutral year-over-year.

And to your marketing point, Jason, yes, on the face of the P&L, our marketing growth, obviously, was less than revenue growth. But per my comments on opportunities that we're seeing, we not only counsel everybody but, frankly, look towards having marketing spend grow at the rate of revenue growth or hopefully, as we flow into next year, even faster where we're able to put marketing dollars onto the field that drives great long-term returns. So yes, on the quarter, it was a point of P&L deleveraging, but that wouldn't be the way to think about it going forward.

Yes, and finish up with your last question around share repurchases, we're constantly looking at capital allocation. Back to the guidance we've given you guys pretty consistently, number one is organic growth. We're going to continue to invest in the business to drive that. Two is M&A, and that can take different flavors, whether it's a product tuck-in, geographic expansion or consolidation. And third priority at this point is share repurchases. We want to save the powder for those first two growth opportunities first. So nothing definitive to put to you whether we would pursue a buyback, but it is definitely on the list of capital allocation.

Thanks.

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

Hey guys. Thanks for taking my questions. I just wanted to ask a few about GoCentral. First off, in terms of the improvement that you're seeing in conversion and retention, maybe just some more details on what you think is continuing to drive the improvement there.

I think it's a combination, Matt, just of additional features that are continuing to add richness to the experience, but still creating a really simple overall toolset that people can use and get through. And how that shows up in the numbers as your published rates are terrific, and they continue to go up. At the end of the day, when our customers, whether it's GoCentral or even our other products, when they activate the products, whether it's being published or used, for the most part they get a tremendous amount of value from those products. And that's really the juice that drives not only renewal rates but then the flywheel of additional units being added over time.

Got it. And then just a follow-up on GoCentral, in terms of the uptake of e-commerce functionality that you're seeing. Just perhaps what's driving that? Is it improvements in the product? Or are you starting to perhaps attract a different type of customer that has more of a need for that e-commerce functionality? Thanks.

Yes, thanks. And e-commerce, we'll divide it into two things. One is service commerce, and the other is product commerce where you're really fulfilling inventory. And a lot of our immediate gains, and where we think we're adding a ton of richness just almost week over week is in the service commerce realm, where, again, if you're a photographer, a personal trainer, you not only are able to book appointments on an individual basis, but increasing richness in class scheduling functionality, both outwards to members and even internally within a business. And you're going to see us connect that deeper and deeper into invoicing and payments. And even within product commerce, there continues to be richness within that product set that is allowing us to add more customers who are actually selling physical product than we've ever had. In the totality of our 18 million customer base, that's still a small number, but we're seeing really nice growth in both components of what you call an e-commerce.

Great. That's it for me guys. Appreciated.

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

Yes. Thanks a lot. Just a couple. It looks like the conversion rate on GoCentral continues to improve. I think the last time you shared a metric around that, you said it was mid to high single digits. Any updates on the conversion rate? And then just a quick follow-up on the growth in the second quarter. Was there any impact from the World Cup, if at all?

I'll take those two. On the conversion rate, the conversion rates are still sitting in that zone, which I think, as you know, is really healthy. Right now, I encourage everybody who's listening to just continue to try the product on a regular basis, and you're going to see increased richness and capability not just now, but in the months to come. Right now, the biggest thing about GoCentral is just general market awareness about the capabilities of the product, and that's what we're going to go work on. In terms of the World Cup, no. No impact.

Okay, thanks. And then maybe a quick clarification, if I can sneak that one in. So the FX has obviously moved versus the last time you guided. How does it affect the full-year outlook for free cash flow and revenue?

FX is factored in to both our forward guide on revenue and unlevered free cash flow. I can tell you, at least historically, through the first piece here, the third quarter, it's pretty flat year-over-year.

Right. But for the back half versus the last time you guided, there is probably a little bit of adverse impact, right?

Tiniest amount. Yes.

Got it. Thank you.

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

Great. Thanks for taking the question. I wanted to stick with GoCentral here, but maybe a different question on like the product. So I think you're at scale. You talked about hundreds of thousands of websites, 1,600 verticals, I believe. But can you talk a little bit about the - so we can understand the effectiveness of GoCentral as one of the core on-ramps to the platform and maybe that's a big part of what we're seeing in Domains reaccelerating? And then, of all these features, Scott, you talked about with e-commerce, social scheduling, et cetera, are users adopting these features at sign up? Or after the site is up and running, they get more comfortable and then they highlight - then they sort of adopt these features based on your sort of customer marketing? Thank you.

