GoDaddy Inc. (GDDY) Q4 2019 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to the GoDaddy Q4 earnings conference call. [Operator Instructions]. I would now like to hand the conference over to your speaker today, Mark Grant, Vice President of Investor Relations. Thank you. Please go ahead.

Good afternoon, and thank you for joining us for Godaddy's Fourth Quarter and Full Year 2019 Earnings Call. With me today are Aman Bhutani, Chief Executive Officer; and Ray Winborne, Chief Financial Officer. Aman and Ray will 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 normalized EBITDA, 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 acquisitions and achieve desired synergies, and including our recent acquisition of Over and the expected acquisition of Uniregistry's domain registrar and marketplace businesses. 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 13, 2020, and we undertake no obligation to update these statements as a result of new information or future events. With that, here's Aman.

Thanks, Mark, and thank you, everyone, for joining our fourth quarter earnings call. 2019 closed out with strong operational execution and consistent financial performance, as we near $3 billion in revenue while growing unlevered free cash flow 19% year-over-year. Equally important, we are entering 2020 with confidence after having moved quickly against a set of objectives to realign how we operate as a company, including changes to our priorities, leadership and teams, all in passionate support of our mission to enable entrepreneurs with technology, humanity and purpose. We made these rapid changes to accelerate execution, all while delivering on our financial commitments across the board. With five months into my tenure, I wanted to share a few thoughts on our core priorities of enabling a strong platform, creating an intuitive customer experience and continued brand expansion, including our recent launch of our new logo. First, our core platform goals remain unchanged: increasing our velocity of innovation, delighting our customers with robust and flexible products globally and seamlessly acquiring and integrating brands onto our platform. Many investors have asked me two critical questions. How much is it going to cost? And when will we see results? Based on my experience of enabling platforms and the state of our platform in context of the resources in place today, I can say with confidence that we will achieve our platform goals with minimal incremental investment. In terms of results, we expect to deliver new capabilities every quarter. And I am happy to share that we recently launched the capability to simultaneously launch products across all GoDaddy brands globally, including our EMEA brands. It is live with a couple of brands today, and we plan to roll it out to all major brands over the next few months. Turning to our second priority. We are staying focused on building seamlessly intuitive customer experiences. When we look at the entrepreneurial journey, there is a clear pattern of interconnected tasks that create friction for our customers, which leads to frustration and discouragement. We've been investing heavily behind a number of solutions for each of our customer audiences, namely in Websites + Marketing, WordPress and our naming capabilities. First, Websites + Marketing caters to our independent, do-it-yourself customers, where we've delivered increased simplicity in commerce and content creation. In commerce, we recently simplified our customers' ability to transact with their customers through new integrations, including Google Shopping and the Facebook developer platform where we're now powering service commerce bookings on both Instagram and Facebook. Each of those platforms is important to our customers and their engagement with their customers, and we've totally streamlined the management of these channels. In content creation, we recently acquired Over, a company with a suite of user-friendly design tools to quickly create beautiful and professional digital content for every marketing channel. We will quickly integrate Over's capabilities into Websites + Marketing to help our customers seamlessly enrich their social, e-mail and website presence. And as an independent app, Over's 1 million monthly active users look remarkably like our everyday entrepreneurs with the average subscriber creating 23 pieces of content a month. With near-perfect ratings on the App stores and an NPS north of 80, it is a truly compelling experience. I highly encourage you to download the Over app and give a try. Secondly, for our partners who create websites on behalf of others, we have been making significant investments in the open-source WordPress ecosystem. As you all know, WordPress is the world's largest CMS with a massive community of users. Our team has been rapidly innovating the WordPress editor to simplify the website building experience, and we recently launched our Go template. The Go template has become one of the most downloaded templates in the WordPress community, and it's based on our acquired technology from CoBlocks. This improved experience is being adopted by the entire WordPress community, not just our customers, and is cementing GoDaddy as the global champion of WordPress. And lastly, for our large customers, we just announced the acquisition of several business components from Uniregistry. We've acquired a set of world-class tools, experiences and technology to help our customers and domain investors buy and manage domains, a broker network to add capability to our aftermarket business of corporate registrar as well as a portfolio of high-quality names that will help us improve liquidity in the secondary market. Stepping back, Websites + Marketing, Managed WordPress and our aftermarket are thriving on account of the seamlessly intuitive experiences we are enabling. We are seeing validation that building a website with GoDaddy is an exceptional experience, whether that be in third-party reviews, successful published rates, the billions of GME we're enabling or strength of our renewal cohorts. And most compelling, Websites + Marketing is taking market share within the captive website building industry, while Managed WordPress subscription sales have been hitting new record levels since our latest launch at the end of October. All are signs of a healthy franchise. Moving on to brand. This time last year, we launched a bold evolution in our brand strategy, deploying investment into influencer-driven creative content and a slate of icons that embody the GoDaddy spirit. This has been a highly successful strategy, producing strong levels of brand sentiment, social buzz and impressions, all of which are well ahead of our competition. We celebrated this evolution last month as we launched our new logo, the Go. The Go captures our unique ability to enable, connect and champion, millions of people around the world who are making their own way as entrepreneurs, truly making opportunity accessible to all. The logo launch was incredibly successful, and we couldn't be prouder of our teams and the results. In closing, I want to say a quick word about my confidence in our ability to deliver. As Ray will touch on, we nailed 2019, right in line with the targets we set at the beginning of the year. Beneath the headline results, we underwent substantial change as we realigned our teams behind our core customer populations, furthering our identity as a customer-led software company. In the midst of change, companies often take their foot off the gas but not at GoDaddy. I'm particularly proud that this team stood up, fiercely embraced change and refused to do anything short delivery what we committed to. That's unique, and that's what creates the durable business that is GoDaddy. We're looking forward to sharing more about the changes we're making and our future at our April 2 Investor Day. With that, here's Ray.

