GoDaddy Inc. (GDDY) Earnings Call Transcript & Summary

Good morning, everyone. My name is Elizabeth Porter. I'm an analyst on the software with Morgan Stanley Equity Research. I'm really, really excited to have with us today excited With us today GoDaddy Inc. [indiscernible] at www.morganstanley.com [indiscernible]. Thank you so much for joining us. We're really excited to have you guys in front of us here. So I think just to kick off the conversation. So GoDaddy Analysts, just a couple of remarks on our -- just for second year is video. And when we think about a change that first analyst at merge. But how has the business evolved under your leadership?

Yes. I think super excited to be able to do an Investor Day and to tell our story. The biggest evolution in our business is, we used to be the dream, create, grow company, customers come to us they dream about an idea they buy a domain name. And this last couple of weeks ago, we put out a different way of thinking about our customer, different way of thinking about the company, which is what we see as the entrepreneur and they have an entrepreneur wheel, and what the domain is their public identity, right? And then how do we take that domain name and translate into sort of ubiquitous presence for them, which means online and off-line and how do we connect commerce to every piece of that. So some of the most exciting things for us internally is sort of doing the work over last year or 2 confirming a number of things from a strategy perspective. And then putting this new frame out there. And look, every surface of the company is going to be commerce-enabled. And then people asking us what do you exactly mean? What's new about that? Now one of the things we talked about is that we're going to launch what we're calling payment domains. It is actually in testing in the U.S. now, where we're expecting a bit broader launch in Q2, where when customer buys a domain name, they have a payments capability right alongside with it, they don't have to actually do anything else. But we think it's the natural extension of what domains should be. You can pay people with their phone number, you can pay people with their e-mail address. So when you do that, you also give away some level of your private, personal information, but you meet someone at a farmers market, and want to buy lettuce, it's great to be able to just give your domain name, accept the payment and you get all the data, you get the experience customized to you. It's -- we think it's a product that the market is ready for. We think it allows us to really shorten the domain dream, create, growth cycle and say, from the first day, you got the main name, you're taking payments. Maybe I'll start there, and I'm sure you [indiscernible].

Yes, we'll definitely dig into that one. So like before we even dive into the business side, would love to get your macro perspective just on the demand backdrop, kind of what are you hearing from customers in terms of the health of their own business and their spending intention for the 2022?

Yes. So I think a lot of questions on the demand that we're all seeing Omicron playing a role in it, but also just coming off 2021, how are we feeling about it. For our customers, January definitely a tough month, right, with Omicron, particularly in our earnings call, we talked about not just sort of some unevenness in the demand that we're seeing, but also our own absentee rates where people would just not come into work, and that impacts our business. When we think about our customers though, and we look forward in rest of '22 and beyond what our customers want most is normal. It's sort of a normalization. They want traffic back into their stores. They want people to just come in and transact with them as they would normally. What does that mean for our business? For our business, what it means is that we expect that whatever online presence of commerce they're doing, they'll continue to have that in certain verticals still doing better year-over-year than others. But for most verticals, that means they've got this new online business that does well, but it's a little bit harder to grow on that now given where demand is for them. And then their normal business comes back and does better. And for us, as GoDaddy, any one year is smaller because we've got a base of 21 million customers. We had a massive year in 2020 with 1.4 million net customers add but it wasn't a base of 20 million customers. So what you see for us is, yes, some ups and downs. But broadly, we're looking at our base of customers. We're looking at how we can continue to renew them at very strong rates with great product and great care, and then also continue to sell more products to them, which we've done consistently over the last couple of decades. And so we feel good about our position. We feel confident because 85% of the revenue we're going to get over the next 3 years is selling to the customer that's already in our base versus how other companies may be thinking about it.

I'll just add to that. It gets to the durability and the predictability of the model and also our relationship with those 21 million customers allows us to continue to provide value to them. And that will evolve over time as we normalize and they continue to grow their businesses, we'll be there with them.