Yes. Thanks, Ron. So first, the nature of that question was around GoCentral on its own pulling in new customers to the franchise and what's the interplay with Domains. And I think what we're finding is these - those are complementary. So GoCentral is pulling in new customers who had never had a domain name and they're starting and building a site and then they're attaching a domain name on the back end of it. Equally, we continue to have people coming in and getting a name and then attaching GoCentral. And I think the combination of those two things, it's nice just that they're not really trading off from one another. And obviously, we're pretty happy with the net customer adds this quarter. Although, as we've said for a long time, we don't really manage that number on a quarter-over-quarter basis. It's an output, but it's an output of what we think is doing the right thing, which is, and this hits your second point, adding richness and functionality, creating a good experience, a great experience. And if we can get customers to the publish event and then having them interacting with us, generally not only are they staying but they're thrilled, and we're doing and helping them have their ideas be successful in the world.

And as awareness of all these products that you're launching is so many, has that happened? How do you gain awareness and all? And that's it for me. Thank you.

Well, now we're getting back to the marketing and how we're getting that message out into the world, Ron. And I think to Jason's question on marketing and how to think about that going forward, we're going to be continuing to, not only through dollars but also our messaging, add different ways that we're communicating and interacting with customers that isn't maybe necessarily about big mass media but hitting a whole bunch of different touch points, whether it's social media or whether it's different influencers, obviously, down to sort of low-funnel tactics. And those are going to be ramping up in the quarters to come because, as you point out, I think right now, there is a heck of a lot more capability in the GoDaddy experience overall than perhaps people might even be aware of. And well, that's a marketing challenge, and the nice thing is I think we can do that pretty well.

Thank you.

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

Hi Scott. The international business, 24% growth, looked great. I'm just curious if you could just break apart what you're seeing there and how you think about the bigger drivers as we look in the back half of the year in the international market.

Hey, Brent, it's Ray. And I'll let Scott come over the top on this. 24%, obviously very happy with that. I mentioned in my call comments, the purchase accounting had a little bit of an impact on that growth as well as some currency. The 15%, though, we are incredibly pleased with. It's very strong. That's across all of the regions, so we're seeing very good growth in each of the regions and continue to see a lot of opportunity there to continue to grow. It will - just another one of Scott's points in his comments about marketing spend, we'll continue to put branding spend against new markets as we move through the rest of this year and into 2019 to continue that customer growth.

The only over-the-top that I would add is I think international is continuing to just move along and advance, really, at the same what I'd say is pace and progress for all the time that we've been a public company. And some quarters show up a little better than others, but I think what you're really seeing is a steady and consistent growth as we both build awareness and our customer base and our services in markets around the world.

Thank you.

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

Yes, I had a couple on GoCentral. I guess, first, if you look at these customers, how did the interplay there between those customers and the customer care organization look versus your more traditional customers? Anything kind of interesting, either performing better or differently than the traditional customer? And then as you see improving unit economics there with better activation and retention and upgrades, like what are you guys doing and how should we think of going forward, just scaling marketing spend behind that? Is that a big source of incremental marketing dollars, given the success you're seeing there?

Yes. Hey Lloyd. To your first question, don't think about this as a different - something totally different related care or even the business system. And so to the specifics of that question, our care team interacts with our 18 million customers, and they're helping them with some things at some point in some time and helping them develop their ideas. And GoCentral is more capability that we're adding to the interaction that we have with our customers. So there's sort of nothing different there. I will say that one of the things we're working on with Care is doing new things and adding new capabilities of this still, frankly, unique asset and experience we have, which is real people being able to help not only with GoDaddy's products but others in the world. And so what we're doing on the Care side is adding, I think, richness into the support experience, again, not necessarily around GoCentral, but really unique ways that we can interact and help our customers, like migrating and completely making over an online presence that maybe was built five to eight years ago or making and scheduling consultation appointments for certain kinds of customers. Again, it's, how can we do some things that are different? So anyway, thanks for the question there.