Hey, thanks, Aman. I'll touch on our fourth quarter financial results and our outlook for 2020. As Aman highlighted, 2019 was another solid performance as our teams delivered terrific outcomes across the business. From a financial perspective, full year results landed right on top of our initial guidance, with revenue up 12% year-over-year and unlevered free cash flow, up 19%, delivering over 1 point of margin expansion. We also returned significant capital to shareholders and strengthened our balance sheet, leaving us well positioned to drive growth in 2020. Turning to the fourth quarter results. Bookings grew to $834 million, rising 14% year-over-year on a reported and constant currency basis as currency headwinds subsided. Growth was broad-based with strength across product categories and included a reacceleration of growth in international bookings. Revenue came in at $780 million, growing 12% year-over-year or about 13% on a constant currency basis. We're seeing good growth across each of the revenue categories, with particular strength in Websites + Marketing subscriptions and continued momentum in aftermarket sales. The key metrics underlying growth have remained consistently strong. ARPU rose to $158, up 7% year-over-year, while we added 757,000 customers in 2019, in line with what we've shared previously. Unlevered free cash flow for the quarter was $178 million, growing 40% year-over-year, reflecting good operating leverage in the P&L and an easy compare, created by the timing of CapEx spend in Q3 and Q4 last year. On the balance sheet, we finished the year with $1.1 billion in cash and short-term investments, and net debt landed at $1.3 billion, putting net leverage near the low end of our targeted range of 2 to 4x on a trailing 12-month basis. Moving on to our outlook for 2020. We expect to deliver revenue of approximately $3.3 billion, representing growth of 11% versus 2019. We're starting the year on pace and expect to deliver revenue of $795 million for the first quarter of 2020. We will continue to drive margin expansion in 2020. We expect $835 million in unlevered free cash flow, which includes a highly anomalous extra pay period that won't occur again for over a decade. Absent this payment, unlevered free cash flow growth would be 16% year-over-year. The extra pay period doesn't impact the P&L, and therefore, you should expect mid-teens growth in normalized EBITDA as we deliver operating leverage. Stepping back, we're well positioned to deliver another year of exceptional outcomes in 2020 by leveraging our competitive advantages, investments we're making to increase customer value and continued optimization of our platform. And as you can see in our financial guide, we're doing that in a disciplined fashion, delivering both top line growth and margin expansion. We look forward to sharing more details on our growth plans as well as a financial framework with you at our Investor Day on April 2. Thanks, everyone, for joining today. And with that, operator, let's open up the call for questions.

