GoDaddy Inc. (GDDY) Earnings Call Transcript & Summary

All right. Good afternoon, everybody. My name is Chris Zhang, and I'm one of the lead analysts on the Credit Suisse payments and fintech research team here. Today, we're honored to have Mark McCaffrey, CFO of GoDaddy, with us to give us a fire side. And let's just get started.

And I love the word honored. Thank you.

All right. So maybe from a -- start with the historical perspective. GoDaddy has always been a global market leader of domain registration, hosting services. How did you evolve from that to also being a large provider of solutions to the entrepreneurs and small businesses and empowered them throughout their journey? And as you mentioned, that's an evolution that can expand your customers' LTV by over 80x.

Yes. Thank you for that statistic, too. If we get the word free cash flow in a few times, we'll be right on track. Listen, we're in a fortunate spot. In the technology industry, I always come back to, there are 2 key essential things you need: you have to own the customer relationship, and you have to have a great innovation and products to give them value. And in our beginning, we were known as a domain company, and we had a brand as a domain company. People came to us with their ideas, their dreams, wanting to do something on the Internet. And we realized early on that we were bringing people into the funnel, but because they needed other services, whether early on e-mail, web development, now we look at Commerce as a big, big part of the funnel, that they were coming to us for a domain name, but they were going elsewhere to get other value. And that if we could become that one-stop shop for them, we realized we were going to have a differentiation, right? And so we thought about it from our customers, our entrepreneurs and micro businesses, which is a little smaller than small businesses, right? And their needs are much different, and they're all about trying to pursue their dreams and sell and do it anywhere they want to do it quickly. They don't need to be worrying about different apps, different vendors, different whatever it is they need to follow their dreams. And if we could give them that sage guidance through our care, build that relationship, tell them how they can get value quickly out of products, help them with their website development and now go into -- allowing them to transact, that we would be able to grow a relationship on an LTV basis over a number of years. We first tested it out in e-mail. And over a couple of years, we had great success just attaching e-mail to the domain's name. And now as we go on further, websites obviously became a big part of that, we are so excited about the commerce element of now when you come with a domain name, you want your website, you can choose us as payments, we're competitively priced, and it becomes a one-stop shop for everybody there. So the long-term value, the term we statistically use, is 83 times, and that's great. And at the end, we think our big differentiation as a company is we have the brand, all right? We have the scale to do it. We have the technology to do it, and we have the care. We own the relationship at our customer level that allows us the right to play in that space. And we've shown it time and time again that as long as we have that relationship and have great innovation and give them the value, we'll continue to grow that relationship over time.

That's a wonderful overview of the journey. So GoDaddy's business is now a lot more diversified with many attractive growth drivers. It would be very helpful to give us maybe also an overview of your growth algorithm for the 2 segments, so both the core platform segment and the application and commerce segment. Maybe not trying to bridge to the exact numbers in your 3-year outlook that you gave earlier this year, but on a high level, in a more normalized environment, can you help us just break down the components of your growth? What's the relative size of the contribution from end market growth, share gain, ARPU expansion and so on?

Yes. I'll give you kind of a high level. Obviously, we're in the cusp of the end of the year. We'll talk about 2023 and what we're seeing out there when we get together in February. But we gave some, I would say, long-term opportunity guidance earlier in the year. I always laugh, it was the day Russia was invading the Ukraine. So it was pre a lot of the environment we're facing now. But we saw a lot of opportunity. And when we look back in 2022, we're really proud of the fact that from a cash flow perspective, a cash flow per share perspective, a normalized EBITDA perspective, we've been able to look at meeting targets and, in some cases, exceeding targets. Yes, revenue growth, FX has impacted us. So I think a lot of people have talked about that. If I never have to talk about FX again, I will be okay with that. But even in a difficult environment, looking at our thesis play itself out in 2022, I think, is something we're extraordinarily proud of. We're in an environment that we have to continue to balance our decisions today while looking at the long term with an eye on the future at all times. We outlined what we thought our long-term opportunity was on an Investor Day, and that remains totally unchanged. We believe in our strategy. We believe in the one-stop shop around the entrepreneur and the small business. We believe in our model. We generate a lot of free cash flow. There, I said it again. You'd probably hear it a few times from me. And as we look out into the future, maybe the timing of some of this has changed based on the environment we're looking at. But that opportunity exists, and we'll continue to pursue it. We use the disciplined approach we outlined at that time, but we think that opportunity is there for us to get. And our customers continue to come back to us. The one thing we've always noticed is in these times with our customers, we almost become more mission-critical for them. They are trying to do better in their markets because costs are going up for them. They want to be more successful. In some cases, it side hustles to help out. That makes our guidance, our care guides, our ability to have them get value from our products make us successful.

