GoDaddy Inc. (GDDY) Earnings Call Transcript & Summary

Well, good afternoon, everyone. My name is Trevor Young. I'm one of the Internet analysts here at Barclays. And I'm pleased to be hosting GoDaddy. I have Mark McCaffrey, CFO. Thank you so much for joining.

It's great to be here. Thank you. For those of you traveling in, welcome to San Francisco.

How has it been going so far?

It's good. It's been a good day. It's always nice to have these sessions close to home, too.

Close to home and in person.

Yes. Nice and in-person. That's right. I think this is like the first time we've met in person.

In-person, yes, that's right.

You're taller than I thought.

I appreciate it.

So let's get right into it. First, on the 3Q call a few weeks ago, you flagged that gross adds over the last few months suggested some sort of pull forward versus the pandemic. Now obviously, overall, the phenomenon of more business is migrating to online during the pandemic seems pretty well understood. We've gotten some questions from investors as to what specifically you've been seeing near term that kind of informs that view that this is some of the pull-forward dynamic may be lapping out versus softer macro. Just any color you can share on that?

Yes, absolutely. I think the point of the comments we were making in Q3 was we're in an environment that we're coming out of a potential pull forward of the pandemic. But we're in an interesting macroeconomic environment right now. And it's created this I would say, dynamic of not being in the normal patterns that we've seen. We're not seeing the normal seasonality that we've seen. It's hard to distinguish between what is pandemic related pull forward versus what is really being shifted by the macroeconomic environment. And we try to pivot to the -- hey, we are seeing some positive signs out there. Our retention rates remain strong, 85% plus. We're seeing great progress in Commerce, which we've talked about a lot. But yet, we're in an interesting time looking out into 2023. So we want to be prudent, pragmatic and transparent.

And it seems like consistent with that, some choppy trends or uneven demand picture in September, October, have you ever -- have you seen any changes to that customer behavior since then? Has it evened out at all? Or is it still kind of [Indiscernible]

Haven't really gotten into what we're seeing in Q4 just yet. We got to close out the quarter. But we think we're well positioned with what we're seeing around our, I would say, our ability to get into Commerce, get into expanding that one-stop shop theory. I always come back to -- we have 21 million customers. We have the ability to have a relationship with those customers, see what they need. Even in these markets, we become mission-critical for them because they're trying to sell to their customers. It allows us to focus on the things that we can control versus worry about the things that we can't control right now. '22 was -- hey, I'm proud of what we did in '22. When you really look about -- look back to our Investor Day, which was in February, the world changed significantly since then, a matter of fact, almost within 48 hours, it changed significantly. We talked about our thesis. And you look now, and again, this is what I said in Q3. I'm not trying to close out the year prematurely here, but we're at 7% growth on a reported basis, we're at 9% growth on a constant currency, which is generally in line with where we said we were going to be. We've over-delivered on normalized EBITDA margin, which we're very proud of, our cash flow per share remains exactly where we projected it would for the year. So with so many things going on, we were able to look at and say, okay, we're still able to execute that '23, when we get to February and we talk about '23 more granularly, we'll take the same considerations in there. But we're actively managing, right? We have the great benefit through years of work of being cash flow positive and that creates opportunities even in these environments. And between our customer care and our technology, we have the ability to really, really focus on what our customers need in the value. And remember, we're at a price point that ARPU for us last year was about $182. And at those price points, it's still a compelling price point for customers versus the value you're getting in these markets. So again, it allows us to focus on things like retention rates, giving value. Obviously, Commerce is coming into market, which we think will be a big deal.

I'm glad you hit on that because I was a question on Commerce and payments. It's really been a multiyear initiative here. '22 has been kind of figuring out the go-to-market strategy, some of the bundling there, testing out the right features and so forth. So '23 is where we should really start seeing some lift there. First, can you talk about some of the streams of revenue within Commerce and payments because it's not just payments, right?

