GoDaddy Inc. (GDDY) Earnings Call Transcript & Summary

All right. I think we can get started. Good morning, everyone. Thanks for joining. My name is Maya Kilcullen, I work on the software team at JPMorgan. And I'm joined today by GoDaddy's CFO, Mark McCaffrey. Mark, if you could just take a few minutes to introduce yourself. And then for those who aren't familiar with GoDaddy, can you just give a brief overview?

Absolutely. Happy to do so. First off, I'll start with -- Aman, was supposed to be here, our CEO. He's feeling a little under the weather. Given the current environment, I thought it would be good that he not get up here and talk. So you're stuck with me. So very financial-driven conversation, hopefully, with Q&A. Hey, I'm hitting my 1-year anniversary at GoDaddy. And I have to say it has been the most exciting year you could possibly imagine of being a CFO at a technology company. And I am -- I couldn't be more thrilled with what GoDaddy has been able to do in the last year, some of our Investor Day messaging and strategy that we put out there in February. Hopefully, you've all had a chance to listen to, look at, around our model. And to remind everybody, GoDaddy is about empowering entrepreneurs to do business everywhere. And we take that very seriously at GoDaddy, and we focus on the entrepreneur and the small business. And just to clarify, for us, the small business is really a micro business. So we do maybe 1 to 5 people, up to $1 million in sales is their sweet spot. And they're looking for a one-stop shop. And we've been around a while. We know that customer base. We think we're really good at understanding their needs. We have a great care organization that allows us to have a personal relationship with them. And it allows us to really look at -- I know these are becoming words that everybody is using now, but we used them back in February, a durable, predictable model that allows us to really grow on our existing customer base. And we have 21 million existing customers. We continue to attract new customers, but the right new customers, which we think we're doing a great job through our marketing and our experience in marketing. And with that, we're able to really outlay our 3-year growth algorithm, which is 10%-plus, 15%-plus, 20%-plus, right? 10%-plus revenue growth over 3 years; 15%-plus normalized EBITDA growth over 3 years; and 20%-plus cash flow per share growth over 3 years, a CAGR on each one of those. And at the same time, commit to buying $3 billion back in stock. So I'm kind of getting what we call our big number of messaging out there, the 10%, the 15% to 20% and the 3. But even in the changes that we've seen since February, we feel really good because of our resilient model that we've been around. We know our customers that we can -- we're comfortable delivering on that over a 3-year period of time.

Yes. And so then just drilling into that 10% top line growth, can you talk about the split between growth from existing customers versus new logos?

Well, we really try to focus on ARPU is the way we look at it, is how do we increase the amount we're selling into our customers while attracting the right new customers. So we don't get into very much a percentage of, hey, we're dependent on these many new ones versus these many existing ones. We look at it as, hey, we want to bring in new customers that are going to spend more with us. I can get as many new customers as I want on any given day by just dropping my prices. That doesn't mean they're going to be around a year from now, and that doesn't mean they're going to spend more money with us. So we try to really look at it from the entrepreneurs wheel standpoint as to who are those customers that are -- once they get into that wheel, they're going to be able to expand how much they want from us, how much value we can give them. And it's important to us because our concept is a one-stop shop. And what -- we hear a lot of people talk about a one-stop shop. But in our customer base, the one-stop shop really is relevant because you're talking about the entrepreneur who's got maybe 4 people, and they can't be running their business off 8 applications and focusing on scrapping for every dollar they can get. They really need that ability to go to 1 person, whether it's for payments, whether it's for website, whether it's for their domain name and be able to call up if they're having a problem or figure out how to get more efficient. So that becomes our value proposition, is really around how do we drive that ARPU in that existing customer base and become mission-critical so that they can do what they want to do, sell to their customers, at the same time, not having to worry about how many applications do I have working in the back end and how many aren't working and which ones don't talk to each other.

Yes. And can you talk about that revenue split between the core platform and then applications and commerce?