All right. That's very helpful. And...

That's the best way I could do without giving 2023 guidance.

Totally. And yes, since we're on this topic, I know this just comes up in every meeting, so I think it's helpful to ask. And I think you already kind of alluded to which part of your 3-year outlook is relatively more sacrosanct. And just maybe just to crystallize it with the 3 -- 2 or 3 areas or 2 or 3 metrics, I know because you gave the guidance, you gave the 10%, 15%, 20% in terms of the CAGR, are you looking at some parts of the -- in terms of margin or...

So they're all interrelated in a way. And it's like asking somebody who's your favorite child. You always hesitate in answering that question with, it's absolutely this. But I think the way we evaluate it is what's in our control and what's outside of our control. And when we gave our original thesis, 10%, 15%, 20%, and we were targeting $3 billion in stock buyback, it was based on the current environment out there. Now FX has come into play. That impacted this year's growth algorithm around our revenue. We'll see what it does for '23 and '24. Again, there are movements in there that are outside our control. But listen, we -- one thing we pride ourselves on is we have an experienced management team that has seen a lot of these cycles before. So we know the levers. We know the -- how to operate through them. We know what to focus on. For many of you who are new to our story, again, a lot of us know us as a domain company. In 2008, when we were primarily a domain company, we did very well. We grew. We always look at our cohort from 2008. Since then, that cohort has generated $1.9 billion of revenue for us. So we have positive statistics we can look at as to how the market is going to react to us. And we know that there are certain things we're going to be able to control during that environment and things that are going to be moved, and we're going to have to adjust to. We have the fortune because we were profitable, and we do generate unlevered free cash flow as well as free cash flow, that those are the things that we can kind of use to offset other things that are outside of our control. So I'd say it's less about, hey, we're going to focus on this and this and ignore that going forward. We're continuing to focus on all of them, knowing that there's an interplay between all of them, but we will always focus on the things that we can control versus the things we can't control and stay laser-focused on that.

Yes. That's super helpful, Mark. So maybe let's -- switching -- switch gears a little bit to -- on the product -- to the product side. I guess as you move upmarket and also, I guess, upmarket in a relative sense and now that you target small businesses within $1 million of GMV, what do you consider your strongest competitive advantages in your product offerings? And are there some other areas you would like to further strengthen?

Yes. So we feel really good about where our product offering is now. And I'd come back to what we always say when we -- hey, how do we differentiate ourselves? We have a great brand, right? We have scale. So because we have scale and we're profitable, we can make decisions on what's best for our customer and do that in a manner that we provide them value and, therefore, get value. We believe in our technology. We believe if you look at the entrepreneur's wheel that we've talked about a lot, we have a great product offering around that wheel, and we have care. And so that relationship comes back to an acknowledgment that our customers' needs may change over time, and our relationship with them allows us to identify those needs very quickly. And that creates an opportunity for us to pivot if we need to broaden our product offering. We feel really good where we are today. Like Commerce, 2022 for us was kind of the launch, the experimentation around the market. Commerce for us is a very broad offering. We talk a lot about GD Payments, which is the transaction fees we receive from our customers. But the whole commerce portfolio for us is software and hardware. It's GD Payments. We do, do some reseller business, where we're on the back end and, quite frankly, the attach we get from commerce-enabled SKUs related to Websites + Marketing and Managed WordPress. So all 4 of those today are in play, right, as we enter 2023. And we feel good about our ability to grow them going into 2023 and do it in a manner that it's something that our customers need. So it's a nice way of saying we're really excited about the future of commerce. What we have out there on the innovative side that is not included in that right now is something we've been talking about recently in beta, which is called Payable Domains. I'm trying to come up with a really cool name for it and haven't found one yet, but Payable Domains. [ Pay W ] is taken, by the way. Someone owns that domain name, but Payable Domains. And think about it. It's the concept of any time you get a domain name, it will automatically be enabled to take payment. So as soon as you secure a domain name, you can take payment on that domain name. You have a couple of steps you have to take, but almost frictionless right when you're getting the domain name. And if you look at our ability to grow with our customers over LTV, if you make that selection of adding payments right on the first choice, right when you're deciding that domain name, you now have an attach immediately. And once our customers start attaching, it comes to the why would they go anywhere else to get that service. Our pricing on it is extraordinarily competitive. But let's take it out of the whole, hey, we have the one-stop shop, we're attaching, but think about it from innovation around domains in and of itself. We will be the only company in the world that offers a differentiated domain. We were the leaders in domains before. Others have entered the market. We are still the leader. We are innovating to make our domain names different from anything anybody else can offer. Not talking about increasing prices related to it. We'll get transaction fees, but Payable Domains will create a new domain. And if we can increase the top of the funnel around people wanting to do transactions when they're first looking at the domain name, that just creates the stickiness of our entire offering right up front. So we haven't even -- we're in beta on it, but we are so excited about it. And it comes back to -- I honestly feel bad talking about it. If you ever get a chance to talk to our CEO about it, he will go on for hours about this. But when you think about the possibilities that we haven't even thought about, about changing the domain space in and of itself, not only the one-stop shop offering but the domain space and innovation around that, it's a pretty extraordinary concept. And we are the only one who has the entire stack to do that. There was a moment for me to stop talking, right?