And then just dig into a little bit more on that. Really based on your guidance in 2020 [indiscernible] debate has been COVID was an accelerant [indiscernible] pull forward of demand [indiscernible]. Is that now behind us, it's now kind of what inning of...

Yes, my hope is that things go back to normal. None of us want another variant and sort of disruption of any sort. And yes, there is to some extent, some pull forward. But again, you have -- if you look at it from the GoDaddy lens and one of the data points we've shared in the past, the data points around the Great Recession, you saw a lot of similar things in terms of oil prices, concern about the health of small businesses. But we've publicly shared data that, that cohort of customers from 2007, 2008 cohort, particularly, over a 10-year period did really well. In fact, when we had shared that data for a 10-year period, that cohort has produced about $1.5 billion in revenue for GoDaddy, and that cohort still has produced more over the last 2, 3 years, it's at $1.9 billion now, right? So our expectation is, yes, there's the math of the large cohort and shift between when you got customers and some pull forward and so on. But over the medium to long term, it normalizes out, those customers behave similar to others we've seen over the last 20-plus years.

Got it. And then GoDaddy is historically known for deploying [ registration ] capabilities, like [indiscernible] growth opportunities helping SMBs address needs around commerce, specifically marketing. And the new disclosures that you guys added at the Investor Day on revenue for application in commerce it really helps investors track progress. So what are you going to help accelerate the shift to those areas? And what should we think about contribution from this segment over the next 3 to 5 years?

Yes, I'll let Mark talk about contribution of the segment. But I think what I'll say is it starts by just seeing what GoDaddy has been able to do. Of course, we're the leader in domains, but we were able to add hosting and websites to that. We now have a very competitive product in terms of the website. We were also able to add e-mail to that. right? We shared at our Investor Day that now 1/4 of our -- we have about 25% penetration on e-mail. And my understanding is for years, people have asked, well, is that possible? Can you do it? Well, the factor is GoDaddy provides the combination of care and a very sort of intuitive way to add more products. And when customers call us, we're able to sort of sell them something that a lot of people feel is super easy, which is e-mail. It's actually not as easy for our customers because when they have an issue, they need to call somebody and GoDaddy in those moments does a fantastic job. So our idea is to take that model and extend it to its next possible or logical thing, which is we look strategically at the closest adjacencies for the company. We looked at the businesses that were largest and had the highest growth rate and commerce and payments was the obvious thing. Then we tested with our customers to see did our customers want GoDaddy as their payments provider. And there was a big question on that, but our data clearly showed that our customers wanted a one-stop shop. They didn't want to go to different people that they were more than happy with GoDaddy that capability to them. Now I'm happy to say and we publicly share this data that when you look at the Websites + Marketing flow, people come in, start an online store, they have to choose a payments provider. And even before we put our differentiated pricing in the mix, which is 20% lower than our competition, we were able to see a very significant percentage of customers choose GoDaddy Payments over the best names that are listed right alongside there. But we shared at our Investor Day that now over 60% of customers through that flow pick GoDaddy Payments. And I'm happy to tell you that, that percentage has continued to tick up for us. So that clearly tells us that customers want these products from us. They want commerce, they want e-mail, they want website capabilities from us. And yes, the [ NCP ] clearly shows the results of our effort to do that. And in terms of what are some of the things we're most excited about are going to really change things. Again, I'll come back to payment domains. We don't want the customer to go through this idea that they buy a domain name, they build a website, they build a store and then they have payments, we want to say, if you've bought a domain name, you started with payments already. You're going to have it. At GoDaddy, we have 84 million domains under management. We are a [ PayPal ]. We process a lot of GMV. We are a sophisticated hosting provider. Those are the 3 things it takes to do something like payable domains, and our view is to light up all of those domains as payment instruments if that our customers want. And I'll let you talk a little bit on the segments.