[Operator Instructions]. The first question comes from Deepak Mathivanan of Barclays.

This is Mario Lu on for Deepak. Can you elaborate on the free cash flow guide? How should we think about the nature of investment that's reflected in your guidance? Are those ongoing or onetime in nature?

Sure. I'll start and see if Aman wants to [indiscernible] over the top. But the guide we put out there at 16% ex special item on the pay period, it reflects all the investment we're putting into the platform that Aman spoke about on the call as well as in the marketing, care, and we'll get leverage on our G&A line item. So it reflects everything that we've got line of sight into. And if you look at our history, we will tell you what we're going to do, and then we're going to go do it.

Now I'll just say that we've not -- I've now had more time to look at our investments for the year. And as we said, we're covering everything we know in it. So you should take it just as it is.

Your next question comes from Matt Pfau of William Blair.

Aman, I wanted to ask on some of the reallocated resource and maybe a little bit of incremental investment. Is that primarily going to the areas you mentioned in terms of Websites + Marketing, WordPress and some of the other naming, branding type tools? Or are there other areas as well? And then any areas that previously where we're invested in that you're pulling some of those resources from that plan to be less of a focus going forward?

Yes. Thanks for the question, Matt. Just to clarify, the incremental investments we're making are small so I would really look at the reallocation, which was the second part of your question. And yes, our investments are focused in the core products. We also are moving a bit of more investment into our core platform, which is going to allow our products to move faster. And that's one of the key reallocations. When a product suite is more separate, you may have to make certain duplicate investments for certain capabilities, then we're pulling some of those back down at the company level to just create the best customer experience that we can.

Your next question comes from Sterling Auty of JPMorgan.

This is Jackson Ader on for Sterling tonight. Can you just give us a little bit of insight into the expectations for customer additions that are baked into this 2020 guidance on the top line?

Hey, sure. It's Ray. You guys know, we haven't historically guided to customer count. We only called out the impact of the merchandising tactics last year because it was an anomaly. We've mentioned this numerous times, we don't run the business on customer count, and so we're not going to guide to a number. That said, if you look at our go-to-market motion, it's working, as evidenced by the top line growth that we delivered as well as the guide we've got in front of us.

And hey, Jackson, it's Andrew Low Ah Kee here. I'd just add, our 2019 customer cohort was the highest value we've ever acquired. The growth and the progress you're seeing in Websites + Marketing and WordPress is showing up in that value, and in Aman's comment during the call earlier that we're taking market share.

Okay. That's helpful. Then a quick follow-up, if we can just stick with the Websites + Marketing, the subscribers that you're adding, what does the attach rate look like, if you can give us any kind of quantitative detail there? And if not, maybe how has it -- how does it compare to maybe some attach rates of other products in the past?

Yes. We don't talk about the specifics of the attach rate. But I would tell you that, broadly, it has met and exceeded our expectations, and it's higher than what we've seen in the past and with other products. And the best example of that is if you look at Websites + Marketing, a product that we sort of built from the ground up and really gone into market over the last 2.5 years or so, has gotten rapid adoption, right? We see the growth in the product, which is significantly a function of how well we are able to attach to people coming into the site or coming into care for us.