Yes. So we're historically known as a domains company. I think that's what GoDaddy has been known for, for years, and we've recently started applications as a big part of our business, and we've entered into the commerce. So I look at it -- for the most part, we divided it into 2 segments now, which we recently launched at the -- in February at the Investor Day. And it's really to define, hey, where do we think our growth areas are. And again, expanding on that entrepreneurs' wheel. We have a great brand around domain names. And we continue to expand and innovate around domain name as we get a lot of questions in -- I can't talk enough about aftermarket because I think it's a great job of developing a new platform that brings buyers and sellers together but monetizing our core platform base and making more -- providing more value to the market at the same time helping drive our growth. And then on the applications and commerce end of it, it really gets into our create and grow, is to our ability with Websites + Marketing, which is a more do-it-yourself type of website builder versus Managed WordPress, which gets into the pros and the more complex systems. But all those bring those type of areas to our consumers and allowing them to grow their business and be more profitable. It's important to note, while we talk about this as 2 different segments, the reality is our customers go across both segments. So generally, you'll find a customer in 1 segment that is also a customer in another segment. And our value proposition is about growing both but using both as an entry point to the entrepreneurs' wheel and then developing those -- that value proposition to the entrepreneur. Commerce is the newest element of that. We've talked a lot about payments and our ability to grow our payments business. I readily admit it's new to us. We're 1 quarter in and we are thrilled with how it's performing and some of the early signs we're getting. But I acknowledge, over time, I will need to disclose more information financially about what payments means to us, GPV, GMV, all that. So more to come.

And can you talk about the actual process of cross-selling customers, especially Domain customers, how -- what is the level of success of bringing them on to other solutions?

This is our secret sauce at the end of the day, our Care Guides. And going into the nature -- and I said that we're small micro businesses. But when they call up, they're usually calling up to fix a problem, find a better way to do things, and it creates a huge opportunity for us to cross-sell and provide them more value through different products. Now it's extremely important to us, this -- we have to provide the value, right? We have to be relevant to them being able to make money on their own, and that provides us the opportunity to cross-sell and continue to cross-sell and look for an innovative solution. We really -- when we talk about a one-stop shop, this customer base really needs a one-stop shop. They can't be spending time with multiple vendors on a phone trying to figure things out. And that's our biggest ability, to cross-sell is to make sure we give them that integrated solution of how everything works together and can do it seamlessly, easily so they can focus on what they want to do. And remember, they don't have an IT department in the background. They don't have anybody they can call up to fix if the payments isn't linking the way they want it to. They really rely on us to do that. But that care and that relationship and those 21 million customers we have that relationship with allows us to drive that long-term value even more by cross-selling those solutions into them.

That makes sense. I quickly want to remind the audience too that you can submit any questions online, but also feel free to just shoot your hand up and we can get you.

And if it feels like I'm paying more attention over here, that light is blinding over there. So it's just naturally, I'm leaning this way, when I'm staring, but I don't want anybody on that side to feel like I'm ignoring them.

Okay. So high level, can you just discuss any lingering impacts from the pandemic, from the Omicron variant? And then specifically on just the employee retention, some of the employee shortages?

Yes. Knock on wood, lingering COVID pandemic. Every time we feel like we're through it, something else happens. So I want to acknowledge that I'm not trying to jinx us in any way that the pandemic is not over. We came out, and I think we talked openly in our Investor Day and then in Q1, we had some lingering impact from COVID in a manner that we hadn't seen before and related to our Care Guides. We -- they got sick and that is a sales motion for us. So we saw -- we came into January with a lot of our Care Guides who we depend on to have those relationships with our customers fell ill and it wasn't a 1- or 2-day type of event, it was more prolonged. So we saw some sluggishness in January around that, but we saw it recover as they came back, and now we'll see what the rest of the year holds. But we feel pretty good that even if demand is uneven going into the year, related to any COVID circumstances that might persist, that we have the levers within our strong operating model to manage through it. We had fluid demand last year and we were able to deliver very strong results through it. Obviously, we had strong -- beginning of the year is related to the tail of COVID, but we still had strong performance in Q3 and Q4. That gives us a lot of confidence that the demand is going -- it may go up and down in any given month depending on what's going on, but we have the ability to manage through it. Was there a second part of that question? I apologize. I got it? All right.