On the segment. First of all, thank you to all the investors who gave feedback when I was coming on board. It's pretty clear in the message there, to simplify our story, to acknowledge our story has changed since our IPO and to really focus on the areas of [indiscernible] we have within our -- calling our customer [indiscernible] those entrepreneurs need more and more services. We have an ability to do a one-stop shop yet, we have the ability to invest in growth areas, which we showed in our [ ANC ]. And at the same time, we have a durable business around our core platforms. And needless to say, aftermarket continues to be an area that is performing very well for us, and we have the ability to drive both of these into the future. So we're excited, it's obviously a change for us in our story, but hopefully, everybody sees that we have a strong balance sheet, a lot of liquidity. We're doing a lot of things in the market to drive short-term value. But at the same time, we're still investing in our long-term value for applications to come.

Great. And when we think about the commerce and payment solutions. 2021 is really about getting it all out there, launching a lot of these products. And when you think about 2022, the focus is bring that to the market. So kind of what are you doing to evolve kind of the go-to-market strategy?

Yes. We've been very good at selling to customers that sell about $100,000 or $200,000 to their customers. But the capabilities we have today easily cover the needs of a customer that has about $1 million in sales. And we could do much more. But our view has been very clear to really look at our customer base and say, look at the base of the payment, we have a lot of customers. Many of these customers who sell about $1 million are already in our customer base. Let's build an offering that works for them. Let's launch it, and then let's evolve our go-to-market function. That -- there's some of the changes, for example, that when we're selling to that customer, they want a higher touch model, right? They -- our are marketing or advertising has to evolve a bit to get that message out broadly. We enjoy as a business sort of a B2C-level brand presence, right, and awareness, in the B2B space. So we want to capitalize on our brand to be able to tell a lot of people that we have these capabilities and attract them to our business. And at the same time, we want -- we put the pricing in play now. We want to be able to have tools with our brand, with the product, with the seamless experience with all of the interconnected one-stop shop capability and then pricing as a lever to go into our base as well and attract those customers to move over to GoDaddy.

And here comes -- we talked about new customer adds, and we have a history even with the cohort in 2020. If you look at every 2 years, we had about 2 million customers. But the evolution for our commerce is we have to focus on customers that have a higher propensity to spend that want to grow their business, and now will allow us to generate that long-term value. So that is what we're looking at in our go-to-market this year, is how do we create the muscle around our go-to-market for that customer who has a higher propensity to want to build their business because that provides a little long-term value for us.

Maybe one quick thing to mention connected to that. The LTV for a customer that gives us commerce capabilities with us 83x versus a domain customer, right? We've seen that grow with the website customers. We've seen that grow with e-mail customers. We've shown those penetration rates have grown over the last few years consistently. We don't see any reason that we shouldn't be able to do that with commerce. We think actually the clearest path to us and the key challenges for us are around execution and making sure that we execute. And we have a great plan. We've aligned Board, and shareholders, I think, like our plan. It's about executing really, really well.

And then I wanted to go back to the point you have for payments. Kind of the pricing kind of set, you have kind of the 50% kind of new customers picking GoDaddy Payments is a great start. When we think about kind of the people that are coming in, is it more new customers that are adopting GoDaddy Payments? Or how much of it is like the installed base that you're able to move over because clearly kind of price and you have a lot of great incentive. So what's kind of the balance between those 2 pieces?

Yes, today, we have 2 flows that are sort of folks are picking payments. One is around Websites + Marketing, which has a 60% number. The other is in WordPress where we shared the 25% number. Pick GoDaddy Payments now in the WordPress ecosystem, folks have 140 choices, and there's more work to be done in terms of servicing our capabilities, but we're happy with that 25%. What those tests have done is they've actually sort of focused on new versus existing. But now we're spending with the go-to-market efforts, much more effort in terms of our existing base, going to our customer base and saying, how we talk to you about having GoDaddy Payments or a broader GoDaddy one-stop solution. It's too early for us to talk about numbers on the existing but clearly, we're set up for -- we have differentiated pricing. We have a large base of customers. We've done it before. So it's absolutely something we're targeting.