Yes. I can totally tell. You and the entire management team is very passionate about this offering. I guess for potential customers, I guess there are maybe similar products or ways to get paid in various forms but not really in Payable Domains. What are some of the alternatives out there to Payable Domains? For example, for the micro merchants, we can think of, let's say, Venmo for Business, Cash App for Business, although they come with a Venmo handle or a $Cashtag, but not necessarily the merchant's own URL, right? And I can probably also think about Shopify Starter plan, and those offerings have their own pros and cons. What do you think are the main competitors? And who are you taking share from with your offering?

So we're early. And all I can say is taking it out of Payable Domains just into Payments itself, because Payable Domains is in beta, I just want to make sure everybody knows that. But our commerce selection, our GoDaddy Payments, when we launched it this year and we offered it in our Websites + Marketing offering, we offered it against everybody else. We did not take away any other selections. And 80% of the time, they chose GoDaddy Payments. Now we had a thesis when we came into this that we were testing within the marketplace, which is, one, if we could offer a competitive fee, 2.3% versus the market that's anywhere between 2.7% and 3.0% or even higher, that creates a huge advantage for us. Number two, if they -- and remember, in our customer relationship, if they don't have to go to another vendor to get that service and they can just get it through us, again, the one-stop shop theory comes into play. And we saw that theory play out this year. 80% of the time, they chose us over any other selection. Now there is another advantage when you're looking at Payable Domains and you get into the whole, you can do payments through a domain without giving PII. All you need is an e-mail address, which is generally public information for everybody anyway. And the ability to do that without having to give away personal information, we think, is another added benefit that will coming to play with Payable Domains. But even on the pure new customers coming into the funnel, looking at the ability for the one-stop shop and looking at the lower fees, it was compelling enough for them to say, okay, I'm just going to go with GoDaddy Payments. And remember, I come back to our customers, right? Our customer is the entrepreneur and the micro business, the small shop, up to $1 million maybe in annual revenues where we target. And that differential in pricing, that's a big deal. And then you even take it in this inflationary environment right now where everybody is calling them and saying, "Hey, price for this is going up." And we're coming in and saying, "Hey, we can take your transaction fees percentage down." That's a big deal. And I think that's where we've earned the right to play in this environment because we have that relationship. We have the stickiness. We have the reputation. We have the brand. And again, really excited about where we're going with it.

Totally. That's very helpful. And I wanted to ask for your permission to do a little deep dive in the Payments. I have probably a couple more follow-up questions, but it seems like you already gave a lot of very, very helpful points about your Payments. I guess maybe one thing that's about -- for your existing customers, what are some of your strategies to convert them on to GoDaddy Payments?