No, I think you got it. Yes. I do have a couple of questions coming in from the audience. So I'm just going to read down the list. So the first one is what proportion of Domains revenue is aftermarket? And where do you see that potentially going over time?

So we haven't broken out the actual percentage of aftermarket to the entire core platform. So you could probably go into our financial disclosures and back into some estimate. But it is becoming a larger portion of our core platform growth. And I think we have disclosed that from quarter-to-quarter that it continues to be a driver of growth in core platform and obviously contributing to our overall growth. Aftermarket has been a wildly successful platform. And while we've seen some large transactions around the aftermarket purchase of certain domain names, what we really like and what we really measure success by is we can continue to see better volume every quarter and the average transaction size going up. And while it's nice to talk about some of these big dollar transactions, the fact that most of our transactions are around the $2,000 mark, and people are paying $2,000 to buy a domain name from somebody else is a signal that the market is continuing to drive demand, right? And that limited supply is increasing that average sales price. And as we continue to see that from quarter-to-quarter, we continue to be encouraged that this market is really a platform that has allowed -- and the platform was created to connect the buyer and the seller and do it in an efficient manner that someone who wants a domain name now can find who owns that a lot more efficiently and effectively. And that has really started to take hold and just grown. Now we do see large transactions from time to time. They come in pretty quick and fast, and people are willing to spend large dollars on some domain names. I am not discounting that in any way, shape or form. I think it's fantastic, but does create volatility in our business. So we don't know what quarters they show up in. We do think there may be some seasonality towards the back end of the year, but we only have a year of witnessing that. So we're not quite sure. And in our guide, we built it to what we can see in front of us. So we're excited about the market. We're excited about the innovation that we created around it and taking what was hosting -- sorry, hosting and domains and adding an innovative element to it that has helped our growth rates. And we're excited to see where it goes, but the market is continuing to grow at those deal size -- sorry, at the average deal sizes going forward.

Going back to the pandemic. How much of a pull forward do you think COVID-19 created in the business?

So I point to some statistics out there. And when we look at our cohorts, we look at them from year to year and spend a lot of time analyzing them. And the facts that we have come up with are our cohorts have remained wildly consistent from year to year. And we look at the retention rate around 85-plus percent. And those numbers aren't changing. And to us, that is an indicator that we didn't have pull forward, that we continue to see our momentum in the market, our ability to grow, our cohorts growing their LTV over time with us. Yes, there are different impacts of the pandemic that play out and we manage to. But we feel good about the customers we have obtained, we feel good about their ability to retain them in our portfolio like we've done on a consistent basis from year-to-year. And we continue -- while we monitor it, see it acting like most of our cohorts have for years and years to come.

Yes. So maybe this answers the next question as -- but if we do move into a recession, what do you expect the impact to be to the top and bottom line? And how are you mitigating any of those impacts?

Yes. So we feel we're -- we have a great model, and we have a predictable, durable and resilient model. This statistic I always put out there is in 2008, if we look at that cohort dating back to us, lifetime-to-date revenue from that cohort has been $1.9 billion, and that is consistent with what we've seen from a lot of our cohorts. We feel we have the ability, whether it's revenue, whether it's growing our normalized EBITDA margins, whether it's delivering on our cash flow per share metrics, we have the ability to do that on our own basis. We believe when it comes to our customers, we are mission-critical to our customers. And remember, our customers, because they're at the micro level -- micro business level, they are -- this is what they depend on for putting food on their table, making their own payments. And therefore, they're very committed to our one-stop shop us being mission critical to helping them. And that is a strength we've seen play out in other recessions. And it's hard to always predict what will happen, but we think our model and the strength of our model holds up within that environment. Now there are things outside of our control, FX rates and things that we will continue to monitor. But we also have the leverage within our model to react to that. We -- I think we estimated that we will generate $3.8 billion of free cash flow over the next 3 years. 85% of our existing revenue comes from our 21 million -- 85% of our revenue comes from our existing 21 million customers. And while we constantly are monitoring what's going on in the market, macro, micro, everything else, we think we have a really, really strong model that allows us the ability to manage lead and be effective through any type of recession.