That's right. And we've gotten a little -- a lot more specific in the last quarter to talk about Commerce and exactly what it means for us. Everyone loves to jump to GoDaddy payment, which is a big element. We are really excited about it. It's transaction fees for our customers, payment processing. It's in market. We're seeing great traction. We've talked about coming into the funnel, the 80% of websites less marketing customers are selecting our payments over others, and we're offering all the same payment options we used to. But when you talk about Commerce and it's total broad in the revenue streams, that we are seeing and all are in play right now. We have hardware software sales. We have a point-of-sale device. We have software related to it. It's all integrated online, off-line very, very excited about its ability to provide value to our customers. We have GoDaddy payments. We also have resellers. And we've seen this as an opportunity where there are software vendors out there who have a, I would say, a broader vertical play. Example I like to use is the doctor's office, where they're doing software around the doctor's office, managing the office. They also have to accept payments, they don't want to do on the back end. We have the ability to provide them that service on the back end. And because we're at a lower price point than most, we can charge them or 2.3, they charge their customers, the market rate, which is around 2.7 or 2.9 depending upon where you're at. And we make our full fee. They make a little bit on the top. It's a win-win. So that reseller is also a revenue stream, and we've signed some on this year. And then you look at Commerce, just enabled Websites + Marketing and Managed WordPress, the enablement of the subscriptions around those products and couple that all in and that's 4, I would say, revenue streams that are in play today that we've been working on in 2022, and we've been able, now are excited about the momentum going into 2023. And to be clear, it comes back, and I always say this, right? There are 2 things you need in technology. You need the customer relationship and you need innovation. And this is an example of both of them coming together. And in 2022, we took our care guides, we train them on how to sell into new customers and how to sell into our customer base. And what was working, what were the pressure points, what were the things that they were valuing on all of these. We were able to see what worked, what didn't work, tweak it, go forward, see the success. And now we feel like we're in a great position going into 2023. And if you look at the success we've had when we've done similar plays, we did productivity. We did websites. Now we're doing Commerce. The ability to grow that attach over a period of time creates an LTV equation, we keep talking about, 83x value once a customer starts attaching Commerce for us. And we also believe, obviously, the stickiness of this. We'll not only -- we have great retention rates as it is, but help improve those retention rates as they go forward, making them just dynamic.

Yes. That makes a lot of sense. So it sounds like 3 or 4 key potential revenue streams folding up into payments and Commerce. That sounds like you feel pretty well positioned going into next year. So in the past, GoDaddy collectively has said, we think we'll do $150 million in incremental bookings from this initiative in '23. Do you still feel confident that, that's the right bogey, the right floor?

Yes. So I don't get too far ahead going into 2023 because then none of you will show up in February when I talk about 2023, so I just want to be conscious of that. We'll try to peg the number to be more transparent about where we going. But to put it kind of in a box, we see all 4 streams contributing towards that number and the behavior and our ability to increase that market now, and we're pretty excited about it. We're pretty excited about the results now. I don't want to -- that number was a long time ago, it was pre Investor Day, but when you look at it all in -- this is working, right? It's all in market right now.

And you have all the moving pieces to get there.

We have all the moving pieces.

It's just a matter of when.

So I want to just have the deep breadth to say, okay, what do we think this is going to be for '23, but allow -- be allowed to do that when we talk in February.

Yes, makes a lot of sense. Sticking with product real quick. Aftermarket, pretty significant ramp there starting in 2020. Last year, in '21, I think you grew 70% for the full year. You're now lapping a couple of years of really difficult compares in that business. Just talk a little bit about what's driving your expectation for that more moderate growth for 4Q and then into 2023? Is it just because it's transactional? Is it because you've got such strong growth, it's tough to replicate that?