And then payments. Obviously, it's still very early, but kind of what color can you provide us around kind of how you're tracking that $150 million in 2023 that you put out as a target?

I can jump into the financial numbers. So like we mentioned, this year is focused on go-to-market. I think we've put a number out there for $150 million all in on commerce bookings for next year. And we're comfortable with that, right? We see multiple path to get there. Obviously, we're very early stage, but we're still comfortable with $150 million.

And just from a product standpoint, with thought processes that we shared some data around sort of customer, the size of the customer growing, and that's really interesting and exciting for us. But we also want to continue to put new products in the market to give us these multiple options. So for us, launching a new SaaS product in later this year or likely in Q2, we'll test it first before we do a big launch. Same thing with payable domain that's testing in the U.S. now where we hope to do a bigger launch in Q2. Those give us more shots and goals. Those will give us more surfaces to go after that.

And then the domain payable sounds like a really big opportunity and just something that we have never seen before. So how should investors kind of wrap their heads around the size of the opportunity?

Yes, it's tough because we're so early that it's tough to give any guidance on it at all. It's a completely new product in the market, doesn't exist today. I think the key things to think about on that is that GoDaddy has 84 million domains under management. Globally, we have 21 million customers, 9 million of those customers are outside the U.S. It really, really takes away the friction for our customers. The way the product is built is that you buy a domain name and you can -- if you bought a [ onbutani.com ], you can then go to someone and give them a QR code or a pay link or the name and say, go ahead, you can take a payment on this, and you don't have to do anything else until you actually get a payment. So we've really streamlined the onboarding of that experience so that there is 0 friction in that process. We think that between the customer base, the position in domains, the fact that we're a PayFac and there we're sophisticated hosting provider, but we have key ingredients, and it would be very hard for another player to put those 3 things together because it's just the differentiated position that we have as a company.

I hope you have your domain name, by the way, because everybody is [indiscernible]. Just the importance of that decision-making on the payments and the domain payable takes it from a decision that's made at the back end to a decision that's made upfront we think, is a key differentiator in allowing us to progress that, obviously it new, right? But when you think about that decision being made as part of the first decision you make really creates an opportunity to us to get stickiness around payments very early in lead generation process.

And then going on to more competitive differentiations. One thing that I think is going to be is the GoDaddy Guides. Now every company has a piece of customer service, but for GoDaddy, what's so different about these customer care guides and why is it a differentiator for the business?

Yes. Just to be super clear, we don't have call centers. We don't have customer service. We don't have call center agents. We have care and we have guides. The job of care is to take care of our customers, the job of guide is to understand what the customer needs and be able to service them. Our guides do not receive scripts, our guide, yes, have targets and their #1 target is NPS or customer sat. But our guides have a lot of flexibility in how to support our customers and it is a key differentiator for us. Our customers tend to be very creative. Our customers tend to be very driven in whatever business they have, but they do not tend to be technically sophisticated. So it's very important the way they're able to take their ideas and then service them with the technical products along with the human side of it, which is brought together by the guide. One of the data points that we are very proud of is that our NPS in care is 65-plus. Now that includes voice and messaging. And I can share with you that if you go back a couple of years, as messaging sort of took over more and more of voice contact, they were concern, they said, well, our guides also sell a lot. How are you going to handle messaging providing that high level of sort of interaction that ultimately can lead to sales? And so you saw the difference in terms of NPS. When somebody interacts on a message, whether it's -- one, it's a synchronous too, they just don't feel as connected, they're less likely to give you a high NPS. Well, today the NPS and messaging for us is right up there with voice. There's no literal difference between those 2 because for us, the first goal is to get that customer sat up there, get the NPS numbers. And once we have that, we know it leads to great relationship, which means those customers are going to buy more products with us because we've seen that cohort, after cohort, after cohort in the last 20 hours. So the care guides that are real true differentiator. I would say that our competitors have tried to build that capability and have struggled to produce the same level of offering. And we've continued to provide higher level of NPS while we leverage on the cost line. And the way we do that is by -- it's 20 years a culture of improvement, it's also better tools, it's better day-to-day operations. It's also that as customers move to messaging, we were able to manage traffic much better. Today, a call that comes in or a call that comes into GoDaddy, literally a set of machine learning models decide who that call should go to. We can route it very, very specifically. And those are the type of innovations that have helped us reduce the cost but provide a higher level of care.