So I have a question too just about new customers. So can you talk about the net new customer adds per quarter or per year? And then maybe just give a little color on pricing or average length of a contract?

So on the first one, I try to be transparent, but fair. We don't disclose that on a quarterly basis. I have my IR leader over here giving me the evil eye, do not say anything. And I don't think on the second one we do on that one either. Listen, we do it on an annual basis. We continue to focus on ARPU. We've added metrics around ARR to our financial disclosures on a quarterly basis. So we're trying to be more transparent where we're going. But a reminder, customer adds to us really, we focus on our ARPU. And the reason being is -- and I think I opened with this. I can add as many customers as I want at any given time, but I want customers that have a better propensity to spend long term with us and build the business. And that to us is our focus and what we look at when we attract new customers and that will continue to be our focus.

So in your introduction, you mentioned the new $3 billion share buyback.

Yes.

Can you just talk a little bit about what sparked that decision? And then I did have a question from the audience on if you are considering using any of that for M&A activities.

So the word I'd like to use and hopefully everybody remembers is, discipline, in how we approach things. We believe we have the ability, and we've committed to the $3 billion buyback over a 3-year period of time. We announced in Q1 that we are on target to complete the first $1 billion by the end of the third quarter. So we take that buyback very seriously. Our ability to generate free cash flow over a period of time allows us to return short-term value to our shareholders. But at the same time, we are investing in generating long-term growth, and we do that by continuing to invest in tech and dev. You're all in the tech industry. We all know that tech products and innovation over time is the right answer. That's what makes us relevant to our customers and makes our ability to continue to generate that long-term value. And we commit to -- we are very committed to continuing that innovation, and we've talked about some of the areas that we are investing in. Commerce and payments has been one of them. We've talked about aftermarket, which was innovation in the last few years we introduced. And if Aman were here, he would be jumping up and down about the concept of payable domains, which we think is an innovation that will make the payments in our market could be a game changer. And that's the idea, that every domain name has the ability to add payment functionality without adding any other information right when you buy that domain name. And taking that choice of being able to monetize a domain name right upfront when you get that domain name puts that decision-making process at the front of the funnel versus somewhere down in the middle to the end of the funnel. We will continue to invest in those areas because we think they are drivers of long-term value. And we think our model, because it's durable and predictable, we can continue to return short-term value to our shareholders, which is where we got to the $3 billion buyback over 3 years with a target of $1 billion a year.

So I have a couple more questions coming in on payments.

Yes. I love it.

Can you talk about the -- I don't know if you can disclose, but the percentage of gross adds that are signing up for payments? Or maybe more generally, what is the momentum like compared to your expectations?

So really thrilled with what we're seeing, and -- this is really early stage for us. And we launched the OmniCommerce payment solution last year. We're really in what I would say, what is working with the go-to-market and what are we seeing in attach rates with the focus on the choices around new. And remember, we haven't limited the choices of our customers when they are building a website. They still have the same choices they had prior, but just an added 1 with GoDaddy. And we're seeing -- Christie, make sure I get this number right, 25% of them are choosing the GoDaddy payments when they are -- in Managed WordPress, which is a great sense for us and 70% on the premium tier. So the first statistics are fantastic. Really, really early stage. We think the driver of this is around the one-stop shop and the one-stop shop is the idea that if I'm going to build my website, I might as well have my payments under 1 umbrella. Oh, and by the way, it's the best pricing in the choices that are there, and that's very compelling for our market, the micro entrepreneur, the micro business, the entrepreneur. Even in this market, that transaction fee puts money in their pockets, which becomes very important and a compelling argument to choose it upfront. And we couldn't be more excited about what we're seeing in there. We're very focused on the choices and the new customers. And we think as we get into the year, we'll be able to start to take a harder look at what do our 21 million existing customer use and do we have a compelling argument to get them to switch?