Yes, be careful of success sometimes, right? Q4 was our best quarter ever last year. And we saw overperformance in aftermarket, and we've talked about it. And we've always said when we gave guidance out there that there is volatility to upside related to the aftermarket. And we also knew coming into this Q4 was going to be a tough compare. And coming back to some of the numbers I used earlier in the questions, when we look at 2022 as a whole, again, 9% constant currency, 7% free cash flow per share numbers, normalized EBITDA exceeding our -- where we said we were going to be. All those are in line. We did that knowing back then some of those indicators we gave that Q4 was already going to be a tough compare. You take FX into effect and you take the overperformance from the prior year, we always knew Q4 was going to be a tough compare. Now what we talked about in Q3 was the dynamic that we saw coming into play on larger transactions and that was, hey, we see buyers and we see sellers, but these transactions are subject to a negotiation. And that negotiation means they have to agree on an asset value and right now, while we see the buyer and the seller, we don't see them necessarily agreeing on that asset valuation. And we think it is a little bit of -- we can wait and see if the values move going into 2023. But quite honestly, this was a new product in a new market that we've never seen before. So we're watching for all the indicators to see what it will be going forward on the large transactions. We are really happy with the technology around the momentum for the experience for, I would say, we measured transactions around $10,000, and we see the ASP continuing to go up. And we see that activity. That part of the process is still there. It's intact. It's great. It was great innovation when we came out with it a couple of years ago, continues to be a market leader, and we expect that being a big part of our business going forward. We just don't know about these large transactions.

So the core within aftermarket above 10 -- or below 10,000, excuse me, performing how you'd expect, it's just at much higher price point ones where it's difficult to predict, probably very lumpy.

Yes, that's right. And remember, the smaller transactions happen through our platform. So it's very, very frictionless, very seamless, someone who wants a domain name, somebody indicated they would be willing to sell theirs. It's all performed seamlessly within that. We've taken friction out of that system, which allows the momentum in that business to work very well. It's a big transaction that really require that interaction between a buyer and seller. That's a little bit of interest in Q4.

Yes. Tough to predict. I want to get to the 4Q point in just a minute. But first, on international, it's about 1/3 of the business. Generally, over time, seems to perform in line with total company. And if I recall correctly, you have a decent presence within Europe following the HEG deal a few years ago. Can you just talk big picture about the international strategy, which markets are most attractive versus which ones are highly competitive? And just overall, where do you see international going over the next 3 to 5 years?

We think the secular trend around Commerce and going online is going to be global. Now certain countries will go there faster. Other countries still need to build out infrastructure. We've seen in countries that we call Tier 1, which are English-speaking type of countries. I don't think there's any surprise there. We've seen similar behaviors to what we see in U.S. markets and those continue to be an area of focus because we feel our playbooks and our one-stop shop theory worked very, very well there. We continue to look at expanding the markets. Now we're in a dynamic time. Obviously, we're seeing a little bit of shift in what's happening in Europe versus what's happening in the rest of the world, and we're very conscious of that. We're very pragmatic about where we spend investment and making sure we're getting the ROI, and we look at long-term plays like countries like India, and we see great opportunities there, but that's the long play versus the short play. And then we take a step back and say, hey, our one-stop shop in our funnel. We talked about Commerce, we're launching Commerce in the U.S. right now in 2023. We're really excited about it. We feel we have a playbook. We feel like the playbook will work through in 2023 and solidify. But that also gives us an opportunity to expand that going on internationally, which creates our ability to have that one-stop shop fully as we launch into other areas internationally. Now we have to be, again, launching Commerce in other countries as simple [Indiscernible] get up one morning and say, hey, I'm going to do the transactions, but we have the ability, we think focusing on the U.S. right now, seeing the results we're seeing in the U.S., seeing -- we have 11 million customers in the U.S., seeing them, their even ability to be attracted to some of our Commerce value proposition. We're seeing those thesises and we don't think they're going to be any different when we go into other markets.

Yes. Makes a lot of sense. So we've hit on key product initiatives, payments and Commerce, aftermarket as well as international. Stepping back as you exit this year, 4Q guide implies growth rates that are below the 10% guide that you put out in February and as you aptly pointed out, a lot's changed since then, including materially worse FX headwinds. Just help us understand what needs to go right from here to get back to that 10% CAGR over the next couple of years.

