GoDaddy Inc. (GDDY) Earnings Call Transcript & Summary

Good morning. Thank you, everyone, for joining us at the Morgan Stanley TMT Conference. My name is Elizabeth Porter. I'm an analyst of the U.S. software equity research team, and I'm very, very pleased to have with us today GoDaddy's CEO, Aman Bhutani and CFO, Mark McCaffrey. We are taking audience Q&A. So there'll be some mics going around at the end. Lastly, for important disclosures, please see the Morgan Stanley disclosure website at morganstanley.com/researchdisclosures. So with that, Aman, Mark, thank you so much for joining us today.

Thanks for having us.

Great to be here on a Monday morning.

Yes, starting off strong.

So before we just dive into the business, I'd love to get your view on just the macro perspective with 21 million customers, touch points to entrepreneurs, you guys really have a good sense of the pulse. So what are you hearing from your customer base in terms of the health of their own businesses and their spending intentions into 2023?

Yes. Great place to start with our customers. We always say our customers are resilient. They have to show up. These are micro businesses. This is not your 50-person company. These are people that have one employee, 2 employees, 5, 10 at the most. And they have to show up in the morning and make it work. And what we see from them is definitely some pressure. They're not immune to the economy. They're not immune to not being able to find people to work, the unemployment rate, but they want to come in and make a difference. And what they see with GoDaddy is a partner that wants to support them to succeed. And the products we sell them are low-priced products. And these are products that they keep with them, the domain name, the website even if they have pressure. So even though we see some pressure just mathematically, we always talk about 85% plus of our customers are retained with us every year. So our customer retention rates continue to be strong. And they've been strong even as we've seen the macro go up and down, right? We stated that 85% plus customer retention rate and that shows that these customers believe in the future. They're going to keep their domain names. They're going to keep their businesses. They're not shutting everything down. They want to make it happen. Yes, it's a little bit of a harder time, but they're here to stay.

Got it. And one of the headwinds that GoDaddy has had over the last couple of years, just been digesting this pull forward from COVID. You had a time where everybody needed to get online and that is fundamentally kind of what you guys are enabling and that was obviously more important than ever when businesses were closed physically. So it's tough to parse out maybe some of the impact from COVID versus a weaker macro. But kind of what inning do you think we're in, in terms of when we can start to get back to a more normalized pace of demand?

Yes, there's no doubt that there was a tremendous amount of demand during the COVID period, and we still have some of that in Q1 from last year. But ultimately, our business is based on sort of the core secular trends. Those secular trends are around entrepreneurship and people starting their own businesses having ideas that they want to bring to the world. And it's never been easier to bring your idea to the world than with the Internet. Well, today, the largest opportunity in the world for our customers is to turn that idea from content into commerce, to bring their idea to the world and charge for it on the Internet. And I think we're still super early stages for micro businesses to do that. So plenty of opportunity there. The second secular trend is more and more people being tech enabled on the Internet with products and solutions that are really simple to use. So you don't have to be very sophisticated technologically to be able to use these services. And that's an area we're playing too. We've expanded our suite of products to provide a one-stop shop and omni-commerce solution. So a customer, a very, very sort of small customer can start with that idea with very little out of their pocket and really get against this large opportunity. So for me, yes, it was a big year and over the short to medium term, things move around, but the core secular trends have not shifted, and that's what our business is based on. And you see that in the stability and durability of our business too.

And I'll just -- when you look at our core business and you look at 85% of our revenue comes from subscription based, you look at our customer numbers, you look at our retention rates, the core business, the secular trend is pretty consistent despite COVID, despite the macroeconomic environment. Yes, there's pressure. So we have a broad business. We have aftermarket that's transactional. We've talked about the volatility in that. We've talked about hosting in Europe. But when you look down to the core ability that 85% of our revenue generated is from a subscription base and our 21 million customers, that has remained remarkably consistent from cohort to cohort to cohort and it shows up in our ARPU, right? Coming back to the original question, our ARPU is $197 this year exiting, but continues to go up every year on a very, very consistent basis. So we feel pretty good about the momentum going into 2024 -- 2023, no doubt, some headwinds coming into the year. But those headwinds will turn into tailwinds and they're going to be -- give a lot of momentum going into future years.