Your next question comes from Nick Jones of Citi.

You mentioned there's some interconnected tasks that lead to friction for your customers. Can you maybe elaborate on that and a little bit? And how does that inform on kind of the product development pipeline?

Yes. Let me share with you a journey that we see very often. Everyday entrepreneur has an idea they want to take online, and they start with a name and they come in and -- come in to our site and looking for a domain name, and that's fantastic. They can find the name. If the name is available, we can give it -- we can sell it to them. If it's not available, we actually have broker services that can help them. But the minute you get past that name, somebody may be thinking about, "Oh, I want to create a little image logo. I want to be able to just send this out to my friends and say, 'here's what my idea looks like.'" And immediately, you have the need to create online content, right? And if that experience is not intuitive in terms of, if at that moment, you can't offer that service, then there's a break and friction in the process for the entrepreneur to continue. And we basically have mapped out this journey, sort of in a pretty detailed level. And now we're looking at gaps in that journey and saying, "You know what, here is the moment where somebody has to create a digital asset as an example. Well, let's look in the marketplace, who's got amazing products that do that." And that leads us to something like Over where we see a great group of people building an amazing product and a need that our customer has. And then when we plug that in, we say, "Okay, now let's look at the next one and so on." Does that help?

That does. So if we look at kind of some of the products that come out, there's things in e-commerce, things in driving traffic, some things in design. Is there one category that's kind of most exciting? It sounds like maybe the design part and the content generation.

I think content creation is a big category. Commerce is a big category. Category we're putting more energy into is messaging. So our customers engaging their customers is a really big category. And it's really complicated for our customers that tend to be micro businesses to handle just all the channels that they have to handle because customers are coming in and talking to businesses in new ways. And our -- the entrepreneur needs to be able to answer those requests. So bringing those channels together, making it simple, is another good category for us.

Your next question is from Brent Thill of Jefferies.

Aman, if you could just double click into the platform goal with minimal new investments, many are watching that line and believe there's a lot of interesting things you could do there and manage -- managing the other part of the stack. Can you just walk through directionally at the high level, how do you think you can manage that without having to put more capital into the business? .

Yes. So as I discussed last time, this was an area of investigation for me to understand deeply. Just given my background, I wanted to really understand it. And a couple of things pop up. The first is, if you look at the last 2 years, there has been significant investment in the tech and dev line, and the company has been focused on improving. The second -- so that -- there's already a set of investment there for me to use. The second is that given my background, the one big thing I can bring to the table is that, like many other companies, sort of investing in their platforms, a company will -- on point A will want to go to point B and say, "Okay, we should make these investments." Well, I've been through that cycle and realize that you get to point B and then often have to go to point C from there. And that's where I can bring my expertise and say, "Hey, guys, I know we're on this path. I know it makes sense. But I know what it looks like when we get there. So let's just chart the path from the A to C directly." And I had alluded to this last time in the call, too, but it's not a matter of putting armies of people behind this thing. It's about finding the right people with the right skill set and get them focused on a small number of priorities. So that was the plan that we wanted to put in place. And now I'm very confident that, that's the best plan record.

Okay. Great. Just real quick for Ray. Hosting and Presence growing slower than Domains. I think vendor asking, is there a catch-up that can come? Is there something you can do there, if they're buying the domain from you, why wouldn't that line grow a little faster?

No. Thanks, Brent. We've been really happy with the growth we've seen in there. Obviously, the Websites + Marketing and Managed WordPress are the software subscriptions we're leaning into. Those are growing around 40% on a unit basis. So growth is there. It's just living in a large line item, right? This is a $1.1 billion line, very difficult to inflect that and -- but we're very happy with the success we're seeing in the subscription growth.

Your next question comes from Ygal Arounian of Wedbush Securities.