And then when we think about GoDaddy versus Squarespace, Wix, Shopify, the only thing always comes to mind is just the simplicity that you guys deliver. And when we think of combining that with the move to go to market, kind of targeting some of these million-plus sales customers in commerce, going to market with pros that typically require some more complexity in their products. Kind of as we move up market, how should we think of you going differentiating versus peers?

Yes. So we're very, very clear about how our product suites are built working back from the customer population. We -- at the base of the pyramid, there is a set of customers that want to do it themselves. They want a very simple experience. They want to be able to build the website, commerce-enabled 40 minutes, just get it up and running. They want to be able to connect it to Amazon, Ebay, Etsy without having to talk to anyone. And the Websites + Marketing does a fantastic job of doing that every day and twice on Sunday. Like it's really, really seamless, it's easy for our customers to use our -- marketing team focuses on nothing other than making sure it's simple for their customer. Our goal is to not complicate Websites + Marketing in any way at all. When we look at the customer that wants flexibility, that wants a set of customization, all of that for us is built on the WordPress stack. And it's a separate team that is working to make WordPress easier and easier to use. They take learnings from the Websites + Marketing team as those guys innovate. But the WordPress ecosystem is what helps us grow that. Now we are the largest WordPress force and we have been around WordPress a very long time. But this is us really entering WordPress in a very meaningful way to evolve the product, to make it much simpler for those customers. And again, keeping the product suite completely aligned with the customer population. So we're not sort of while we try to address a certain different customer segment, make it harder for our existing segment, and that's not the case for us.

And then Mark, so one of the highlights during the Q4 earnings call was certainly the $3 billion repurchase announcement through fiscal '24. Why is now kind of the right time to pull the lever?

Well, first of all, and again, thank you to all the investors who gave a lot of feed. As it was coming on board, we were looking at our 3-year plan. What I heard was, while they liked our share buyback, the opportunistic nature made it hard to predict and build into models. So when we looked at our 3-year outlook, we decided that we have the ability to drive balance and returning value to our shareholders, but yet still investing in long-term growth and depending on creating long-term value. And that was the time to give out what our intent was in order to allow people to see our commitment to model, reduce our fully diluted share count and return that value. Took a [indiscernible] onboarding on my time. It's a good old [indiscernible] comfortable with the 3-year plan. The good news is we have a durable and predictable model that allows us to do that, but still need some tome to onboard and get there and coming with that number, that again, took it away from being opportunistic to more here's what we've done.

And then GoDaddy historically have done a good amount of M&A, helping build out the portfolio. And with 80% of the projected free cash flow now being used for buybacks, does that suggest a more limited appetite for M&A kind of going forward? And just how should we think about the M&A approach kind of more broadly?

So we laid out on Investor Day on how we're going to look at it in our [indiscernible] allocation strategy and disciplined approach we're going to take to it. We do have the ability and the capability of doing both, right? And as I said since I came on board, the great thing is we have the ability to do demand and versus more. And if we maintain that balance. So while we will look at from time to time, different things, it has to meet our criteria, it has to meet be strategic. It has to be something that makes sense financially, and we have to be able to integrate it. And in doing so, we have to allow you to see the benefit it's going to provide to our model in order for that type of deal that makes sense.