Okay. Got it. And Aman, you mentioned GoDaddy being a one-stop shop. And historically, it's been known for more domain registration, but you've really built out the portfolio from everything to build, grow with commerce, marketing. And I wanted to ask how successful have you been in attaching these capabilities to your core domain customers? And why is this so important from a customer lifetime value perspective?

Yes. I think the simple math on customer lifetime value is that GoDaddy wants to track, and we've talked about it over the last 2, 3 years a lot. We want to attract a customer that has a high intent to do something with the domain name that they buy. Because with that high intent comes all these other services, and our customers have been telling us for a long time that they get the domain with us or maybe the website, but then they go to other providers for other services, and that leads to complexity for them where they have to sort of manage those different relationships. And it is, of course, easier for them to do it with us when they have a great relationship with us. So we've expanded our product portfolio from domains and websites into commerce. We're innovating with new products. If you haven't seen it, I'm super excited about a product we call Payable Domains, where a domain name becomes a payment instrument on day one because we're pulling forward that moment in the customer's journey and the entrepreneurs journey where they have a payments relationship with someone. And we think it should just come with the domain name. So in the U.S., as of this month, anybody that buys a domain or has a domain with GoDaddy is able to enable it as payable, which means a checkout path to set up for them. They have a QR code, they can send a link to someone and accept a payment just because they have a domain name and then we make money on the transaction on the back. But what it does is it enables people to just have an idea and start transacting. And in terms of penetration, the commerce products are very new for GoDaddy. So penetration, obviously, we're just starting out with it, but we have a history of being able to go into our base and selling product. We shared last year, early last year that our penetration with e-mail was 25%. And most people thought e-mail is kind of a done product. Everybody has e-mail already, and we've continued to go into the base because of the service we provide, because it's a package. It's not just that we say, hey, here's e-mail, you should have it. We actually have real reasons to believe we actually have a service that helps customers get on e-mail. And then when they have a problem, we are there to support them, right. Our care makes a difference and then customers stay with us. So we're using the same template, that same simple, intuitive, seamless experience backed by human care, but now in commerce.

We always say in the technology industry, you need 2 things: you need to own the customer relationship, which we own the customer relationship through our Care Guide and you need to innovate with great products. And having those 2 allows that base to continue to grow into the future and achieve those long-term objectives. But you have to have both elements. And coming into this, that is something we're very proud of and then we think is a key differentiator for our model.

So digging into commerce a little bit more. When we think back, 2021 was really the year about product launches. 2022 was about bringing those products to market and innovating on the go-to-market strategy. What's the focus for 2023? And remind us, what are the different revenue streams that you enable from commerce? And is 2023 the year that we can start to see those scale?

Do you want to take the revenue streams first and then...

Will bring you back into that. All right. So excited about coming into 2023, having all of our revenue streams for commerce in market, right? We are connecting with our customers. We are growing our commerce business. And we look at it, there's 4 pillars when we say commerce. We love to talk about GoDaddy Payments, which is something now that is really starting to take off and we're seeing great attach but that is one of the 4 pillars. We also have the hardware and software element of it. And when we -- I'm sure people will ask about the Worldpay agreement we just announced here recently. But a big element of that is the hardware and software element, which is transactional, but also subscription over a period of time. We have a great reseller business. We don't talk about it much because we're on the back end, but we do provide reseller services to other software companies that have to transact. So that's a big part of our business and a growing part of our business. And then with that, we have the attach related to websites with marketing and Managed WordPress and WooCommerce. All of that now is in place. So when we talk about, hey, this was the year to kind of show the progress. That's what we're doing. We're going to show the progress as commerce is really taking off for us.