I may have missed this in the disclosure, but the guidance, does it include the acquisitions? And any way to think about what the contribution is on -- I'm guessing Uniregistry would be a bit more of a contributor? And then on that topic of Uniregistry, just maybe walk us through a little bit more the rationale of the acquisition, what the gaps in your offerings that you think it's complementing or things that it's building on a little bit better and how just it overall fits with the portfolio. And if you could tell us the domains under management and how that contributes to your overall domains.

Yes. Hey, it's Ray. I'll start with the impact on guidance and then toss it to Aman. On the top line, the combined impact of both of those acquisitions over in Uniregistry are about 1 point, and the impact to unlevered free cash flow is negligible.

Yes. And in terms of the components of Uniregistry, the key pieces that are for the GoDaddy business now include a set of tools and experiences for our large customers. Second, there's a set of -- sorry, there is a portfolio of names that is part of Uniregistry that is coming into the company as well. So if I just take those two items separately. When we look at our large customers, there is a set of friction for them to be able to do their jobs. It's -- there's a lot of off-line stuff. There's a lot of sort of handholding and interaction in the broker service. And Uniregistry is built from the ground up tools and experiences for that cost. So bringing those back into the GoDaddy family and offering it to all of our large customers is a fantastic addition. In terms of the portfolio, it's about 350,000 domains. It's a fantastic portfolio. It allows us to continue to improve the liquidity of our secondary market and really offer those names up to all the people coming into GoDaddy.com and searching for a domain name.

If I could ask one quick follow-up on WordPress and the Go theme plug-in, is that something you guys monetize? And how should we think about how that fits in with the rest of the Managed WordPress portfolio?

Yes. So the Go theme is really about our position in the open-source community. It's about the broader, the set of brand building for us as a company. We don't monetize the theme. People can use the Go theme whether they are a customer of ours, for example, on Managed WordPress or if they're just using WordPress anywhere in the world with anybody else, right? This dramatic -- the team is really focused on dramatically reducing the time designers need to put something together that's beautiful and do it really fast. I would encourage anyone to just go out and try it. If you go out and try it, you'll see the difference in how you yourself can create a site that looks gorgeous and happens quickly.

Your next question comes from Naved Khan of SunTrust.

Yes. Maybe a couple of questions. So if we have to think about segment level growth, maybe, Ray, you can give us some pointers like, I think, previously, you kind of spoke about like Domains growing maybe slightly faster than unit and Hosting and Presence growing maybe 2 to 3x and then apps growing faster? And how should we think about that for 2020? That will be very helpful, if you can. And then just on the conversational marketing. Obviously, you guys ramped up the spend through 2018 and '19, how should we think about that growing as a part of the mix in 2020?

Hey, it's Ray, Naved. I'll start with the first piece of that, and then I'll toss it to Andrew. I'm not going to provide specific guidance on a line item. But I think a decent way to think about 2020 in the overall context of our 11% would be Domains in the high single digits. We're going to lap some pretty strong growth out of aftermarket in 2019. Hosting and Presence in the high single digits, and that's going to be driven primarily by continued growth in Websites + Marketing as well as our Managed WordPress offerings. And in biz apps, which is now over $500 million line item, growing in the high teens. We'll share more with you guys, more insight into the growth algorithm, how we're thinking about the market opportunity for us at our Investor Day in early April.

And Naved, it's Andrew here. On conversational marketing on the full year in '19, we obviously scaled up our spend and delevered that line a little bit, which is a good thing. While we've scaled that up, importantly conversational marketing and the pace of testing, iteration of campaigns has really improved and increased. And we're seeing those gains and improvements kind of driving new and expanding reach into our existing customer base paying off, and we're seeing good strength in bookings as a result. Op is good.

There are no further questions at this time. I will turn the call over to Aman Bhutani, the CEO, for closing remarks.

Well, thank you, everyone, for joining us for our call. And I'll just give a shout out to all GoDaddy employees all over the world, doing great work. Thank you very much. We'll talk to you in the quarter. Bye.

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