Yes. It's a great question because I talked about new coming into the funnel, and those are customers that haven't selected somebody before. So making the first choice towards us, it seems a little intuitive. And like I said, our thesis worked out. But we have, globally, 21 million customers, 11 million in the U.S. We're doing Commerce in the U.S., just to be clear. We have not launched globally yet. We're focusing on the launch in the U.S. right now. So within that 11 million customer base, we have customers that have selected other payments platforms because at the time, we didn't offer anything. So it's a different muscle. Now you have to go into a customer base and say, "Hey, is this a compelling enough reason for you to switch?" And listen, we all know if something is working, generally, the hurdle to switch is higher. But I would also say that the unexpected consequences we saw in an inflationary environment within our existing customer base was the same thesis we saw on the new. The differential in price was a compelling enough reason. When everybody was calling them to raise prices, we were calling them to, "Hey, we have a way for you to lower some of your costs." And within that group of customers, that is a differential. By the way, you're bringing it to one vendor. You won't have to deal with 2 vendors. You won't have to deal with 3. It works with the dashboard. If you want to -- it's already integrated with selling on your website, selling on your mobile device, selling in person, all that is integrated into one system. And you're doing it for a lower fee. So you have better analysis into your customer base. You can get more data that you can use to sell. You can see which channel is working better. All that data in this environment became a compelling reason. And we saw people switching. And remember, the secret sauce here is we already have a relationship through our care organization that people are calling. They're looking for advice. They're trying to fix something. And we have an opportunity to say, "We can make this easier on you. Let us help you switch." And again, the differentiation within our care organization is extraordinary. And it's just not about these people calling up to get help. It's about the continued relationship we have over time, and it's really amazing how technology has changed. That used to be a phone call, now it's text messaging. It's back and forth. It's a relationship. Did you get what you need? Have you thought about this? And some of the dynamics, even in a world that has gone remote for us with our care organization, it's been an extraordinary benefit. Our productivity around them has gone through the roof. And again, it's created that platform as we enter into 2023 that we are really excited about. Now I always have to say, I have to admit, and I've told our team internally, don't get disappointed if during the holidays, no one is switching their payment. Rule of thumb, don't switch your payment provider in the middle of the holiday season. But we saw enough beforehand that we are excited that we can continue that journey going into 2023 and really start to target that muscle around the existing customer base as well as to continue to attract new customers into the funnel.

That's excellent. Thanks for all the details.

As a CFO, that's what I do. I give a lot of details.

That's really helpful.

I did get a few laughs there. I know it's the end of the conference here for 2 days, but I saw a couple of smiles there. So I just want to acknowledge that and appreciate the laughter.

All right. And I know -- I mean, there's a lot more topics. And I think sometimes it's kind of underappreciated in the market that GoDaddy actually has a pretty robust suite of payments offerings from online to POS, invoicing to capital payment links, Virtual Terminal to Payable Domains right now. Maybe just one last topic I want to touch on is from the Poynt acquisition, you also added the Poynt Capital or now the GoDaddy Capital solution, which is a merchant cash advance, which is, of course, kind of logical next step to your Payments offering. Maybe can you talk a little bit about how the adoption has been for this offering and which merchants and transactions are eligible? And what's the kind of attach rate?

So I always like to be transparent on things when I can talk about them and when I can't talk about. This one is a little early, right? So I think we're really excited about the 4 offerings we have in the market today and how they're making progress within the new customer. We got a lot of stuff out there that we think we can continue to press and add on to this. Once we get the customer base and the transition over within our customers and our existing customers, the possibilities are definitely out there. But right now, I would say, yes, there's a few things going on in the peripheral, but we are laser focused on those 4 things that we outlined there around commerce. And those are the hardware and the software, right, the GoDaddy Payments. The reseller agreements, we think we can do on the back end and attaching commerce-enabled SKUs within that. And again, that brings us a lot of subscription revenue. It brings us a lot of transaction revenue and really gets to a more efficient operating P&L for us.

That's very good. That's a very good answer.

Thanks.

So maybe switching gears to a couple of M&As you've completed since 2 years ago when you acquired Poynt. So beyond that, there's Pagely, DNAcademy, Dan.com. Maybe can you briefly discuss kind of your philosophy behind the acquisitions? What's your approach to integrating these acquisitions? And how do they contribute to your overall platform beyond Poynt?