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

Hey guys. Thanks for taking the questions. Two questions. So first off, Ray, we've seen our aftermarket Domains sales contribute to upside for a couple of quarters now. Does this create volatility in your ability to forecast the business? What is kind of factored into the back half guidance currently? And then second question, we've lapped HEG, so can you give some color on the bookings growth at the core GoDaddy business? And if you don't want to be specific, is it fair to say that the core is growing at a faster-than-reported growth, given that HEG is a relatively slow grower? And then kind of along similar lines, was there any contribution to bookings from Main Street Hub in the second half? Or is it - I mean, sorry, in the second quarter?

Yes, let me start with your first one on the aftermarket. Obviously, we continue to see Street highlighted that in the second quarter, and it's bent off of unit growth. And I mentioned the merchandising change we made early this year. And while I'll tell you more of a transactional business than new registrations, we are seeing pretty consistent flow there. And so you've seen that reflected in our full-year guide. So we believe Domains will grow double digits for the rest of 2018. So that is sustainable in there. Your second question was around core GoDaddy bookings. The 13% bookings growth this quarter is pretty consistent with what we've been printing. So nothing to point out there between core and HEG. And lastly on Main Street, we closed in early July so nothing reflected in the second quarter. That's all in the back half of the year.

Great. Very helpful. Thanks Ray.

Certainly.

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

Thanks a lot. I think most of mine have been covered, but maybe on customer care. You guys have seen some nice leverage there, especially this quarter. I don't know if some of the accounting has played into that, or if not maybe talk just a little bit about what's been driving that. Are you benefiting from maybe some capacity that you've added to the business recently and you're benefiting from that, or maybe it's more to do with the recent change in revenue mix? I know you mentioned aftermarket or the mix of greater portion of your revenue coming from recurring customers that aren't as taxing on the system. Just trying to get a sense of what's driven that, and kind of how you're thinking about that going forward.

Hey, Mark, it's Ray. There is some seasonality in the expense flow in Care. But I would tell you probably one of the single largest factors in the leverage we're getting out of that line item is some movement in capacity outside the U.S. We've mentioned that we've opened call centers in Latin America as we've scaled there now. That's a lower-cost location for those calls that we were serving out of the U.S., same with some calls we're moving into Europe that were being serviced out of the U.S. So we're seeing some rate benefit there. But again, I think you should expect that line to move around on a quarter-to-quarter basis as we put investment in on [clips].

Two - hey Mark, if I could just add two things that are important here. When Ray talks about moving capacity around the world, it's actually to serve customers in those markets. So Latin America, for example, as we've opened up centers there, its serving customers close in, in a manner which reflects their local context. And so that's what we're trying to do. And so we're actually seeing better service, better customer interaction, which is the goal. And some of - any rate differences is sort of a - is a benefit. And I think you hit on something else, which I think reflects more of the spirit of what we're doing, which is as your product experience gets better and as we add richness to the product portfolio, the level of services that we have, several carry a little bit more monetization than products that we've particularly had in the past. And when you do that over time and those kinds of products renew, you'd naturally get a little bit of leverage into something like Care.

And I was going to ask a follow-up on trying to get a sense of product up-sell opportunity. And is it possible to identify maybe one of the products where you think you have a particular opportunity for up-sell in trying to scope how you think about the opportunity, like the percent of existing customers that don't have [x], but should, that don't have SSL certs, but you've identified they should? Is there any way of kind of picking one or two of your big opportunities there and trying to frame the opportunity from that perspective?

Let's see. Appreciate the nature of that question, Mark. We've always - we've described the penetration of presence, for example, as being out of our customer base. A little over one-third of customers have an active point of presence, whether it's something they built on GoCentral or a WordPress site hosted with us. And its highest macro level, you could even go into that audience plus many of the other names that are held. And gosh, look at any site that was built five years ago, and I would say we could add a hell of a lot of value to all of those points of presence and all of those customers. Now that's a super big white space number, but I think, at its highest level, it's indicative of the potential that exists within our base. And then the example that I gave you in the scripted comments is a very specific one. And what I and we are particularly excited about is being able to get to that level of specificity because the only way you can actually reach out and engage with your base is being incredibly precise around your audience and having a specific idea for how to interact with them. And the SSL idea related to the Chrome changes is one indication of many, many different ways that we think there's something of value that we can - that we have and can do with our customers. So it's just a matter of reaching them in the right moment.