And how should we think about margins on -- for the payments piece?

How do -- so we haven't gotten into disclosing out margins per se by any specific component. We believe and we've committed to, and this is where I always will come back to normalized EBITDA margins. We continue to look to expand it faster than we will our revenue growth. We think we have the ability to leverage that. We think when it comes to payments and the transactions, that will help in our ability to do that with the idea that transaction fees will drive our ability to expand. They're less intensive on our operating model. So we feel good about our ability to continue to drive that normalized EBITDA knowing that as we continue to expand the long-term value within each customer, which includes transactions that we'll get better leverage out of it on the bottom line.

And then just focusing on margins more broadly. Can you talk about gross margin this past quarter? And what do you expect to see for margins throughout the rest of the year?

Yes. So great question. And you'll always see I'm trying to move off the conversation, honestly, on gross margin inform -- really look at normalized EBITDA margins, because in my mind, it's more inclusive as our ability to manage our costs and do it effectively. And as long as we're growing that normalized EBITDA margin effectively, those are the choices we'll continue to make. Now I don't see any dramatic changes to our gross margin profile as it exists today. I think we've always talked about it being in the mid-60s. However, product mix does impact that gross margin line. And with that product mix, with us offering more solutions, whether it's aftermarket, whether it's payments, it will move that a little bit. It effectively will allow us to get better normalized EBITDA margins but may have a short-term impact depending on product mix within our gross margin.

Makes sense. So at the Investor Day, there was some discussion about creating a network effect with developers around your forthcoming extension of Connected Commerce to WordPress. Please elaborate on this.

This is the one that I wish Aman was up here. He could probably give a more elaborate answer. But we come back to our ability to drive growth. And the way I look at it is long-term value is around connecting all these elements. Our customers really need that one-stop shop and our ability to grow, connect this and allow them to do business, whether it's online or off-line in a brick-and-mortar store or out of their house. The ability to do that and manage that with 1 solution creates an ability not only to provide them more value, but obviously allows us to grow our long-term value we're getting from those customers. We start with everything looking at what they need. And then we back into what can we provide them and how do we get them those innovative solutions on how to do better, and we'll continue to do that. And we'll continue to look for how commerce, and we can introduce different elements of that to allow them to continue to grow their business.

Since we only have a couple of minutes left, I'm just going to hit the investor questions that were coming in. So since Starboard has joined the GD cap table, what have been the changes that have been introduced in the company?

We don't -- well, that seems like a loaded question, to be honest with you, because it doesn't really get into anything in detail as -- Starboard is an investor of us. We have a great relationship with them, continuing open dialogue. We continue to look at our strategy based on providing short-term value to our investors and driving long-term growth, and we will continue to do that.

Okay. And then is there any reason to believe that paybacks like Square would match your payment pricing?

You'd have to ask Square that. We feel really good about our pricing. We feel about our ability to deliver that pricing. To be clear, we're not doing it as a loss leader. We're making money off of our pricing, and we feel good about our payment solutions and our ability to make money off of it. And we feel that our value proposition is very compelling.

Okay. So just shifting over to some of the M&A recently. It's been about a year since the Poynt acquisition. Can you just talk about the progress you've made with integrating the business?

Well, I think we've seen some of the results when we talk about payments and commerce, a lot of that comes out of what we've been able to integrate in with our Poynt acquisition and whether it was the launch of OmniCommerce last year. And can I just say, for a technology company, when you acquire somebody and you launch a product a quarter earlier than you anticipated, that's an accomplishment. And I'm not taking any credit for myself, but for the team that integrated that in, I think it was a fantastic job of getting that out into the market faster than we anticipated. Why is that important? We've been able to look at the attach rates, look at what's working, start to evaluate what the impact is going to be and see where we can drive incremental value. So when we look back at Poynt and we look at the progress and the fact that we're talking about payable domains and the innovation that will continue to be delivered around that, we couldn't be more thrilled with the integration and our ability to deliver on the value and really meet our customers' needs and deliver them continuing value.