I can't control FX, just to be clear. And I come back to -- let's look at the year. And look at where we thought we were going to be versus where we ended up. And this is where I come back to the, hey, on a constant currency, we would have been at 9%, which is in line with what we talked about at Investor Day before FX. So we had 2 points of FX pressure, got us around 7%. We think the momentum of the business in things like Commerce and things like our ability to be that one-stop shop, the ability to get the LTV calculations out of our existing 21 million customers as well as attract customers that have a higher propensity to spend with us or grow their business and therefore get value out of spending with us. All those elements are in existence now going into 2023. There are things that are outside of our control. No doubt about it, but our ability to work within those parameters drive profitability. Our free cash flow allows us the opportunity to be opportunistic if we see an ability to get the right return on investments as market develops. And we continue to focus on just running the business well, making sure we're agile and making sure we're able to respond to the market dynamics that exist out there. We don't have a crystal ball, no doubt about it, right? But I think I always say, hey, without getting too far into '23, if I use '22 as kind of the proxy for what we think we can achieve, '22 worked really well in our ability to focus on doing what we did well, maintain our profitability and generate the free cash flow. That was all positive. Let's look at how our -- what our ability to do that in '23 and then onward will be and make sure we're positioned to balance our decisions today with looking at that long-term opportunity. We talked about the long-term opportunity at Investor Day. We think that long-term opportunity is still there. So everything we're doing, we're trying to balance with that long-term opportunity with the eye for the future, but making sure we're doing it in the right manner and balancing between the two.

And since you alluded to it a little bit, how do you think about that balance between profitability versus growth, some of those reinvestment opportunities because, frankly, you're already at pretty healthy normalized EBITDA margins, 24%, 25% free cash flow -- unlevered free cash flow trending a bit ahead of that. Obviously, you've had some good lift from leveraging customer care and then marketing. But on the latter, that's improved because you have pulled back on spend this year given the demand environment. How should we think about marketing forward and overall leverage in the P&L in the next couple of years.

Yes. So great question. And just a reminder, when we started to, I'll say, get more efficient with our marketing. We really started to change how we were doing things last year, not this year. So it was really Q3 a year ago that we really started to look at the data, look at the -- our ability to market more efficiency, look at our ability to run our own algorithms research and get a better return on every marketing dollar we were able to spend and put that in place. So we -- if you look at Q3, Q4, Q1, Q2, and then Q3, again, this year, you'll see a consistent pattern of how we're doing things. And again, not harping on our '22 results. We've done that in that marketing dynamic. We feel really good about our ability to leverage our P&L. In other words, as we bring customers into our funnel, our ability to be more efficient in our operations around marketing to them and that care relationship exists, right? We think our -- we differentiate ourselves in 4 factors at the end of the day. We have great brand, all right? We have scale, which allows us the ability to react and do things that make sense for the short term and the long term. We have great technology. We've continued to innovate and we have care. We own the relationship customers. With those 4 things in play, we think we have the ability to continue to get operating leverage out of our P&L, continue to focus on profitability, continue to focus on cash flow per share, continue to focus on free cash flow, right? And do that in a market that we may not be able to predict what the FX or the demand environment is in any given period, but we're able to focus on those other levers to make sure that we're heading in the right direction at all times.

Yes, that makes sense. And you alluded to it as care being part of the differentiation there. But you've also seen nice leverage there pretty consistently and frankly, quite surprising quarter after quarter, year after year. How much of that efficiency has been exhausted. I mean is this something you can continue to lever...

So we -- like I said, once we get customers into our funnel, we believe, we get great leverage. Now in the care circumstance, care is not a transactional element of our business. It is a -- once our customers start engaging with our care, it is an ongoing relationship. It is an exchange, it's text messages, it's SMS, it's across the board. So our ability to continue to provide value for our customers once that relationship is established, it is just extraordinary. And now that you add on value elements like Commerce, it allows us to expand what we can deliver to them. Again, our ability to get to the LTV and get to that leverage is based on the fact that once we get customers into our funnel, not giving them a reason to leave or fall. When we were a domains company, people would come to us for domains and then they would leave, right? They would get other products elsewhere. If you look at us today and you look at our history now, we've been doing productivity and websites for about 2 years. We're seeing more and more attach grown to our domains related to those products. You talk about websites, again, we're early stage, but we're seeing more attached to websites now coming in with the demand. You project that out to Commerce, you continue to see that. All that comes at a greater efficiency because it's the same interactions, but now you have more value to provide them over time, and that creates that leverage within our funnel. And we're really excited about it. The idea being, again, if we don't give them a reason to leave us as a one-stop shop, they will continue be with us, and they will continue to get value from us, and therefore, we get value over a period of time. And I think that's what we're all excited about. And that's why we talk about, we really see our ability to leverage. No doubt, we've used technology both in marketing and care to get better interactions, make those interactions more effective, know the right customers are going to the right experts at any given time. But the idea is once we establish those relationships, once we have those relationships, they will provide better leverage for us going forward.