Great, thanks.

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

Hey, good evening, guys and thank you for taking the question. I was wondering if I could just hit on HEG real quick, like just looking back at the acquisition, it was a great result, and you've almost - I think you more than cut leverage in half following that. So the benefits are clear, I think, in terms of cash flow and margins. What's left there? And how do you - what are you working on in terms of HEG in - with regard to synergies, cross-sell, up-sell and then penetration of the European market?

Hey, Brian. It's Ray. I think we've gotten a lot of the work behind us at this point. Still opportunities on cross-sell and getting the product in, still opportunities to get the Care to a level that GoDaddy's at on the sell side of that. I think we've mentioned this before, the Care organization there from a service perspective was top-notch, great NPS scores. But we want to get that selling motion put into that program. So that's still something on the list that we've got to tick off. And as far as expanding out beyond that footprint, that's still a big opportunity for us. We've launched GoCentral in Germany today, and we're looking at markets outside of that to start putting branding money up against.

Got it. That's helpful. And maybe just a follow-up, what does the pipeline look like? And would you entertain levering up like that again? Or do you anticipate, given the fragmentation of the market, you're going to take off more kind of bite-sized acquisitions as we go forward?

Yes, I think if you look at the balance sheet capacity we've got, we're at roughly 2.5 times today. We continue to believe this business easily supports a two times to four times leverage. And I think if you're going to do the work, our opinion is go bigger, but you'll see us do both. You just saw the Main Street Hub we closed this quarter. I mean, it was more of a product tuck-in, but we'll be looking at consolidation as well as geographic expansion.

All right, very helpful. Thank you.

Yes. Thanks for the question, Brian. I had just one comment on it. I think HEG, a year in, yes, you'd say we've hit every mark that we wanted to hit from a financial return and even the first level of bringing the businesses together. But we're - our aspirations are higher, and we're still building the real capability to have a single global product portfolio and have all customers on a single platform. And we're in the middle of really ticking and tying that work. And the nice thing is we can now ramp up our presence in many of the local markets in Europe. We can lean into growth while we continue to build those capabilities. It'll still be another six months to 12 months. And like you said on the pipeline, those capabilities, when we really got them down, open up a whole another range of things that we can do around the world that's not even this year or the next or even the following, but could stretch for five or 10 years.

Good start, thank you.

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

Thanks. I just wanted to follow-up on Brent's question on the international side. You mentioned there is strength across regions. But as you look forward, is there any region, whether it's Europe, Asia, LatAm, where you see a particularly attractive opportunity for investment, whether that's organic or inorganic, where you just see a better return on incremental investment for that next leg of growth? And then on Business Applications, you saw that relatively flat sequentially. Is there anything you'd call out there? And would you expect that to return to sequential growth in 3Q? Thanks.

Hey, Mark. It's Scott. Let me do the first one. So the nice thing is that we really are seeing global growth. I'd call out two things. Europe, back to the HEG comments, when we look across the landscape in Europe and what it means to have an online presence. Gosh, I just - we see opportunity at every turn. And the art in Europe, obviously, because of the relative slower growth of markets and the difficulty of switching, it's all about having an activation point to go capture incremental growth. But the opportunity is there. And so you're going to see us, again, building in a prudent way but continuing to increase our go-to-market in Europe just because we think the value proposition we have there is fantastic. It's going to get better and better. The customer unit economics are wonderful, like just all of the fundamentals are really strong. And the only thing that we have to balance in Europe is just a relative rate of incremental growth and just having prudent levels of growth, given that. Asia is a totally different story where, just in several of the countries, we're just seeing nice, nice growth. And we're so early in our own market development presence there that the focus is really establishing GoDaddy as both a brand and a business. And a lot of the Southeast Asian countries - and when Ray talks about adding countries and adding spend, those are particularly focused on heaving up more and more and expanding in Southeast Asia.

Hey, Mark, it's Ray. On your biz ops question, we continue to see great growth in there in the high 20s year-over-year, strong up-sell on 365 adding seats. So that business is growing very well. The specific question around sequential really relates more to the first quarter than second quarter performance. If you remember, I highlighted World Hosting Days, which is a seasonal event that we'd picked up with HEG, kind of threw off the sequential growth, but it's very solid.