Yes. And I think you asked about what is 2023 about. We have the products lined up on the starting line, and it's really about getting out of the gate as quickly as possible. With our partnership with Worldpay, we'll have tremendous reach into a customer that wants an omni-commerce solution, the product, the hardware will be branded GoDaddy. When they come in and use it, it will be co-branded, GoDaddy and Worldpay. So we really are maintaining that relationship with the customer. We'll help onboard and our Care Guides will attach all the products as we do it. But beyond that, we want commerce on every surface. If you have a domain, it's enabled with commerce. If you're doing websites plus marketing GoDaddy Payments already enabled. If you're in the WordPress and WooCommerce space, we have a new product with WooCommerce stores, Managed WooCommerce Stores that allows designers, developers to start with that product on day 1, right? So we've got the products lined up, and now it's go, go, go. Let's get customers to understand that GoDaddy has this offering and that we offer at a really good price, and we -- and they already love working with us. So let's make it happen.

Okay. I do want to dig into Worldpay in just a minute, but before we go over there, Mark, you mentioned really strong attach rates debt to payments. And you guys have quoted about 80% of new customers for Websites + Marketing are picking GoDaddy Payments that were another provider. And when we think about adoption for GoDaddy payments, how much of is it new customers versus an opportunity to transition some of the legacy customers and their GMV over to the GoDaddy Payment rails? And what levers do you have to do them on?

You can see me smiling a little bit because the answer to both is yes, right? We are -- we came into 2022, looking at the attach and the selection process as customers entered into our funnel, and we saw the great results, and we see them to continue to improve, given options, they're choosing GoDaddy Payments. But we also knew with our existing customer base, who maybe had chosen a previous provider because we didn't offer the service at the time that, that was going to be a different muscle. And this comes back to owning that relationship with the Care Guides, how is that going to work? How effective could we be in our existing customer base. And what we saw was almost remarkable coming into the year in the sense that because our price point was lower and because we were dealing with micro businesses, when people were calling up, we were the only one saying we're not going to charge you more for something. We're going to save you some money. And here's how we can do it, give us a little interaction here, and we'll get you all set up. And people were taking it, right? They like it. They like the one-stop shop theory that now I didn't have to deal with a provider that was separate from my domain name, from my website. I could deal with one-stop shop. I had a care guide now who can help me with all of it. And oh, by the way, this is going to cost me less. That's a lot of money in a micro business when you look at the transaction fees around it. So we saw into the year a lot of success. And now keep in mind, we've only launched this in the U.S. So there is so much broader opportunity for us right now. We're focused on the U.S. because that's where we're set up to do. But once that playbook gets established and those muscles get developed on converting the customer -- existing customer base, it's going to be applicable to wherever we take this. So we're really excited. I know I'm smiling about it because it really has just given us -- again, when I talk about the tailwinds, this is part of what we see turning into tailwinds as we go throughout the year.

And just on the metrics around it, we -- it's -- the funnel is pretty clear. We have to identify those customers in our base. That's been an area of focus for us last year. We feel very good and confident about identifying those customers. We have a very good idea of how many customers we have, a very good idea of the verticals there in. We have a very good idea of how to contact them and reach them and what's attractive for them. From identifying them, it's about being able to convert them and from being able to convert them, it's about activating them. And we see good pull-through in those metrics over the last 6 to 9 months on that side as well. So there's no doubt that the larger opportunity is in our customer base already. We already have these customers. We don't have to market externally to approach these customers. And that's the larger opportunity, and we've built the pieces of the funnel to be able to sort of go after it very, very aggressively.

Great. And going back to the Worldpay announcement. So you guys are the preferred -- the preferred partner for your omnichannel commerce solution for U.S. small businesses and bank partners. And how exactly does the partnership extend the reach for GoDaddy? And how meaningful of a growth contributor could it be for 2023?