Yes. It comes back to the strategy we talked about at Investor Day. And when we look at M&A, we look at it from a, does it fit our strategy? Does it financially work? And that's not about whether we can afford it or not. It's, does it work within our model that it creates our ability to drive profitability and continue our ability to grow cash flow per share? We think we've done a great job of growing cash flow per share. And obviously, when we look at M&A, we have to look at the impact on that and make sure it's accretive over a period of time. And with that, we have to look at our ability to integrate. In the technology industry, I'm assuming a lot of people have been around technology for a while, there's integration. But it's not only about integrating the technology. It's about integrating the people. It's about aligning them to the strategy, making sure you get it in the financials. So all 3 of them have to work. And in each of these cases, there was an ability to look at our strategy, look at accelerating, and Poynt was a great example of that, our ability to enter into the commerce market, become a payfacs. It was something that we felt very strongly about, pursuing the needs of our customers. Pagely continued that journey with the WooCommerce that we've launched and now is out there. DNA, it's a smaller acquisition, but it allowed us to put in some learning and education capabilities for our customers that they said that they needed or we're hearing that they needed. On Dan.com, Dan.com was probably the most recent one. Again, it was around domains in the aftermarket. It was a -- it's a good company, great people, great technology. They provided us some liquidity into our aftermarket in the sense they offered a technology around lease to own for domain names, which we thought would be a huge advantage in our aftermarket. Again, the impact of it again was small, but we think the technology and the integration within our aftermarket offering, which has been extraordinary, another example of us being able to get innovation into the market, this will allow us to continue that innovation along those lines. So we very much look at it from a tactical perspective. We're fortunate that we have, again, it's been a few minutes, so I'll say it, a lot of free cash flow, and we have options. We have a great, strong balance sheet. But we are extraordinarily disciplined on how we approach this. And we really sit down and look at those 3 criteria and make sure they're going to work before we enter into it. And what we said on Investor Day, this is how we use our framework. We apply that framework very -- we have a very disciplined conversation around anything we do.

I really appreciate it. And I'm sure investors will appreciate all the incremental color and answer around the acquisitions as well as your overall philosophy. We have a couple minutes left. I just want to see if we have any questions from the audience, please. Yes, please go ahead.

I'm just curious, when you were developing your payment [indiscernible] can you give us color on -- can you hear me?

I could hear you, but not through the mic. So...

Give us color on whether you built it in-house or you used a partner like Stripe and maybe just some color on like kind of the unit economics of the payment transaction, particularly since it's at a lower fee.

Yes. And so this is where I invoke the secret sauce concept. We do it in-house, right? We are a payfacs. So we have built a stack on our own. We have people that we've hired that were industry experts that allowed us to do that. And I will tell you, and I say this as a CFO, we are competitive not to lose money. We are competitive because we can be, and we believe keeping it in-house and adding it to our entire stack and value proposition puts us in a competitive advantage. We haven't gotten out to how we make that work because we don't want to. Again, it's a competitive advantage for us. But that's how we got there at the end of the day.

Is it fair to assume that by cutting out some of the like Stripes or the payback providers, this is how you're kind of making the economics work?

Yes. Economics work better when you control all the aspects of the economics. So I'll leave it at that without getting into too many details there.

Sorry, we probably have time for one more or I have a follow-up here. Or maybe can we...

I was going to go to the -- I think Aaron Judge is going to sign with the Yankees. That's my prediction. I'm sorry, all the Bay Area people, but he is not going to the Giants is my prediction. I'm sorry. I got laughter out of that, too. You see? A little lightness on the end of the day. We got to go with it.

That makes me a little hesitant to ask the last boring question. Since I mentioned that, I'll probably just throw it right here. Maybe a quick answer will be appreciated. At one point, you mentioned you also have a reseller business. Is that big opportunity that's something you actively target? Or is it just something that you're having to have with the payfac offering?

No. So we think it's 1 of the -- I hate to say 4 legs to the stool, but it is 1 of the legs of the stool. And the idea is there are other software vendors out there that have vertically focused into areas, and I use an example of maybe a doctor's office where they provide a full scale of offerings to a medical office. And by the way, they have to accept payment. They want to accept payments in the office as well. They're not a payfacs. We are. So we can offer that back-end service to them. And while they may be charging a higher fee directly to their customers, we are making our 2.3% that we put out there. So it's a win-win situation. So it is something that we started with this year. We've seen some traction around it. We think there's a great opportunity. We've signed a couple of resellers right now, and we have them in the market. And we're seeing that traction start to really take off. And I'd say, again, it's an exciting opportunity of where we've been able to look at Poynt and the acquisition and take all the value that we thought we were going to get out of it and really combine it with the value that GoDaddy could bring with the scale we have at the customer base and then grow it out into other areas like being a reseller. So we're tremendously excited about it. The one that gets the most press is obviously GoDaddy Payments, but this is one we're going to continue to focus on. And again, look for it in the nature of potential vertical options where other people have verticalized specialty but have to take payments in some manner.

All right. Really appreciate the color and the update on that offering. All right. So I think we're running out of time. But on behalf of our full team, I want to thank Mark.

Thank you all. Chris, thank you. It's been great. Thank you all for coming. And obviously, we're here a little while longer if you have any follow-on questions.

All right. And also, I'm going to say I want to thank Christie and [ Connor ] for coming to our conference. Really appreciate it.

Thank you. All right. Thanks, Chris.