Okay, thank you.

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

Great, thanks for sneaking me in. Let me see. Let me try three quick questions. At Slide 9 about the free cash flow margins, that nice kind of up and to the right margin trend, any new thoughts on what the long-term - your long-term free cash flow margins are? Secondly, you didn't talk too much about Amazon and the AWS. I know I asked about it last quarter. I'll just ask about it this quarter. And I know it's very early stage, but any new learnings, new thoughts on that? And then finally, I know somebody asked you about this before, Ray, but so I get the answer right again, you're raising your revenue guidance, but you're keeping your free cash flow guidance the same because you've got some new investment initiatives probably in product development spend and sales and marketing spend that you want to accelerate in the back half of this year. Am I capturing that right, why the revenue is going up, but why the free cash flow is not? Thanks.

Yes, Mark. Let me take a - just a couple of those and I'll let Scott touch on AWS. So with the margins, absolutely no change with our expectations there, we'll do 25% growth this year, and our longer-term projections are the 18% to 20%, so no changes in that - or the next couple of years. And then we think that can grow to the high 20s to 30% over time. As far as the free cash flow guide, you got it dead on. We're seeing upside on the topline. It's a great time to be able to invest back in the business, when you got a wind at your back. And it's several areas of investment we're trying to focus on. A lot of it is based off of Scott's comments of building for the long-term, not necessarily the next two to three quarters, but over the long-term, how do we get the business system put in place in order to take advantage of all the opportunities we see in front of us?

And thanks for the AWS and Amazon question, Mark. We're absolutely starting the process of using AWS as a cloud provider, and there's a handful of product efforts that we're working with the AWS team on to incorporate some of the GoDaddy products and experiences into Amazon. Just because it's early days - I think I'd fired some of those back off at Investor Day, and we're working on the handful of, what you'd call, almost the easier ones, and we're super happy with the early relationship with Amazon and the work, whether it's using the AWS infrastructure or the level of engagement around how we can work together at a deeper level. But it's too early to talk about any one specific thing, particularly in the context of an earnings call, but we feel really good about what we're working on and the level of engagement.

Sounds good. Hey Scott, I'll keep asking every quarter, no problem.

Thanks Mark.

Your next question comes from the line of Jonathan Kees from Summit Insights. Your line is open.

Great, thanks for taking my questions. I wanted to ask about Domains. That's been a surprise last few quarters. It's been double-digits, and you're saying that, that should continue going into - in this year. Long-term, I mean, you set a - kind of a target of where it would start mirroring market growth, about one times market growth. Is that being pushed out now? I mean, is that more a longer-term target now in terms of Domain growth? And then, second, I just want to ask about - especially with HEG, if - what the GDPR or cost impact was from that. Thanks.

Hey, Jonathan. It's Ray. On Domains growth, it has been a nice surprise to us on the upside across the Board. Again, we're getting unit growth from expansion internationally. We're getting good renewal performance. Some of the growth you saw this quarter was the purchase accounting impact year-over-year. So that 16% is a little bigger than what you would expect, but we do see that continuing the rest of the year. What we have continued to counsel folks on, it's good for us, right? We've built that business in that category, but over the long-term, that growth rate should come back closer to one times our customer growth, which we continue to believe is going to be in that mid-single-digit range, this quarter 6.5%. And as far as GDPR cost, yes, we did invest, obviously, into systems to be prepared for that change. It's still early days as far as the regulation and what the long-term impacts for us, but it doesn't affect us like a lot of other the - other Internet companies you've been seeing because we don't monetize our customers' data. So we haven't, at least at this point in time, seen any perceptible impacts on customer impact - or customer growth, traffic or revenue.

Great, thanks. That helps.

There are no further questions at this time. Scott and Ray, I'll turn the call back over to you.

Thanks. Go ahead, Ray.

Yes, Scott, I apologize. I didn't want to jump in front of you there. But one item before we close out, guys, is that our Q2 release today inadvertently repeated our unlevered free cash flow outlook language from the first quarter, so my apologies. Our intent will be to issue a corrective release and 8-K/A on that. Sorry. Go ahead, Scott.

Yes. No, thanks. And everybody, thanks for the questions. Thanks again for the time on the call, and we'll talk to everybody next quarter. Thanks.

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