Yes. It's -- think of Worldpay as a business that has this tremendous reach, reaching into financial institutions, reaching into banks, sort of reaching customers that sell $1 million, $2 million, still on the lower end of sort of maybe the higher end of micro business, but still on the lower end of the customer base. And that customer is aware of GoDaddy. That customer knows and often has had services with GoDaddy. And what we're bringing to that reach is a tremendous product, right? What they want is an omnicommerce solution, what they want is a simple, seamless solution that works in the physical store, that works online, that works on social media, that works on major platforms like Amazon and others and we have that offering, all packaged up for them, and we will help them onboard the customers, convert them, activate them in our care, mostly activate them because for the customer, going into a relationship like this is an important thing. They don't want to just buy it online and go with it. For a customer that sells about $1 million, they want engagement. They want to know that somebody is there to do it. And nobody does that better than GoDaddy. Our care offering where we reach out to people where -- or if people reach out to us and we give them that human element. We do that very, very well. We do it very efficiently. We've demonstrated over the last few years as our revenue has grown, we've been able to sort of maintain those costs pretty low. We are extending that capability with Worldpay as well, right? So they have the reach. We have the product. Together, we can activate. We have co-branded solution. It leads to a lot of exciting opportunity for us over the next few years. I don't know if you want to add something to.

Just to answer your question on 2023. We feel really good about the relationship. We've been in beta with them for a number of months now. So we feel good about where we stand. We have some milestones to deliver this year going into the back half of the year. We think it's well within our reach to deliver those milestones based on the progress we've made, great relationship. We think it will be a great tailwind going into 2024, but minimal impact in 2023. I'm trying to make sure we acknowledge the macroeconomic environment, our ability to hit those milestones, all that is considered, but the driver really is the momentum going into 2024. And again, this is just a U.S. launch.

So I wanted to move a little bit over to competition. I think we've seen that many peers in the web building space have been increasing prices. And do you view that as an opportunity for you to similarly raise prices? Or are the changes appear as an opportunity for GoDaddy to be able to take more market share?

It's a mix of both. So we have a global business, and we have multiple products. And the way we approach price is nuanced. We typically approach price on renewal. We typically don't push it into new and we base it on the customer population that we're serving, but also geography and a couple of other factors. And I can tell you, even in the last 6 months, we've seen opportunities where we -- in spite of what's happening in the world, we lowered prices and we were -- the experiment clearly showed that we were able to get a good customer with high lifetime value and many more of them because of how we priced that product in that market. right? So you'll continue to see that testing from us. You'll continue to see us raise prices where we -- especially in some of the more mature markets, you'll see us raise prices. But then we'll continue to be very competitive priced in other markets and to certain customer populations where we have share to take, and that's what we're going to keep doing.

Yes. It's a continued balance between making decisions in the short term but keeping an eye on the long-term opportunity for us. And the ability to generate LTV is one of our biggest advantages. Very nuanced, just -- we generate a lot of free cash flow. I had to get that in there, to be clear. Very profitable. So that allows us to be opportunistic on how we treat pricing because we're not chasing anything, we're not chasing profitability. We generate the cash flow. We generate the profitability. So we can look at where it's an advantage to take market share versus an advantage to take price and make the best of it. We do thank competition for announcing price changes beforehand to the world because it also allows us to tactically look at, okay, what's coming? Is it an opportunity? How can we react to it?

And there are pricing actions. I don't want to suggest there aren't, there are pricing actions that we're taking in, it's baked into the guide where we feel pretty much in advance confidence about where we want to take price in certain areas, and we build that in.

So Mark, you guys just recently reported your Q4 results where constant currency revenue and bookings grew about 4% and 2%, respectively. And when we look back at customer count, it grew about 1% for the past year. And when we pair that with the forward guidance for 2023 revenue growth of about 5%, kind of what gives you that confidence to see some acceleration from some of the recent trends that we saw in Q4?