Could you actually give a quick overview of the OmniCommerce solution and just maybe some of the drivers behind the momentum that you've seen so far?

Yes. So it's -- and I always want to emphasize, we're early stage in the drivers that we're seeing around it. But we haven't gotten into a lot of financial metrics because it's early stage right now. A lot of the drivers we're seeing around it are the price is compelling. The ease of use in setting it up, the one-stop shop concept, the ability to transact quicker and also monitor the offline and the online into 1 system. The data that's provided via the sales, which is, we're very open with the data that our customers need in order to improve their sales models. So all that seems to be working together in conjunction to provide them more value. Again, it's early stage, and we'll continue to monitor it, but we're really happy with those initial, I would say, data points that we're seeing and our ability to continue to see what -- how that's going to work in the market. Even as we get into what I'll call these times, the compelling argument around our ability to move our existing customers potentially over to what they are currently using for commerce into a more simplified, better solution to run their business. And at a better value point, what progress can we make on that for the rest of the year?

And then sticking on M&A, a question from the audience. Are you seeing any changes in the competitive environment? And what is the M&A opportunity in long tail of domain-focused businesses?

Long-tailed domain for...

Domain-focused businesses.

Listen, we continue to be laser-focused on executing our strategy. And we continue to look at M&A in a balanced -- I would say we have a very capital allocation, very disciplined capital allocation approach. To the extent something, whether it's big or small, comes across our desk, not that we have desk these days, but comes across our preview, we'll review it based on the strategy we've outlined at Investor Day. If it helps accelerate our strategy and provide value to our customers, if it works financially within our model and if we have the ability to integrate in a short-term period of time, we'll look at it. But we remain laser-focused on delivering what we've laid out on Investor Day and executing upon that, and we feel good about where our model is today. And anything that comes across has to be incremental to that based on those criteria we've laid out. And that includes poor platform or applications and commerce. And I would say the only difference now is the -- as we can see, valuations have been in flux, so some of those decisions may change over time. But we're going to remain disciplined on how we approach it and disciplined on our model and disciplined on our ability to deliver on what we laid out on our Investor Day.

So we have room for maybe a couple more questions. So if anyone in the audience has anything else, feel free to shoot your hand up? Yes.

Can you comment on what you need to do to keep technology talent in terms of pay rises? And do you anticipate that the mix between, let's say, normal pay and stock-based comp will change over time also when you move into a recessionary scenario?

Yes. Great question. So level set, we've always taken a very disciplined approach to stock-based compensation and dilution around stock-based compensation. And I've been around the tech industry for a long time. I've seen the cycles kind of come and go. And I'm a true believer, you don't chase the cycle, you do what's right, and you provide value to talent that you need without going to extremes of diluting or getting ahead of yourself. And we will continue to do that. The talent wars have been out there for a couple of years. There's no doubt about it. We've remained disciplined in our approach because we believe our culture, our mission are very attractive to obtaining talent. We focus on small businesses, micro businesses. A lot of people who work with us believe in that mission. We live it every day. Our culture is very open and collaborative. People love working with us. Those have been our key advantages to attracting talent, and we continue to do so. Now it will be interesting to see if in the current market, if others changed their approach to how they've done this in the past, but we don't look at it as necessarily that being an advantage or a disadvantage. We'll continue to seek out the talent we need to meet our strategic objectives. We'll do it in a disciplined manner, and we're not looking of any significant changes to how we look at stock-based comp. Again, we feel like we were in a good spot in our dilution. And at the end of the day, I've committed to a cash flow per share growth, and we're going to continue to move towards that target, and that means we have to be disciplined on how we approach stock-based compensation.

All right. I think that is it that we have for time. Mark, thank you so much, and thank everyone for joining.

All right. Thank you, everyone.