And then for the audience, I'm going to open it up for Q&A. So if you have any questions, please just raise your hand and the mic will come around. But when we think about the multiyear forecast, it suggests that growth accelerates after 2022, and kind of you hit that tough comp in 2022. Kind of what drives your confidence in accelerating growth?

Yes. So, one, '21 was a great year. By no means mean that to be a negative, we had a great 2021. It makes comp, like you said in '22, a little harder. But we also believe in a lot of our initiatives that we're looking in and our investment and we talked about domain payable. We talked about payments, common commerce. And we talked about [ after market ]. Now there's an acknowledgment that we're moving a little bit from a pure ratable model. We will have transactions that create some vulnerability, but will provide growth for us first . It's a little harder to predict, so we're getting used to that. But we think the -- all these in combination will help us to continue to focus on growing. And there is an implied obviously with a 10% CAGR. We know we had a tough comp in '22 there's growth in out in the back end in '23 and '24. So we feel good about where we are, and we feel good about where we're investing and we feel that the 10% CAGR was great. And I would be remiss if I didn't add that we feel good about our ability to generate a 15% CAGR on normalized EBITDA at the same time, which to us just gives the durability of our model and the leverage we can get from our P&L because of our balance sheet.

Great. Do you have any questions in the audience? I have plenty more so I can keep going.

You talked about the cohort behavior from the large 1.4 million in '20. I'm just curious if you're seeing -- in terms of the characteristics, I think you also called out that was like the highest LTV cohort, and these guys were coming at kind of higher than historical attach rates of these other kind of websites, marketing, other services. Are you still seeing that outside pandemic? Are people still attaching at that rate or higher? And also, what is churn from that cohort look like relative to history? Curious like there a lot of people sign up because they have these COVID ventures that are churning more than historically are those as sticky as they would have normally been relative to others?

Yes. So just to recap. On 2020 cohort, overall mix was roughly similar to what we've seen in the past. But you're exactly right. We saw more Websites + Marketing. We saw more Websites + Marketing commerce in some of the higher end SKUs go into it. Overall, the churn rates for that cohort have been consistent with the past, no appreciable difference, right? If we take certain quarters, you see a little bit of variability, actually, it's a tick higher in one or 2 places. But overall, I just look at it as what you saw in the past with GoDaddy. No huge difference. We -- I know there's a lot of concern that the renewal rates will be much lower for those cohorts, but that has not been the case.

And has the attach rate of those higher-value products stayed?

Sorry, yes. So on the commerce piece, we've seen it slow down a little bit, for sure, right? Now where will it rest ultimately, once we're really past the COVID, I'm bummed I'm not sure. But yes, our expectation is that over time, things will normalize and sort of going to the regular seasonality of how the mix is and when -- what we see in what quarter. But it's not quite even fully settled right now.

Get one more in.

Can I just ask about the payments opportunity? Could you maybe just explain exactly what role you're playing with the merchants? Are you acting just as a gateway? Are you acting as merchant of record and taking merchant risk? And is there a room for you to take more risk on behalf of merchants, more of a take rate versus premium providers you're working with?

We are a payment facilitator. So it will be [ GPV ] that flows through us. We sell the hardware, the point of sale directly to customers, when you choose GoDaddy Payments, we are the PayFac for us, either we take risk. We have the ability to do various different things, different from other folks. For example, when we launch payable domain, which is payments attached to a domain, right? When we look at our existing base, we have data boat customers that's differentiated from what other people might have because we may have had a renewal with that customer on that domain for 10 years. which is obviously differentiated than what somebody else who just showed up to sign up for payments. So actually, that was critical to us building those capabilities ourselves so that we could have the risk assessment, the user experience, how we wanted it pricing, how we want it. So that will be the package we've put together. Yes. It sounds like -- I think you understand it very well.

Sorry but that brought us to our time. Thank you so much for joining us. Mark and Aman.

Thank you very much.