Yes. It's hard to be an economist in this macro environment. But we feel pretty good about where we stand and the momentum we have. We acknowledge the headwind. But if you look at how we're exiting the year and acknowledging we have about 2% headwind related to what I call now FX hangover. Reminder, FX hits our bookings, but then rolls out into our revenue over a period of time. So to the extent that's still rolling out in the beginning of the year, that becomes a headwind for us that will ultimately become a tailwind as this normalizes plus the actions we took in Q1, we did take some headwind around the revenue related to integration of some of our platform. So you start to talk about coming out 4%, 5%, adding 2% a headwind. You're already at 7% momentum around some of the business that we've talked about. We feel pretty good about where we are and our ability to get back to double-digit growth. I won't predict when in this market, but we feel very confident we can get back there. The other back of the envelope for anyone who hasn't done this already, I'm finding a lot of people are doing it is, hey, if you look at our existing customer base, 21 million customers, you look at our ARPU of $197 and then you take what would it take, assuming no customer adds to get to our growth rate. It's not that -- it's not that far of a stretch. Like we've tried to position this assuming that the macroeconomic environment will continue that we saw coming out of Q4, but the headwinds naturally become tailwinds going into the back half of the year.

And you mentioned kind of confidence in a double-digit growth rate on a revenue side, kind of longer term. Don't think anybody knows when we're going to get through some of these macro headwinds. So if we had to unpack some of the drivers of that double-digit growth rate, kind of where do you have some of the most confidence? Or where do you see the most opportunity when you parse out things across ARPU, kind of customer additions, the impact of attaching more commerce and payments.

Yes. I think our core priorities of the business continue to be #1 commerce, which is driven mostly by presence and we continue to see a lot of opportunity in the commerce area. Mark talked about the 4 pillars of revenue. If you look at new relationships like Worldpay, if you look at new WordPress or WooCommerce solution, Payable Domains, these are all products that if you try to do math on Payable Domains with GoDaddy having 84 million domains under management and you decide a very small percentage of those customers decide to use the payment side of it, the math adds up really quickly. So even though we're not at a point where we can do real math and put it out there for folks, these are very large TAMs that we're going after, and that's just enabling commerce on our core offering. In terms of the second priority around WordPress and serving the designers and developers, WordPress continues to be the largest content solution on the Internet. And we are a large part of it, but we have been a large part of it on the hosting side and the unmanaged side. And there's a large opportunity to bring these people over on to the managed side, and we're doing a lot of good work there and seeing some early results there too. And then we're going to continue to innovate in the domains business. That's not going to stop. We are the leader in primary domains in the world. We built an aftermarket business. We connected the primary market and the aftermarket over the last 2, 3 years in a completely new way, and that's led to great growth in the in the secondary market. On top of that, we'll build a brokerage business. We now have a corporate domains business where we're working with enterprises. So we bought a registry business, and that's continued to grow well. So you'll see us continue to use sort of our expertise in the domains business to look for new opportunities to serve new customer bases internationally, as an example, we've done very well there. So you'll see us push in all of those areas. And as Mark said, some of the headwinds start to become tailwinds. It doesn't take a lot, given our base to push that revenue number up.

And I have to stress this upon it because we talk about domains and innovation. You said everything perfectly there. But I think it's -- we've talked about Domain Payable in the commerce sense and as a growth driver. But sometimes I think it gets lost we've innovated the domain space by making all the domains payment-enabled. We're the only one in the world who can provide that, that has the technology to do that. Now -- and we're just doing it in the U.S. right now, right, because that's where we're launching payments. But think about the innovation around domains by allowing a domain to be able to accept payments for anybody who wants it. That to us is just changing the domain space in and of itself. We'll be the only ones out there who can do that.

Yes. I have a GoDaddy domain, so I'm looking forward to enabling the payable stuff.

Let's get it.

Try that out a little bit. I'm going to ask another question, and then we'll open it up to the audience if you have any questions and mic will go around. So obviously, macro is a tough environment right now, but you guys are kind of controlling what you can via the cost side and taking actions to protect profitability. Last quarter, you noted about $100 million in cost reductions as well as the 8% reduction in global workforce. So can you just talk a little bit more about where these reductions are coming from? Do you feel that you have the right cost structure right now? And if things do get tougher, like do you have incremental levers that you can pull?