It makes a lot of sense. Sticking with costs, we do get questions from investors around hosting in-house versus some workloads that you pushed out to AWS or potentially some other partners there. Can you just remind us what's handled in-house by GoDaddy in terms of like in your own data centers, what workloads for customers versus your own internal processes?

Yes. So we haven't gotten in to elaborate. We do this here. We do that there. We do that there. I mean I think the idea is we're moving more of our infrastructure to AWS. As we come out with further products, we're going to continue to use AWS as a key leverage metric for us to be able to do that efficiently, more agile. It becomes a great ability for us to get things to market a lot quicker, a lot more secure. We still have data centers. We still have customers in data centers. Over time, if the opportunity presents itself, we will move some of those workloads to AWS, but that's harder and not as cost effective in the current environment. So we'll continue to -- the way I look at it is we'll continue to expand our use of AWS and we'll continue to try to mitigate the risk of our data centers. And I say risk, they're subject to energy costs. The energy cost obviously have not been great, especially in Europe right now. We've done a lot of work to mitigate by signing contracts that limit our exposure for 2023. Part of us expanding our AWS relationship was to get better pricing and offset some of the cost aspects that we were seeing in the energy costs. So we're trying to be proactive at how we manage that through our P&L, but we will continue to look for opportunities to make that more efficient and quite frankly, limit our risk in this current environment today.

Yes, that makes a lot of sense. Just last one before I open it up for the audience, on M&A and product strategy forward. Historically, GoDaddy has been highly acquisitive. Poynt has been a big acquisition and feeding into the whole payments in Commerce like we talked about. But thinking beyond that, over the next 3 to 5 years, what are some of the areas that could kind of define the next leg of growth for GoDaddy? And what are you -- are you looking to increasingly build some of that functionality in-house with the talent you have versus going out and buying it.

Yes. So we'll always evaluate, and we'll always look at it at what makes sense given what our customer needs are, what opportunities are out there. We've been very open and transparent about our M&A criteria. It has to be part of our strategy, it has to work financially, we have to be able to integrate it. If we look at the recent acquisitions we've done, Poynt, we're seeing Commerce become a big play. We did Pagely. We saw -- we launched our WooCommerce store yesterday. So those are starting to come to market. Dan.com, another example of us using technology, acquiring it and putting into play in the aftermarket. It allows us to lease to buy in the future, which is something that sounds easy but to put that into technology isn't easy, but we're able to leverage that. So there are areas we'll continue to look at like that, that add incremental value if they meet our criteria. But listen, we feel really good about our strategy. We feel really good about our ability to get things market, we feel really good about our customer relationships. And if we see something through our Care Guides that our customers are not getting and that we believe we have an opportunity to provide them, whether it be build or buy, I guess, build or buy. We'll look at what makes sense, right, knowing what the market is, what our opportunity there. Our goal is to be that one-stop shop to our customers. And we recognize that our value and our LTV is based on once they come in, not giving them a reason to leave. So we will always look at that as our framework for we want to be that provider and again, I probably haven't said a couple of things here as we get to Q&A, which is: one, we really -- our customers are entrepreneurs and micro businesses and we really value that relationship and our ability to provide them value, and we generate a lot of free cash flow I haven't said in a [Indiscernible] minutes, okay, which absent M&A goes towards repurchases. So we have a strategy. It hasn't changed. I just want to remind everybody.

Great. Well, with that, I'll open it up to the audience if we have any questions. Guess not, thanks so much, Mark.

This is when I start talking randomly. So this is when Christie is like, okay, no, no, no.

Great.

You're all good. All right. Thank you.

Thanks so much, Mark. Really appreciate it. Thank you.