Do you want to start? I can' comment on that.

So the action in Q1 we're taking that we talked about for Q4 earnings. And just to put it in perspective, we're very focused on our core platform, integrating certain acquired brands into our core GoDaddy technology stack. And with that, that allows us more efficiency in our core platform operations and allowed us to look at really driving profitability and being in a place where we should be related to that. At the same time, we're turning and we're investing where we think our growth levers are around applications and commerce and the commerce end of the business. So a lot of this is about really refocusing into where we think there are going to be the growth drivers going forward, and making sure we have that infrastructure in place to meet those needs. Now going back to Q3, Q4, we've said this, we will continue to take actions necessary to make sure we're in the right place to manage through this appropriately. We believe we're in the right space now, but we can't predict the future, so we will always look at the macroeconomic environment. But we did things like the U.S. contract in Q3, which is important to control our cost structure. We're looking at how our data centers can be more efficient. We're constantly looking at driving that efficiency. It's just -- it has never been and will not stop here, but it will never just be a onetime event for us. And that is something just profitability, cash flow, we think it creates an opportunity for us, and we'll continue to manage through that aggressively.

And then I think the thing I'd add without sort of trying to get different states in the future. My view is that as we did these actions, we also looked at it, how do we provide a better service to our customers. So even the brand integrations that Mark talked about, we're looking at all of them as if we take x amount of actions and we lower the cost, are we still providing that high level of service? In fact, for some of those brands, can we provide a better level of service because we can leverage more of GoDaddy core, if you will, into these brands. So to me, that's a 2-step process. We want to continue to make sure that we have -- we're always thinking from the customer back. We're always thinking from the customer's perspective because that is what drives our long-term growth. Again, 85% of our revenue comes from our base. We want to make sure that we maintain these relationships with these customers, right? But at the same time, we'll continue to look for ways to serve them at a lower cost but that same high level of service. And if folks ask us about it, we'll give you examples of how we use technology or different ways of working or having -- how our global workforce is organized for us to be able to do that successfully.

Great. Do we have any questions? I'll definitely keep going. We have about 2 minutes left. So I wanted to hit back on the growth algorithm that you laid out at the Analyst Day, 10% 15%, 20%, 10% revenue CAGR, 15% EBITDA CAGR and 20% free cash flow CAGR. Obviously, topline piece has shifted a little bit, just given the macro. So can you just give us the puts and takes around the updated thinking around that growth algorithm?

Yes. So yes, the 10% to 15% to 20% at the Investor Day thesis, we believe the long-term opportunity and our strategy still is there. We've been very open. The one area around growth because of the macroeconomic environment, FX pressures, whether we achieve the first end of that 10% is a little bit dependent and out of our control, but we continue to believe we will get there. But the 15% and the 20%, if you look at what we did in 2022, we exited ahead of schedule, right? And an example being -- I think when we did our Investor Day thesis, we said at the end of 3 years, we would be around 26% operating margins. We exited 2022 at 26%. So we feel really good about our progress and our ability to manage through that element. If you look at our cash flow per share and our growth in there, again, we exited ahead of the schedule, and we continue to focus on it. Those are things we can control, and we continue to believe those remain intact for the 3-year thesis we put out there. And we're fortunate. We put out there a buyback program. We've taken -- we've used it as an opportunity given the current market. We'll continue to look at that as an opportunity when it makes sense for us to continue with a reminder, we're authorized up to $3 billion. I get a question a lot of, hey, is it going to go ahead of that, but we are authorized up to $3 billion. We're about $1.3 billion through it right now. We still are trying to target around $1 billion a year. So we continue to use the levers at our hands to make sure we're getting through this unstable environment in a very stable manner. And I think that's something we'll continue to do.

Great. Well that actually bring us...

Wow, I got 2 minutes on that answer. All right. Great.

Perfect timing. Well, thank you so much, Aman and Mark, for joining us and sharing your insights with us today.

Thank you.

All right. Thank you very much.